As winter bids adieu, low cost carrier, Southwest Airlines (LUV) is gearing up for summer travel sales. The carrier has announced discounted fares up to $69.00 on a one way trip that can e availed on 10 days advance booking between April 3 and June 27, 2012. The discounted tickets are available on specific days like Tuesdays and Wednesdays to select destinations.
Southwest remains benefited from the seasonal impact on its business. Summer travel boosted revenue growth last year on higher leisure travel demand. Additionally, load factor also increased reflecting higher occupancy on flights compared with summer 2010.
However, Southwest’s outlook remains lackluster for this year with uncertainties hovering over the macroeconomic environment. According to the International Air Transport Association, global airline passenger growth will be around 4% in this year compared with 6% in 2011. Further, profitability of air carriers are also rated down with an estimated overall profit of $3.5 billion for this year, reflecting a steep decline from $6.9 billion in 2011 and $16 billion in 2010.
Therefore, carriers are banking on discounted airfares to attract passengers. However, the steeply rising fuel prices remain unfavorable for airfares and airlines are left with limited pricing flexibility.
We believe the peak season revenues remain crucial for Southwest and other carriers like United Continental Holdings Inc. (UAL), Delta Air Lines (DAL), US Airways Group Inc. (LCC) and JetBlue Airways Corporation (JBLU) to offset staggering fuel costs and derive substantial benefits by attracting more travelers on discounted tickets.
Currently, we maintain our long-term Neutral recommendation on Southwest supported by a short-term (1-3 months) Zacks #3 (Hold) Rank.
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