Important Factors that Can Affect Southwest in the Future
Southwest's 2Q15 Results Are a Mixed Bag for Investors
Anti-trust investigations
Southwest Airlines (LUV) has received inquiries on pricing as well as details of discussions and meetings in regards to industry capacity. The company is among the big airlines that have come under the scanner for probable price fixing of ticket fares in order to maintain high profits. These inquiries affected the stock prices of the company in June. However, the company is expected to steer clear of these investigations.
Other companies that have received inquiries are American Airlines (AAL), United Continental Holdings (UAL), and Delta (DAL). These airlines are part of many ETFs, including the iShares Transportation Average ETF (IYT), which invests 16.85% of its holdings in airline stocks.
Pilot issues
The company has been facing some unrest due to its pilot wages. The airline industry has been facing a shortage of pilots, and the company has been paying its pilots well. Southwest pilots are already among the most productive in the industry. However, the labor unions have raised issues of pilots being underpaid in comparison to competitors such as Delta.
Southwest has been buying larger 175-seat 737-800 planes in order to keep its unit costs low by spreading the same pilot costs over more passengers. However, legacy competitors like Delta operate a varied fleet of larger planes, and the pilots for these larger planes receive higher pay.
Thus, Southwest would need to add newer and even larger 737-900ER or 737 MAX 9 planes to its fleet that can accommodate 190 to 200 passengers, so as to spread the same pilot costs over more passengers.
PRASM decline continues
The weakness in yields is expected to continue, and Southwest’s latest guidance expects the company’s PRASM (or passenger revenue per available seat miles) to drop 1% in the third quarter of 2015. However, PRASM is expected to turn positive beginning in the fourth quarter.
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