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Southwest Trims View on Soft Bookings & Spike in Oil Prices

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Southwest Airlines Co. (LUV - Free Report) has revised its guidance for second-quarter 2018 unit revenues and capacity as well as full-year capacity.

For the current quarter, the company expects operating revenue per available seat mile (RASM) to decline around 3% year over year (the earlier guidance had called for a decline in the 1-3% range). This downside was primarily due to soft bookings following insufficient marketing initiatives post the Flight 1380 incident in April.

Additionally, the company now anticipates second-quarter available seat mile (ASM) or capacity to increase approximately 3.5%. Earlier, the company had called for 3.5-4% growth in the metric.

Further, high oil prices and slackness in revenue trends have forced Southwest to trim its capacity outlook for 2018. The company now projects ASM in the low 4% range compared with its prior forecast in the low 5% range. Also, for the latter half of the year, ASM is anticipated to expand approximately 6% year over year, lower than its past view of a rise in the low 7% range.

This was perhaps much anticipated given the gloomy picture of airlines due to the recent trend of rising oil prices. In fact, the International Air Transport Association (IATA) recently lowered its forecast for airline profitability in 2018. The research firm predicts the industry’s global net profit to be $33.8 billion, much lower than the 2018 profitability expectation of $38.4 billion, unveiled by the organization last December. The profitability forecast for the current year also compares unfavorably with what the airlines achieved in 2017 ($38 billion).  

Price Performance

The plight of airlines, thanks to the oil price surge, can be gauged from the Zacks Airline industry shedding 12.9% of its value, way below the S&P 500 index’s growth of 2.3%.



 

Zacks Rank & Key Picks

Southwest carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Transportation sector are GATX Corporation (GATX - Free Report) , Expeditors International of Washington, Inc. (EXPD - Free Report) and SkyWest, Inc. (SKYW - Free Report) . While GATX and SkyWest hold a Zacks Rank #2 (Buy), Expeditors sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of GATX, Expeditors and SkyWest have rallied more than 18%, 37% and 61%, respectively, in a year.

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