Southwest Surges Most in Seven Years as Pricing Power Improves

  • Benchmark revenue gauge posts smaller drop in fourth quarter
  • February, March bookings are also showing promise, CEO says

Southwest CEO: Tax, Regulatory Reform Help Airlines

Southwest Airlines Co. jumped the most in seven years as the largest U.S. discounter said a pickup in demand and pricing power that began last year is carrying over into 2017.

Airfares are firming up after almost two years of declines, Chief Executive Officer Gary Kelly said Thursday. Revenue from each seat flown a mile, an industry benchmark, is poised to end its long slide this quarter or at worst fall by only 1 percent, Southwest said in announcing fourth-quarter results.

“The outlook for 2017 has picked up from what we thought 90 days ago,” Kelly said in an interview. “That strengthening we saw in November and then even more in December has continued so far into January. Bookings for February and March also support that continuation.”

Southwest is benefiting from renewed pricing power after slowing the growth of flights and available seats so that demand can catch up with supply. Sales are particularly strong for last-minute tickets typically purchased by business travelers at higher rates, Kelly said.

That helped the Dallas-based airline exceed analysts’ profit expectations. Fourth-quarter adjusted earnings of 75 cents a share topped the 69-cent average of estimates compiled by Bloomberg. Sales rose 2 percent to $5.08 billion, Southwest said in a statement. Analysts had anticipated $5.03 billion.

“I like the position of the company,” said Logan Purk, an Edward D. Jones & Co. analyst who called the fourth-quarter results “a pretty solid beat.” 

“It’s obviously doing well, even in the face of some fare pressures,” he said.

Shares Jump

Southwest rose 9 percent to $53.92 at the close in New York, the biggest increase since April 2009. The shares led the Bloomberg U.S. Airlines Index and helped boost the stocks of other U.S. carriers.

The company’s outlook for the first three months of the year is a sign that the “domestic revenue environment continues to mend,” Duane Pfennigwerth, an analyst at Evercore ISI, said in a note to clients. The unit revenue forecast for this quarter is better than the flat to down 2 percent expected by most analysts, said Helane Becker, a Cowen & Co. analyst.

Investors have closely watched that measure since it began lagging behind year-earlier levels almost two years ago. The figure slipped 2.9 percent in the fourth quarter. Southwest had predicted a decline of as much 4 percent.

Southwest will slow capacity expansion this year to 3.5 percent, from 5.7 percent in 2016.

Updating Fleet

Southwest expects costs for each seat flown a mile, excluding fuel, special items and profit sharing, to rise 6 percent to 7 percent this quarter and 3 percent for the full year. “Significant” wage rate increases will account for 4 points of the first-quarter change and substantially all of the annual increase, the airline said.

Jamie Baker, a JPMorgan Chase & Co. analyst, estimates the airline will face $700 million in higher labor costs this year from contracts with pilots and flight attendants, plus a pact with mechanics that is being negotiated.

The airline is working to offset rising costs this year by updating its fleet with more fuel-efficient planes and phasing in a new computerized reservation system. The carrier will focus on optimizing its use of planes, airports and employees this year and on recovering quickly from weather interruptions and other factors, Kelly said.

Routes to Cuba that began in November and December are “performing not great” right now, but the airline will give them time to develop, he said. The flights didn’t begin during a high-demand season, Kelly said.

“We’ll give it a full year and see how things progress,” he said. “There are people on those flights and they’re delighted to have us serving Cuba.”

JetBlue Results

JetBlue Airways Corp.’s fourth-quarter profit of 50 cents a share topped by 1 penny the average of analysts’ estimates. Sales were $1.64 billion, the New York-based carrier said in a statement, matching analyst expectations.

The airline will expand capacity in a range of 6.5 percent to 8.5 percent this year, compared with 8.9 percent in 2016. JetBlue fell 3.1 percent to $21.10.

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