Southwest Airlines (NYSE:LUV) has raised passenger fares by $10 on a round trip on routes that are less than 500 miles one-way.  The increase in fares was brought about because of the steadily rising oil prices, which have increased from $90 per barrel (Brent crude) at the end of June to nearly $114 per barrel at present.  This step will help offset the impact from higher fuel prices on the carrier’s operating margin for the third quarter. As a result, the stock rose 3.4% on Monday on this news.
We currently have a stock price estimate of $12.54 for the airline, approximately 30% above its current market price.
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Southwest has significant influence on ticket pricing in the domestic airline industry
Airlines such as Delta (NYSE:DAL), US Airways (LCC), United Continental (NYSE:UAL) and American Airlines have followed Southwest’s lead to increase their fares on similar routes by a similar amount. Southwest has thus proved again that it can influence industry fares. The airline owes this influence to its status of a low-cost carrier and the fact that it flies the largest number of domestic passengers.
A few days earlier, Delta tried to increase fares on some of its routes but was forced to reverse its decision as other airlines did not follow suit.
The stocks of the airlines that participated in the fare hike also increased on Monday. US Airways increased by 5.06%, United Continental by 5.71% and Delta by 3.61%. On the whole, this increase in passenger fares positions the industry better to incur higher jet-fuel costs by lowering the impact on margins for the ongoing quarter.Notes: