Things in the Sky

Well, earnings season has started this week, with results from American, Continental, and Southwest and more on the way next week. To be honest, I haven’t had the time to give the earnings releases the time they deserve. I’m hoping that over the weekend I can look over the SEC filings and listen to a few conference calls.

But I did want to point out something that really stood out in Southwest’s numbers – the airline is doing a fantastic job managing capacity. ASMs were down 7.7% year-over-year in the fourth quarter as Southwest cut many unprofitable routes. And Southwest was able to use that extra capacity to enter new markets that present new revenue opportunities – New York, Minneapolis, Milwaukee, and Boston were all added without Southwest growing its fleet. And despite the capacity cut, Southwest increased traffic (as measured by RPMs) 5.3% in the fourth quarter. Those numbers caused a big increase in load factor, on the order of 9.5 points to 77.3%.

And that should also explain Southwest’s favorable revenue numbers.

Yield is calculated by dividing passenger revenues by total RPMs, which show what passengers pay per passenger mile. Southwest’s yield decreased 6.4% to 14.22 cents. PRASM is like yield, except it brings capacity into the mix. One could divide passenger revenues by total ASMs, or multiply yield by load factor.

For the fourth quarter of 2008, Southwest’s yield was 15.19 cents, and load factor was 67.8%, giving us a PRASM number of 10.30 cents. In the fourth quarter of 2009, yield was 14.22 cents. With a load factor of 77.3%, that gives us a PRASM number of 10.99 cents – a 6.7% increase.

Now, just for the sake of argument, let’s say Southwest’s load factor in the fourth quarters of 2008 and 2009 were the same at 67.8%. If that was the case, Southwest’s PRASM for Q4 2009 would have been 9.64 cents, a 6.4% decrease.

So kudos to Southwest for really optimizing its schedule.