(LUV) Airline Shares Rise on Fare Hikes

After several attempts in the past few weeks, U.S. air carriers finally succeeded in raising fares to offset steeper fuel prices. This time, the low-cost carrier Southwest Airlines Co. (LUV) led the way for the board-based increase in ticket prices.

The company raised fares by $10 per round trip on short routes that cover less than 500 miles. The increased prices will apply to about one-third of Southwest’s flights.

Following Southwest’s announcement, other major airlines such as Delta Air Lines (DAL), United Continental Holdings Inc. (UAL) and US Airways Group Inc. (LCC) joined the league.

As a result, shares of United Continental gained about 5.71% followed by a 5.06% rise in US Airways’ share price. Southwest and Delta share prices rose about 3.40% and 3.61%, respectively.

This is the eight attempt this year to increase domestic airfares. Only four have been successful so far. We believe rising fares would boost passenger revenue per available seat miles for these carriers, as they are also reducing their flying capacities in unprofitable markets. Hence, passengers have less choice and have to pay more to travel.

Additionally, the efficient use of fuel-hedging strategies would help carriers to combat rising fuel prices. Apart from cutting capacity, air carriers are adding novel features to their services and introducing new products. Such measures are also boosting revenue growth and reducing non-fuel costs, thereby driving future profitability.

We are maintaining our long-term Neutral recommendation on United Continental, Delta and Southwest with the Zacks # 3 (Hold) Rank. For the short term (1-3 months), US Airways also retains the Zacks # 3 (Hold) Rank.

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