Southwest Starts Capacity Cuts as American and United See Second-Quarter Weakness

NEW YORK (TheStreet) -- For the airline industry, the bad numbers keep showing with the big four carriers all guiding toward second-quarter unit revenue declines of between 4% and 8%.

However, Southwest (LUV) said early Tuesday that it has started to reduce its second-half capacity growth, addressing one of Wall Street's major concerns about the airline industry.

"We have taken steps this week to begin pulling down our second half 2015 (available seat miles) to manage our 2015 capacity growth, year over year, to approximately 7%," Southwest CEO Gary Kelly said in a prepared statement.

Also, "with weaker than expected economic growth, we continue to evaluate our 2016 capacity plans with a current intent to cap our ASM growth to approximately 6% year over year," Kelly said.

Southwest's second-quarter passenger revenue per available seat mile (PRASM) will likely decline between 4% and 5%, the CEO said, "considering recent weakness in close-in revenue passenger yields, an estimated two to three point impact from our year-over-year growth in stage length and seat gauge, and difficult comparisons to last year's strong second quarter performance."

Also Tuesday, American (AAL) said its second-quarter PRASM will decline in a range between 6% and 8%. 

United (UAL), meanwhile, reported traffic for May after markets closed on Monday. United said second-quarter PRASM will decline between 5% and 6%. While American didn't cite a cause for the decline, United listed "foreign exchange impact and revenue pressure related to lower oil prices," adding that "yields from close-in domestic bookings and revenue from oil-related corporate accounts have both softened compared to prior guidance."

The trends are the same at Delta (DAL), which reported June 2 that it "expects consolidated PRASM for the June quarter to decline approximately 4% to 5 %, with the change from previous guidance a result of lower-than-expected close-in domestic business yields." Delta shares fell 2% on June 2.

American shares on Tuesday were down $1.08 to $38.78. Delta shares were down $1.07 to $39.68. Southwest shares were down $1.58 to $34.52, while United shares were down $1.53 to $39.68.

Year to date, American shares are down 28%, with Delta down 19%, Southwest down 18% and United down 25%.

Despite the lower unit revenue numbers, airline margins remain strong and second-quarter earnings numbers are expected to reach record highs.

In a report issued early Tuesday, Cowen & Co. analyst Helane Becker wrote that United's results "continue to be affected by weak demand from oil-related corporate customers," given the importance of the carrier's Houston hub. She lowered her price target on the stock to $75 from $83.

But Becker said "industry sentiment will rebound following 2Q PRASM (reports) as comps become easier." She also reiterated an outperform rating on United, saying "United's management has remained the most rational with capacity growling slower than the other two network carriers." She forecast 2015 United capacity growth of 1.4%.

Late Monday, Stifel analyst Joseph DeNardi reduced his 2015 estimate for Delta earnings by 10 cents to $4.50 a share "to reflect softer unit revenue performance and higher jet fuel prices partially offset by higher share repurchases." He maintained a buy rating.

Some analysts view the current weakness as a buying opportunity. CRT Capital analyst Mike Derchin wrote Tuesday morning that "capacity discipline is alive and well." Derchin said the recent selloff "is a clear reminder that investors remember the 'bad old days' of undisciplined capacity growth and do not want to return to that era.

"We expect market jitters to be eased when airlines begin to lay out initial 2016 capacity plans which can come as soon as 2Q2015 earnings calls in July," Derchin wrote.

However, Raymond James analyst Savanthi Syth on Monday cut her rating on American to market perform from outperform and cut her ratings on Delta and United to outperform from strong buy.

"We now expect the recovery in pricing heading into the seasonally stronger summer months to be somewhat muted vs. previous expectations due to the softer than expected U.S. economic growth and American's aggressive pricing response to Southwest's capacity growth impacting markets beyond Dallas," Syth wrote in a note.

On May 29, Jim Cramer said airlines "right now, are in free fall" and that, if he were a buyer of airlines, he "would wait for the downgrades to happen."

They are still happening.

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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