Southwest Airlines Co., the largest U.S. discounter, is benefiting from a pickup in demand and pricing power that began late last year and is carrying over into 2017.
Airfares are firming up after almost two years of declines, Chief Executive Officer Gary Kelly said Thursday. Revenue from each seat flown a mile, an industry benchmark, is poised to end its long slide this quarter or at worst fall by only 1 percent, the carrier said in announcing fourth-quarter results.
“The outlook for 2017 has picked up from what we thought 90 days ago,” Kelly said in an interview. “That strengthening we saw in November and then even more in December has continued so far into January. Bookings for February and March also support that continuation.”
The Dallas-based airline is benefiting from renewed pricing power after slowing the growth of flights and seats so that demand can catch up with supply. Sales are particularly strong for last-minute tickets typically purchased by business travelers at higher rates, Kelly said.
That helped Southwest exceed analysts’ profit expectations. Fourth-quarter adjusted earnings of 75 cents a share topped the 69-cent average of estimates compiled by Bloomberg. Sales rose 2 percent to $5.08 billion, the company said in a statement. Analysts had anticipated $5.03 billion.
Southwest rose 4.1 percent to $51.50 at 8:28 a.m. in New York, before the start of regular trading. The stock climbed 29 percent in the 12 months through Wednesday, while the Bloomberg U.S. Airlines Index gained 26 percent.
The company’s outlook for the first three months of the year is a sign that the “domestic revenue environment continues to mend,” Duane Pfennigwerth, an analyst at Evercore ISI, said in a note to clients. He had projected a 3.5 percent drop in Southwest’s revenue for each seat flown a mile this quarter.
Investors have closely watched that measure since it began lagging behind year-earlier levels almost two years ago. The figure slipped 2.9 percent in the fourth quarter. Southwest had predicted a decline of as much 4 percent.
The airline is working to offset rising costs this year by updating its fleet with more fuel-efficient planes and phasing in a new computerized reservation system. Jamie Baker, a JPMorgan Chase & Co. analyst, estimates the airline will face $700 million in higher labor costs this year from contracts with pilots and flight attendants, plus a pact with mechanics that is being negotiated.
The carrier will focus on optimizing its use of planes, airports and employees this year and on recovering quickly from weather interruptions and other factors, Kelly said.
Routes to Cuba that began in November and December are “performing not great” right now, but the airline will give them time to develop, he said. The flights didn’t begin during a high-demand season, Kelly said.
“We’ll give it a full year and see how things progress,” he said. “There are people on those flights and they’re delighted to have us serving Cuba.”
©2017 Bloomberg L.P.
This article was written by Mary Schlangenstein from Bloomberg and was legally licensed through the NewsCred publisher network.