Pressure mounts on Southwest Airlines to deliver on its goal of positive unit revenue in early 2017

Southwest Airlines believes it can potentially achieve a positive unit revenue result in early 2017, but its sequential trends from 3Q2016 to 4Q2016 are not improving at the rate of the three large US global network airlines. In fact, if Southwest hits the upper end of its unit revenue guidance for the last three months of 2016, the company's performance could worsen on a sequential basis.

Many factors are driving Southwest's unit revenue pressure at the end of 2016, including the effects of a credit card agreement that lifted its unit revenues in 2015 and 2016, competitive capacity additions in its markets and a still-soft, but improving domestic pricing environment. In order to regain positive unit revenue Southwest's planned capacity growth is decreasing year-on-year for 2017. Additionally, the airline is scrutinising its network in order to determine which routes can generate maximum revenue production.

Southwest is also bracing for cost inflation in 4Q2016 driven by tentative collective bargaining agreements recently reached with pilots and flight attendants in 3Q2016. The cost increases from those agreements - if they are ratified - will continue into 2107, putting extra pressure on Southwest to deliver on its unit revenue targets.