Southwest (LUV) announced this week that it plans to increase capacity by 7% to 8% in 2015 – that’s up from its previous 7% estimate. Airline stocks were hit on the news, amid fears that increases in capacity across the industry will lead to an oversupplied market. Appropriate airline capacity growth is largely expected to be in line with U.S. GDP, which grew 2.4% last year and 0.2% in the first quarter of 2015. Southwest grew capacity as measured by available seat miles (ASMs) at 6% in the first quarter of 2015 alone. While investors were clearly spooked by the news, Morningstar (MORN) senior equity analyst Neal Dihora says in the long term, the move is a wise one on behalf of Southwest. Dihora acknowledges that in the short term, one can expect the carrier to have reduced profitability due to pressure to lower fares amid increased capacity. However, he stresses that it wouldn’t be an enormous amount of money thanks to the large cushion the airline has from lower fuel expenses.
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