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Southwest & Alaska Air: positive momentum in early 2019

Two of the US’ lower cost airlines – Southwest and Alaska – posted solid unit revenue performances in 4Q2018 that will continue in 1Q2019, but the factors driving their respective outlooks are largely unique to each operator. 

Aside from fairly solid underlying trends, Southwest is benefitting from the lapping of headwinds that pressured its unit revenue performance early in 2018, including a suboptimal flight schedule driven by Boeing 737 Classic retirements. 

Alaska is reaping the benefits of revenue synergies from its merger with Virgin America and its own lower capacity growth in early 2019. The company is cautioning that there is some choppiness in close-in fares during early 2019, but is declaring that its revenue performance during 1Q2019 will outperform the industry. 

Summary

  • Southwest is planning for positive unit revenue momentum continuing through 2Q2019 due to solid demand, benefits from its new reservations system and the lapping of headwinds it faced in 1H2018. 
  • Alaska Air Group also expects progressively solid revenue growth as its capacity falls and it continues to reap the benefits of merger synergies from its acquisition of Virgin America

Southwest forecasts strong unit revenue growth in 1H2019 

Southwest Airlines posted a 1.7% increase in unit revenues year-on-year in 4Q2018 and expects a rise of 4% to 5% in 1Q2019. 

Company management has outlined several factors for that forecast, including strength in close-in bookings by business travellers and a strong performance of its Rapid Rewards loyalty programme. 

But there are also elements driving that projected growth that are specific to Southwest.

Airline executives stated in 1Q2018 that Southwest had a 1.5ppt headwind to its RASM (which declined approximately 1% year-on-year): a suboptimal fleet schedule as it retired its Boeing 737 Classic fleet, a competitive fare environment and a shift of the US spring break holiday. 

As it retired its older Boeing narrowbodies, Southwest had to extend its schedule to operate more flights earlier in the day and later in the evening, which are generally lower yielding operations.

Southwest Airlines fleet summary as of mid-Feb-2019

Southwest is also forecasting a 0.5ppt unit revenue benefit from its new reservations system in 1Q2019, which did not debut until 2Q2018. 

The airline also believes it will post a solid unit revenue performance in 2Q2019.

During 2Q2018 Southwest had 3ppt unit revenue headwind from its less favourable schedule and some book-away after an accident in which debris from a failed engine damaged an aircraft’s fuselage, causing depressurisation. Its unit revenue in 2Q2018 dropped 3% year-on-year, and for 2H2018 fell 1.6%. 

Overall, Southwest has a stated goal of unit revenue growth higher than 3% for 2019. The airline anticipates that a system-wide fare increase instituted in late Nov-2018 should also create benefits for its unit revenue performance. 

Southwest is sticking to pledges of capacity growth of 5% in 2019, with new service to Hawaii accounting for half of the increase. The 35-day partial US government shutdown that lasted from late 2018 into early 2019 resulted in Southwest facing delays in gaining necessary certifications to serve Hawaii, but the airline has stated that it could launch service sometime in Mar-2019. 

Alaska in a unit revenue turnaround as its capacity also falls 

Alaska Air Group’s unit revenues increased 5.2% year-on-year in 4Q2018 and that was the company’s largest increase in several years. The airline has faced competitive capacity and pricing pressure and inevitable challenges from the integration of Virgin America. Alaska’s unit revenues for 1H2018 declined 3.6% year-on-year. 

With most of the integration completed, a more benign competitive environment and tweaks to its network, Alaska has bolstered its unit revenue, and expects 1Q2019 unit revenues to grow between 2.5% and 4.5%, driven by the company continuing to benefit from merger synergies (Alaska expects to capture approximately USD130 million in 2019.)

Alaska executives have acknowledged that its 1Q2019 unit revenue forecast was a “modest decline” from its 4Q2018 results, and have highlighted several reasons for the deceleration. 

Broadly 120 basis points of unit revenue has moved into 2Q2019 due to the Easter holiday shift from 1Q2018 to Apr-2019. Additionally, the first quarter is seasonally the weakest for the company. 

Alaska’s management has also cited some volatility in close-in fares since late 4Q2018, but is stressing that it does not want to overplay those fluctuations. “I think there’s just been active fare management with fuel moving around”, said company chief commercial officer Andrew Harrison. 

Mr Harrison said that demand remained strong, particularly business demand, and he expected Alaska’s 1Q2019 unit revenue to outperform the industry by a wide margin. 

Some of that projected outperformance can be attributed to Alaska’s lower capacity growth. The company expects competitive capacity growth of 4.2% in 1Q2019 but its own capacity growth will be just 1.2%. Alaska expect its capacity growth to remain at that level through 2Q2019, before growing above 3% in 2H2019. 

For the full year 2019 Alaska expects capacity growth of just 2%, which is markedly lower than its increases during the past couple of years. Data from CAPA and OAG show that Alaska’s ASKs increased by 11% in 2016, 9% in 2017 and 7% in 2018. 

Alaska also has several initiatives under way to drive up its ancillary revenue in 2019. It has now rolled out its version of basic economy – Saver Fares – network-wide, and expects to garner USD100 million in revenue from that new fare class in 2019. 

Alaska Air and Southwest have encouraging outlooks, for now 

The outlooks offered by Southwest and Alaska for early 2019 are encouraging. It seems that US demand is remaining reasonably solid and is weathering trade uncertainty, any lingering fallout from the partial government shutdown, and growing predictions that an economic slowdown could begin as early as late 2019.

Those airlines, and all US operators, are no doubtful hopeful that the momentum they are seeing in demand trends will remain throughout 2019.

But given growing political and economic uncertainty, conditions for later in the year remain anyone’s guess. 

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