Southwest Airlines ($34; LUV) reported 8.5% higher traffic and capacity growth of 7.6% in May. However, passenger revenue per available mile (PRASM) slipped 6.0%. Southwest now expects June-quarter PRASM to fall 4% to 5%; last month it had projected a 3% quarterly decline. American Airlines ($40; AAL) and United Continental ($52; UAL) also trimmed their PRASM expectations for the June quarter.
The lower guidance has sparked concerns about lower ticket prices. However, an analyst at J.P. Morgan Chase ($68; JPM) noted that Southwest recently raised ticket prices on some flights, marking its first broad fare hike since October. Historically, rivals have matched Southwest's price increases. Airlines also seem attuned to investor concerns about capacity growth. Southwest capped its 2016 guidance for capacity growth at 6%, below its prior target of 6% to 7% and its 2015 projection of 7%.
Since the end of March, Southwest shares have slumped 21%, while Alaska Air Group ($61; ALK) shares have dropped 7%. An improving U.S. economy should help support the airline industry's growth, and we still like both stocks. Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Long-Term Buy.
Teva Pharmaceuticals ($61; TEVA) pushed ahead with its unsolicited bid to acquire Mylan ($74; MYL) by boosting its stake in the takeover target above 3% from 1.8%. A 4.6% stake would allow Teva to challenge Mylan's takeover defense in Dutch court. Teva reaffirmed its commitment to the deal in an open letter that chided Mylan for misleading investors. Mylan is a Buy and a Long-Term Buy.
No changes were made this week, though we did make a switch in our fund portfolios.