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One of the leading stories for this week is Southwest Airline’s flash sales blitz, which ran between June 2nd through June 4th. The so-called epic promotion featured flights as low as 47 dollars, whereas prime travel routes, such as New York to New Orleans, could be found for under a hundred dollars. The sales blitz will be valid for travel between August 25 and December 16, excluding certain blackout dates. While frequent fliers will no doubt appreciate the cost-savings, what are the long-term implications for such a margin-slicing strategy?
Southwest Airlines, of course, is one of the low-cost leaders in the airlines industry and it’s of little surprise that they would pull such a move. Last month, the company announced plans to increase its seat-capacity by 8%, a 1% bump-up from its previous target. Such drastic measures are made financially feasible due to the enormous drop in the crude oil market, which has shed approximately 45% in market value over last year’s average price points.
On one hand, Southwest’s management team could be praised for shrewdly taking advantage of favorable commodity market dynamics. With the leverage of lower upfront costs for fuel, any additional passengers that they can squeeze into their routes is “free profit.” However, they’re not the only ones benefitting from lower crude prices, and it remains doubtful that Southwest competitors JetBlue Airways and Spirit Airlines are going to take this sitting down.
As a result, the financial markets punished Southwest’s stock after their seat-capacity announcement, along with every other publicly traded airline carrier. Why? Speculators assume that other airliners will adapt some variant of Southwest’s marketing plan, which would then eat into profit margins for the entire industry. Investors probably hate that more than anything, and this sets up severe challenges for Southwest and other companies to meet or exceed their net income expectations on a per share basis over the remaining earnings reports for the fiscal year.
The Big Cheap: Southwest, JetBlue, and Spirit, are all struggling in the technical markets to regain the momentum they once carried just a few months ago. Southwest and Spirit Airlines in particular are fighting a downward trend channel and unless they get serious help soon, we could be seeing a severe correction. Either way, investors don’t like the direction the airline industry is taking, and that could spell a quick end to discount travel.
In financial news, the U.S. markets tumbled Thursday following a gridlock between Greece and its creditors. The Dow Jones dropped 170 points while the benchmark S&P 500 lost nearly 9/10ths of a percent against the prior session. The precious metals market had a rough go, sliding from volatility in the middle of the week, with gold closing down at 1,176 while silver lost 2% to finish the session at 16.15. Palladium was even worse-hit, dropping down to 758 on the ask.
In digital currency news, bitcoin struggled to spark momentum, with its price range stubbornly caught at 225 dollars. And that will do it for this edition. Thanks for watching and we’ll see you next week!