Recent news from Southwest Airlines that it is scaling back planned growth through year-end will help keep domestic capacity in check as costs rise, but similar moves will be needed by peers to cement what analysts believe is a necessary market correction.

“Looking forward, domestic capacity continues to appear challenged despite” Southwest’s cuts, Morgan Stanley analysts wrote. 

The Dallas-based carrier said June 4 that full-year 2018 capacity will be 4% above 2017, a reduction of 1% from previous guidance. In the second-quarter, the airline expects ASM growth to be about 3.5% year-over-year (YOY), at the lower range of its earlier 3.5% to 4% growth forecast. For the second half of 2018, Southwest now expects about 6% YOY capacity growth, down from the airline’s previous forecast of about 7%.

The reductions come on the heels of a downward booking trend following April’s accident involving an inflight engine failure that left one passenger dead. The carrier immediately paused its advertising for a time, but bookings lagged even after marketing resumed. 

Meanwhile, oil prices are rising. Brent Crude, below $50/barrel a year ago, has been above $70 for two months and appears to have settled into the mid-$70s.

Calling this the “new normal,” Morgan Stanley argues that “major domestic capacity adjustments are needed” to back-stop airline share prices. The analysts say a domestic-system growth target of 3%-4% “appears to be the right level based on history, core demand growth and investor feedback.”

Even after Southwest’s changes, industry’s track is closer to 6% growth.

Southwest and the rest of the so-called Big Four—Dallas/Fort Worth-based American Airlines, Atlanta-based Delta Air Lines, and United Airlines, were on track to grow about 4% domestically this year before Southwest’s changes. American, at 2%, is at the low end, while United and its much-publicized push to drive more flow through hubs has it at high end, at about 5%. The rest of the industry is slated to add 4%-6%, although some, including Seattle-based Alaska Airlines and Florida-based ULCC Spirit Airlines, have reduced growth projections in recent months.

Adding to the challenge: Southwest’s planned Hawaii routes are not in its projections because needed FAA approvals are not yet in hand, meaning schedules are not loaded. If, as expected, FAA grants extended-range twin-engine operations certifications this year, Southwest’s capacity reductions may not be as large as projected, given the 2,000-nm stage lengths that Hawaii flights would add. Southwest's average stage length is about 750 nm.

Meanwhile, Morgan Stanley’s analysis suggests little sign of yield-challenging predatory behavior by the majors. Southwest’s schedule build-up includes a strong California presence to counteract Alaska Airlines, for instance, but it does not place unusual emphasis on the Chicago, Denver, or Houston markets. Morgan Stanley notes that projected second-half 2018 growth in the markets is “not materially different” than the 3% expected in the first half, which trends below the system average. 

All three markets include key United hubs that the Chicago-based carrier has prioritized as operations that are under-performing from a profit standpoint, and are getting added attention in the form of more feed from spokes. The below-average growth projections lend credence to United’s strategy, Morgan Stanley said.

Sean Broderick, sean.broderick@aviationweek.com

Mark Nensel, mark.nensel@informa.com