Southwest Airlines (LUV) is mulling over raising airfares for fall-winter season travel. After the losses post Hurricane Irene, the airline industry is looking at potential benefits from higher travel demand during the holidays and Southwest Airlines is no exception.
During late summer, the carrier had offered a limited period sale on fall-winter travel from September 8 to November 17. Now, looking at the holiday demand trend, the company has increased fares for business travelers. We see the price hike as a good augury for Southwest Airlines, particularly after a weak first half.
Southwest Airlines faced a serious setback in its first and second quarters due to staggering operating costs given skyrocketing fuel prices. In addition, Hurricane Irene had fueled negative sentiments for the company.
The company quickly resorted to fare hikes and capacity cuts to combat rising costs and weak demand. These strategic decisions have so far been accretive and continue to remain crucial for its operational efficiency.
However, Southwest Airlines faces competition from other low-cost carriers as well as major airlines that cut fares in order to attract customers. It competes with Delta Air Lines (DAL), subsidiary of AMR Corporation (AMR) –– American Airlines, subsidiary of Alaska Air Group (ALK) –– Alaska Airlines, United Continental Holdings (UAL), and US Airways (LCC).
Further, fuel price volatility continues to be one of the company’s most significant challenges, as the cost of fuel, which has been at historically high levels over the last few years, is largely unpredictable and even a small change in fuel prices can significantly affect profitability.
Consequently, we currently maintain a long-term Neutral recommendation on Southwest Airlines. However, the stock holds a short-term (1–3 months) Zacks #4 Rank (Sell).