Common Cents purchased shares of LUV on December 11 as the share price declined on a market-wide decline and concerns over PRASM metrics. It appears that Southwest's discounting of fares to increase market share has resulted in an unfavorable competitive environment...surprise, surprise. The sustained competitive environment, however, will be buffered by lower fuel prices. While lower fare prices brings in lower revenue, the profit may not change much due to the fuel prices (remember: profit = revenue - cost).
Common Cents believes that the competition will not sustain over the long term. Airlines are in a period of profitability (finally) and, I believe, have an implicit agreement to sustain profitability through lack of intense competition. The short-term period of competition is related to Southwest's expansion in certain markets and, according to management, is not intended to be sustained.
Going forward, Common Cents will look to add on to this position at a near 10% decline in share price or sell a portion of the position at a near 10% increase.
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