US discount airlines: capacity growth riles shareholders this holiday season

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Southwest Airlines is still paying off expenses from Christmas 2022.

This week, the US Department of Transportation announced it was hitting the airline with a $140mn penalty over last December’s meltdown. Poor weather and operational failures led to nearly 17,000 flight cancellations. The ordeal has already cost the company $800mn in lost revenue and passenger compensation. The regulatory action related to violations of consumer protections laws.

Southwest has since been mostly exemplary in managing take-offs and landings. Still, shareholders are grumbling. Southwest’s stock price is down more than a tenth in an otherwise ebullient market. It is struggling to manage cost efficiency amid mixed market signals on how much capacity to offer. The new year is a chance to get that balance right.

In the first nine months of the year, Southwest’s “available seat miles” jumped by more than a tenth. Carriers have been quick to add capacity to return to pre-pandemic levels. They are particularly keen to take advantage of leisure travellers taking “revenge” vacations.

However the added capacity has come at the cost of fares. Southwest projects in the fourth quarter that revenue per available seat mile will be down a tenth. That coincides with operating costs per mile inching up this year — though they are expected to fall in the last quarter of the year. 

Southwest is considered a discount carrier, though it is not in the same ultra low-fare category as Spirit or Frontier. Those carriers have seen their share prices fall sharply. Spirit is seeking to combine with JetBlue, despite the objections of regulators. Alaska Airlines has just announced a deal to acquire the smaller Hawaiian Airlines. Meanwhile, legacy airlines such as Delta have benefited from a boom in international travel. Their stock prices have jumped sharply.

Southwest has a plan in mind. It says it will soon curtail capacity growth to maximise return on capital. That is exactly the holiday gift shareholders want.