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Southwest Q2 RASM View Up, Cost View Bleak on MAX Groundings

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Southwest Airlines Co. (LUV - Free Report) has revised its guidance for the second quarter of 2019 to take into account strong demand and the extended Boeing 737 MAX groundings.

With robust demand and solid passenger yields, the carrier anticipates operating revenue per available seat mile (RASM) to increase 6.5-7.5% year over year compared with 5.5-7.5%, expected earlier.

However, operating costs per available seat mile (CASM), excluding fuel and oil expense and profit-sharing expense, are now projected to rise 11.5-12.5% year over year. Previous view for the metric was an increase in the range of 10.5-12.5%. This escalation in costs is due to reduced capacity during the second quarter as a result of the 737 MAX 8 groundings.

Capacity for the second quarter is estimated to decline approximately 3.5% year over year compared with the previous expectation of a 2-3% decrease dip. While this forecast indicates the grounding of its 34 737 MAX 8 aircraft through Aug 5, the company, however, has extended the grounding period until Sep 2 due to uncertainty hovering over the aircraft’s return to service.

Meanwhile, with oil price coming in at modest levels, the estimate for fuel costs remains intact in the band of $2.10-$2.20 per gallon. However, fuel efficiency is predicted to slide 1-2% in the second quarter. Past guidance reflected a year-over-year change of flat to down 1%. This downside is primarily due to the grounding of the 737 MAX 8 aircraft, the most fuel-efficient plane in the airline’s fleet.
Zacks Rank & Key Picks

Southwest carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Air China Ltd. (AIRYY - Free Report) , SkyWest, Inc. (SKYW - Free Report) and GATX Corporation (GATX - Free Report) . While Air China sports a Zacks Rank #1 (Strong Buy), SkyWest and GATX carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Air China and SkyWest have rallied more than 17% and 34%, respectively, so far this year. Meanwhile, GATX boasts an encouraging earnings history, having trumped the Zacks Consensus Estimate in each of the trailing four quarters, the average being 16%.

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