Southwest shares tumble after airline warns of persistently low fares

  • Southwest expects first-quarter revenue per seat mile to be flat year over year.
  • The figure is a gauge of pricing power.
  • The airline still expects to grow revenue per seat mile in 2018.

Travelers might cheer, but investors are fretting over Southwest Airlines' warning that it's struggling with persistently low airfares.

The no-frills carrier said Wednesday that it expects revenue for each seat it flies a mile, a key industry gauge of how much airlines can charge for a seat, to be flat compared with the first three months of 2017. The airline had previously expected a revenue increase of 1 to 2 percent.

Shares of the airline lost close to 5 percent to end at $57.78.

Revenue trends outside peak demand periods, such as holidays, "have been below the company's previous expectations primarily due to the competitive fare environment that continues to pressure passenger revenue yields," Southwest said in a filing.

It also blamed a "sub-optimal" first-quarter flight schedule on the retirement of its Boeing 737-300 fleet, which it is replacing with Boeing's new 737 MAX line, a more fuel-efficient model.

Southwest said it still expects to grow revenue per seat mile in 2018.

Fare wars are a core concern of airline investors, who worry that despite strong travel demand airlines will have to continually lower prices in order to compete.

The United effect

Competitor United Airlines'aggressive growth plan to expand service 4 to 6 percent might be having an impact, said Cowen & Co. That plan spooked investors when it was announced, sparking fears of a fare war.

"We suspect the [Southwest guidance] reduction is a direct result of United's domestic capacity expansion plans," it said in a note.

United and Southwest have a lot of overlap in each other's hub cities such as Denver, Chicago and Houston.

"We expect the shares to be down today on the guidance reduction led by weakness
during off-peak travel periods which screams United's strategy negatively impacting the
business in the near-term," said Cowen.

Shares of all large U.S. airlines fell Wednesday. American dropped more than 2 percent to end at $54.09, Delta lost 1 percent to close at $55.95, and Alaska ended down 1.5 percent, closing at $64.21. JetBlue fell more than 2 percent to end at $21.78.