Southwest Expects Lower Pricing Power as Airlines Add Capacity

Southwest Airlines is experiencing reduced pricing power because airlines have added flights and seats.

The company said in a Wednesday (June 26) filing with the Securities and Exchange Commission (SEC) that it has changed its outlook for revenue per available seat mile (RASM) in the current quarter from its previous estimate of a year-over-year drop of 1.5% to 3.5% to its current estimate of a drop of 4.0% to 4.5%.

“The reduction in the company’s RASM expectations was driven primarily by complexities in adapting its revenue management to current booking patterns in this dynamic environment,” Southwest Airlines said in the filing. “Despite lowered expectations, the company continues to expect an all-time quarterly record for operating revenue in second quarter 2024.”

RASM is viewed as a measure of pricing power, and Southwest’s lowered outlook for its RASM comes at a time when travel is booming, the New York Post reported Wednesday.

The report attributed the airline’s projected drop to the industry adding flights and seats, thereby cutting their pricing power even though airlines expect to see a record amount of travel this summer.

Southwest’s pricing issues have also been caused by the airline’s difficulties in predicting demand trends, which have left it unable to sell the number of seats it expected to sell, Reuters reported Wednesday.

Across the industry, airlines increased their capacity, which led to their having to lower fares and suffer reduced profits, CNBC reported Wednesday.

United Airlines is among the members of the industry expecting to see another summer of record travel this year.

In its Wednesday SEC filing, Southwest Airlines said it is working to improve its financial results and will share details of its plans during its next earnings report and in a September investor day.

“The company remain intensely focused on improving its financial results and creating value for its shareholders as it continues to develop and implement its portfolio of strategic initiatives aimed at enhancing the customer experience; delivering operational excellence; creating new and meaningful revenue opportunities; expanding margins; and achieving return on invested capital well above the company’s weighted average cost of capital,” the company said.