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Home / Business / Cost Creep at Southwest Airlines will help its rival in 2019 – The Motley Fool

Cost Creep at Southwest Airlines will help its rival in 2019 – The Motley Fool



Back in October Southwest Airlines (NYSE: LUV) delivered solid third-quarter earnings for 2018, including a 16% increase in adjusted earnings per share. Nonetheless, the stock fell after management warned investors that non-fuel unit costs would rise by at least 3% in 2019.

CEO Gary Kelly remains cautiously optimistic that Southwest Airlines will generate more than 3% revenue next year, more than offsetting its cost inflation. To do this, however, it must be avoided to engage in fare wars. This is great news for its biggest competitors: Delta Air Lines (NYSE: DAL) American Airlines (NASDAQ: AAL) and United Continental [19659006] (NASDAQ : UAL) .

Southwest Airlines withholds fares

The rise of ultra-low-cost carriers in the US means that Southwest Airlines often does not offer the lowest fares these days. as usual a few decades ago. Nevertheless, tariffs are quite low, especially in the most competitive markets. Given the massive size of Southwest (compared to most budget airlines), its popularity with customers and its "pocket-free" policy, the airline remains the most powerful force in the US aviation industry, keeping tariffs low.

For For example, when Southwest Airlines expanded considerably a few years ago due to a change in federal regulations in the US, tariffs had dropped sharply.

In fact, prices for the Dallas-Fort Worth market as a whole have risen in the third quarter of 2014, 2.3% above the national average and one year later, 8.5% below the national average. American Airlines, whose mainstay at Dallas-Fort Worth International Airport, has put considerable pressure on revenue.

  A Blue Southwest Airlines Jet

Southwest has raised tariff wars in several markets in recent years. Source: Southwest Airlines.

Southwest's expansion at major airports in New York and Washington, DC has also reduced air fares in these markets in recent years. And just last year, it played an important role in triggering a wage war in California.

Course Change

While Southwest Airlines was prepared to provoke price wars, this does not mean that this is the case for profitability.

Southwest's growth in Dallas, New York and Washington, DC contributed to a 1.5% decrease in revenue per available seat mile (RASM) in 2015. More recently, RASM has remained roughly unchanged in 2017 due to its competitive measures and has been slightly down in the current year.

The management of Southwest Airlines and its shareholders will be dissatisfied with this type of revenue in 2019. As a result, Southwest slows its growth, apart from the market, which represents its short-term priority: Hawaii.

The airline also recently introduced a $ 2 to $ 5 price increase. This was particularly noteworthy as aircraft fuel prices have fallen more than $ 0.40 per gallon since the second half of October, when most airlines submitted their fourth-quarter forecasts.

Good news for the old airlines

This is great news for the American Airlines, Delta Air Lines and United Airlines. If Southwest is focused on driving unit sales growth next year, it should create a relatively calm competitive environment. Without an unexpected economic downturn, American, Delta and United should be able to achieve solid revenue growth in such a scenario.

If the price of oil stays at its current level, revenue growth will not do much to drive huge profits. Unlike Southwest Airlines, the old airline companies have withdrawn from fuel protection to enable them to take full advantage of lower jet fuel prices.

Obviously, oil prices remain volatile, but the current fuel of the airlines The bills would decline in 2019. With American, Delta and United looking set to expect lower unit costs for non-fuel units next year than Southwest, they could achieve higher profits even without RASM growth. If the sales environment remains strong and oil prices do not give much, all three top airlines should be able to significantly improve their profit margins next year. This could unlock large profits for its shareholders.


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