Southwest Airlines Co (NYSE:LUV) – another blow, this time from taxes
Its as if everything on our planet, right from natural disasters, poor weather conditions and acts of terrorism all scathe the airline industry in one way or the other. As if these factors were not sufficient to keep the industry cowering, an uncertain economy and volatile jet-fuel prices have meant that airlines could barely even breathe. All of these have been contributing factors to the unpredictability in air travel demand and price challenges just don’t want to beat a retreat. Southwest Airlines Co (NYSE:LUV), Delta and Jet Blue are the prominent players in the regional airline space.
On 26 May 2013, the Obama administration proposed a new tax. A tax of $14 will apply to every passenger. The tax in itself seems like an insignificant amount, and will not really affect intercontinental passengers. However, the impact on LUV’s passenger-base is projected to be a huge one. Middle-income individuals are the airline’s target-market. They choose to travel with the airline specifically due to its low fares. Once this tax comes into effect, these passengers may be compelled to consider alternatives such as rail and road travel. In the bargain, Southwest stands to lose its customer-base which will translate into lower revenue.
How do budget airlines operate?
At the outset, in the 20th century, air travel was prohibitively expensive and only the ultra-rich could afford it. Over a period of time, bigger, more technologically-advanced, faster and quieter planes were brought into operation. They could fly longer distances and slowly but surely, not just the rich started traveling by air. However, even between the 60’s and 70’s air-fares were by no means cheap but air travel was more of a faster and more comfortable mode of transport that also included free meals and other luxuries. It was only in the 1980’s that budget airlines reared their heads and started offering cheaper air-fares by actioning cost-cuts on every front.
A common misconception is that budget airlines are unsafe and many people choose not to fly them because of this. However, this is not the case. Most budget airlines have an updated fleet. They are very conscious about the fact that compromising on safety can actually drive them out of the industry. And so, despite everything, airlines such as Southwest Airlines Co (NYSE:LUV) will hold onto their wings and head for the clouds.