Southwest Airlines says fares could fall, stocks tank
NEW YORK (CNNMoney) — Getting to Grandma’s house this Christmas may be cheaper on Southwest.
But good news for travelers is not good news for airline stocks.
Shares of Southwest plunged 10% Tuesday, making it the worst performer in the S&P 500. Rival airlines all dipped too. The U.S. Global Jets ETF was down 3.5%. Why?
Southwest warned that a metric called operating revenue per available seat mile, or RASM if you’re nasty, may fall 1% in the fourth quarter.
Now that’s a lot of jargon. The airline industry is notorious for it. In plain English, RASM is a fairly good proxy for ticket prices.
So it looks like Southwest, already known for bargain fares and very few extra fees, expects fares to remain pretty low during December — a time when many people are flying for the holidays.
CEO Gary Kelly said as much in an interview with Fox Business Network Tuesday. He told Maria Bartiromo that the huge drop in oil prices is a major reason fares are “softer.”
“We’re trying to manage the business to have stable revenues, keep our fares low,” he said.
Airlines have saved billions this year thanks to lower jet fuel costs. And while they haven’t passed on all those savings to consumers — not by a long shot — fares have come down a bit.
In fact, Delta said in October that it expected another wonky airline metric, passenger revenue, to fall in the fourth quarter. That’s another indication of low fares.
And anytime an airline executive talks about cheaper ticket prices, Wall Street worries the industry is going back to its bad old ways of fare wars.
Not that long ago, the industry went through a wave of bankruptcies and consolidation. And that was in large part because airlines were playing the game that businesses rarely win — undercutting each other on price with the hopes of making it up on volume.
But in recent years the number of big companies in the industry shrank and pricing became more rational. Only four major U.S. airlines remain: Southwest, Delta, United and American. (See ya, Northwest, AirTran and US Airways!)
Nonetheless, several smaller discount carriers, such as Spirit, Virgin America and JetBlue, have shaken things up.
Southwest’s Kelly acknowledged hows competitive the industry is these days. He said in the Fox Business interview that Southwest was “having to work a little bit harder to attract customers.”
So it’s understandable why Southwest’s latest figures may be spooking investors.
After surging in 2013 and 2014, many airline stocks have plunged this year due to concerns that the industry’s best days may be behind it.
Still, shares of Southwest and Delta are still up year-to-date, along with JetBlue and Alaska Air.
Investors are clearly picking winners and losers in the industry instead of pushing them all in the same direction.
That’s why the sell off in Southwest may be a bit of an overreaction.
The company remains one of the best-run airlines out there. And Kelly didn’t think that demand was a problem. He said in the Fox Business interview that “we can get people on the airplanes.”
Along those lines, Southwest reported that its “load factor” — a fancy way of saying butts in seats — was up sharply from a year ago and hit a record for November.
But if fares continues to head lower, airline passengers will benefit more from lower fuel costs than airline investors.