Since the airline industry is a good barometer for the overall health of the economy, LUV's guidance is also constructive for the broader stock market.
Rewinding back to its Q1 earnings report, CEO Gary Kelly commented that leisure passenger booking and yield trends were improving and that corporate travel remained strong.
This message has recently been echoed by other major airliners. For instance, on April 17, United Airlines (UAL) issued upside Q1 earnings, guided for Q2 PRASM growth of 0.5-2.5%, and stated that underlying demand remained healthy across the board.
Additionally, on April 2, Delta Airlines (DAL) raised its Q1 EPS and TRASM (unit revenue) guidance and then provided solid Q2 adjusted revenue growth (+6-8%) and TRASM growth guidance (+1.5-3.5%) on April 10.
DAL has also benefited from its lack of exposure to Boeing's (BA) 737 MAX aircraft, as cancelled flights at other airliners have boosted its capacity and helped keep a lid on costs per available seat mile (CASM).
The same can't be said for LUV, however. In conjunction with its increased RASM guidance, the company also increased its Q2 CASM outlook to 11.5-12.5% from its prior expectation of an increase in the 10.5-12.5% range.
This is directly related to the grounding of its 737 MAX aircraft. LUV's fleet consists of 34 MAX aircraft, representing about 6% of the total fleet. With those aircraft out of commission, LUV's capacity has been reduced, causing it to cut its capacity outlook to -3.5% from -2 to -3% for the quarter.
Since its operating costs are mostly fixed once flight schedules are set, flight cancellations put significant pressure on its CASM.
Unfortunately, there is no resolution on the near-term horizon as LUV just extended its flight cancellations through September 2.
In terms of what it can control, LUV seems to be doing a good job minimizing any disruptions that the grounding has caused based on its solid RASM guidance.
Key Takeaways: LUV's increased RASM guidance is a positive data point for the company, the airline industry, and the broader economy. It is in sync with what other major airliners have indicated regarding demand trends.
LUV hasn't been able to fully capitalize on the healthy business climate due to its exposure to the troubled 737 MAX aircraft. With the company pushing cancellations out until September, there is no immediate relief in sight.
But overall, LUV is executing well in terms of factors it can control, as indicated by its RASM guidance and its recently announced (May 15) shareholder-friendly initiatives, which include an increased dividend ($0.18 from $0.16) and a $2 bln share buyback program.