Can Southwest Maintain Its Revenue Growth Trajectory In 2020 Despite The Grounding Of Its 737 MAX Fleet?

After the Federal Aviation Administration’s emergency order last March, Southwest Airlines (NYSE: LUV) grounded 34 Boeing 737 MAX aircraft in its fleet. Despite the expected decline in capacity from the groundings, the airline’s revenues are likely to witness single-digit growth in revenues over 2019 as well as 2020 owing to growing passenger demand which has driven up airfares. Trefis details the key drivers of Southwest Airlines’ Revenues in an interactive dashboard along with the expectations for 2020, parts of which are highlighted below

A Quick Look at Southwest Airlines’ Revenues

Southwest Airlines reported $22 billion in Total Revenues for full-year 2018. It includes three revenue streams:

• Passenger Revenue: $20.5 billion in FY2018 (93% of Total Revenues). It represents income from the sale of air tickets and other ancillary offerings for the company’s mainline and affiliate carriers. If a ticket is sold and travel is yet to happen, the company recognizes income from such tickets as air traffic liability. Due to the complex structure of ticket pricing, cancellation and rescheduling, a certain portion of the liability is recognized as passenger revenues based on recognized historical patterns.
• Cargo Revenue: $175 million in FY2018 (1% of Total Revenues). It represents income from freight and mail services.
• Other Revenue: $1.3 billion in FY2018 (6% of Total Revenues). It comprises of the sale of loyalty points to credit card companies.

Southwest Airlines’ Total Revenue has grown by 8% from $20.2 billion in 2016 to $22 billion in 2018, and is expected to reach $23.5 billion in 2020

• The company generates a bulk of its revenues from air ticket sales, which contribute nearly 93% of Passenger revenues.
• Redemption of certain passenger loyalty rewards and other ancillary services such as baggage fees and on-board sales are also recognized as Passenger revenues.
• Air ticket sales are driven by available seat miles, passenger yield, and aircraft occupancy level.
• In the last three quarters, Southwest’s available seat miles have declined by 2% and aircraft occupancy levels have remained relatively flat.
• Moreover, the removal of MAX aircraft from flight schedule until April’20 is likely to have a negative impact on capacity growth in the near term.
• However, growing passenger yield from rising airfares is expected to expand passenger revenues by 2.5% in 2019 and 4% in 2020.
• In 2019, the company’s Cargo revenues have observed headwinds primarily due to a weak demand for air cargo services, and this trend is unlikely to change in 2020.
• Other Revenues comprise of the sale of loyalty points to credit card companies and other miscellaneous services such as lounge access, and has remained relatively stable over the last few years. We expect it to continue growing with the Passenger revenues.

Additional details about how key operating metrics underlying Southwest Airlines’ Passenger Revenues have trended over the years are available in our interactive dashboard.

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