Airline Shares Jump as Southwest Eases Overcapacity Concerns

  • Investors cheer slower growth plan as salve for fare pressure
  • Improving outlooks at Delta, Allegiant provide added boost

U.S. carriers climbed the most in almost two months after Southwest Airlines Co. said it would slow capacity growth next year, bringing the supply of seats and flights more in line with demand and possibly relieving pressure on fares.

Southwest’s decision to hold capacity expansion to less than 4 percent, compared with as much as 6 percent this year, added to reports from Delta Air Lines Inc. and Allegiant Airlines on improving trends in revenue for each seat flown a mile, a key industry gauge.

The healthier outlooks eased investors’ fears that the supply of airline seats would continue to outpace demand, forcing carriers to keep discounting prices to attract travelers. That trend has led shareholders to abandon airline stocks this year, putting a Bloomberg index of U.S. airlines on track for the biggest annual drop since 2011.

“One concern people had was two years of capacity growing faster than demand,” Savanthi Syth, a Raymond James Financial Inc. analyst, said. “With fuel coming up, they really wanted to see capacity growing more in line with demand. This is the first sign from Southwest that we’re going to get that.”

The airline index rose 4.8 percent at 1:35 p.m. Wednesday in New York after earlier advancing 5.5 percent, its biggest intraday increase since July 12. Allegiant Travel Co. led the way with an 8.4 percent gain, while Delta rose 5.2 percent and Southwest climbed 4.4 percent.

Delta Outlook

Delta’s revenue from each seat flown a mile is “trending toward flat” despite continued declines in the short term, Chief Financial Officer Paul Jacobson said at an industry conference. Unit revenue, as the measure is known, has been lagging across the industry for more than a year, in part because major carriers like American Airlines Group Inc. began matching cheaper fares from expanding discounters.

The benchmark gauge will fall about 7 percent in the third quarter, partly because of a computer disruption that led to the cancellation of 2,300 flights last month. The carrier lowered its forecast for third-quarter operating margin to 18 percent to 19 percent, citing the outage. That’s two percentage points less than the original range it projected.

Delta’s outlook was “not as bad as the market feared, especially when you consider the computer glitch,” said Paul Lambert, a research associate at Tocqueville Asset Management, which holds more than 572,000 Delta shares. “People are thinking this could be the bottom in terms of unit revenue weakness.”

’Helpful’ Discipline

Allegiant said its third-quarter unit revenue will fall no more than 8.5 percent, compared with a previously forecast decline of as much as 10.5 percent.

Southwest said about two percentage points of next year’s capacity increase will come in the domestic market, with one to two percentage points in international service.

“Capacity discipline from Southwest should be helpful” to all the major airlines, said Julie Yates, an analyst at Credit Suisse Group AG.

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