Can Southwest Airlines Overcome Its Capacity Crunch To Grow Revenues In 2020?

by Trefis Team
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After facing a capacity shortage for most of 2019 due to the grounding of 34 Boeing MAX 8 aircraft, Southwest Airlines (NYSE: LUV) hopes to be able to return these planes to service during the latter half of the year. As the company’s capacity growth plan only includes the Boeing MAX series, the uncertainty surrounding this aircraft is likely to result in another year of capacity crunch for the low-cost airline. Despite this imminent headwind, Trefis expects Southwest Airlines’ Revenues to grow by 3% to $23 billion in 2020, assisted by a higher occupancy rate and rising airfares. In this article, we take a quick look at key operational parameters driving the company’s top line and our expectations for 2020.

 

A Quick Look at Southwest Airlines’ Revenues

Southwest Airlines’ reported $22.4 billion in Total Revenues for full-year 2019. It includes three revenue streams:

  • Passenger Revenue: $20.7 billion in FY2019 (93% of Total Revenues). It represents income from the sale of air tickets and other ancillary offerings for the company’s mainline and affiliate carriers. If a ticket is sold and travel is yet to happen, the company recognizes income from such tickets as air traffic liability. Due to the complex structure of ticket pricing, cancellation, and rescheduling, a certain portion of the liability is recognized as passenger revenues based on recognized historical patterns.
  • Cargo Revenue: $172 million in FY2019 (1% of Total Revenues). It represents income freight and mail services.
  • Other Revenue: $1.5 billion in FY2019 (6% of Total Revenues). It comprises of the sale of loyalty points to credit card companies.

 [A] Southwest Airlines’ capacity likely to remain flat in 2020

  • Before the grounding of MAX, Southwest had planned to expand its fleet size from 750 to 775 aircraft in 2019 (after retiring Boeing 737-700s and adding MAX 8s).
  • However, the company ended FY2019 with a total of 747 aircraft (including the grounded MAX 8s) in its fleet, resulting in a 1.6% decline in available seat miles.
  • In 2020, the company expects to expand its fleet size by just 11 additional aircraft, which includes delivery of 27 new MAX 8s and retiring of 16 737-700.
  • Keeping the slow growth in fleet size in mind, we expect Southwest’s available seat miles to remain relatively flat for the full year 2020.
  • For forecasting, Trefis recognizes available seat miles as an airline’s total capacity, which refers to the number of seats available for passengers multiplied by the number of miles flown.

 [B] Occupancy rate likely to grow

  • Historically, Southwest Airlines’ average occupancy rate has remained relatively stable at around 83.5%.
  • As a variation in flight schedule impacts airline’s capacity (i.e., available seat miles), we do not expect a significant shift in occupancy rate due to supply-side factors.
  • However, considering the overall shortage in capacity across the industry due to the MAX groundings, we expect Southwest’s average occupancy rate to increase by 0.5% to 84% in 2020.

 [C] Passenger yield primarily dependent on fuel prices

  • Passenger yield refers to the average fare one passenger pays to fly one mile and is impacted by fuel prices, demand, and competitive environment.
  • Consistent with the company’s guidance of $2.00-$2.10 of fuel cost per gallon for the full year (which includes targeted improvement in aircraft efficiency and the impact of fuel hedges), we expect Southwest’s passenger yield to grow by 2% in 2020.

Taking all these factors into account, we expect Southwest Airlines’ Revenues to grow from $22.4 billion in 2019 to $23 billion for the current year.

 

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