Interesting follow-up research note out today from Avondale Partners analyst Bob McAdoo.
Bob decided to follow up on Southwest’s second quarter comments concerning business travel. Essentially the airline said in its earnings call that revenues, particularly business fares, were weak in the second quarter. Compared to the rest of the industry, Southwest’s revenue performance — both business and leisure– lagged.
Bob’s hunch? The airline had been too aggressive on fares.
Following up on his own experience flying out of Kansas City over the last year, when he says he has repeatedly found lower fares on legacy carriers than on Southwest, Bob decided to do a broad random sample of fares in a selection of markets to see if his theory about the airline having higher prices than the competition would hold up.
As he explained in his note,
“For each itinerary, we priced out two different close-in journeys and logged in the prices.
First, we selected 8 origin cities from across the LUV network, seeking both more and less active cities. For each of these origins, we then selected the top 50 LUV destinations from each origin and then randomly selected 20%, or 10 destinations, from among the 50 largest destinations for each origin.
…Upon review of the data, it seems Southwesthas a different pricing regimen against Alaska Airlines in Seattle than in the other cities. Southwest seems to be more aggressive in pricing below Alaska. For this reason, we excluded Seattle data and reduced the study to the 70 markets out of the 7 remaining cities.
…For the 140 trips on 70 random itineraries, there was a consistent pattern on 50 of the markets. Southwest was more expensive in 40 of the 50, or 80% of the trips. The legacy airlines were more expensive on 10 or 20% of the trips. When Southwest was more expensive,it was, on average, a $134 higher fare— a 26.4% premium. We obviously don’t know whether this pattern is driving the slower business travel on Southwest. Nonetheless,there is clearly a trend that we will continue watching in coming months.”
Having said all that, however, as McAdoo notes, if Southwest continues to slow down its capacity growth, not only will that help Southwest, it will help the rest of the industry. “A lid on LUV growth should be good for LUV and for all airlines,” he writes.