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On Aug 26, 2013, we maintained our Neutral recommendation on Southwest Airlines Co (LUV - Analyst Report) based on the introduction of various customer friendly programs, network expansion, fleet restructuring and capacity management. The passenger airline holds a Zacks Rank #3 (Hold).

Why Kept at Neutral?

Southwest has taken a number of initiatives that are expected to generate high revenues and reduce its cost over the next several quarters. The company's All-New Rapid Rewards program, increased ancillary product offerings, the introduction of international reservation system and a new revenue management program are expected to support its top and bottom-line growth.

Southwest continues to optimize its combined networks with the introduction of new national and international services across various locations.The integration of the AirTran acquisition is providing substantial opportunities for future growth. Southwest expects to generate net synergies of more than $400 million by the end of 2013.    

Southwest is one of the most profitable low-cost passenger airlines in the U.S. and the company remain focused on cost control. Southwest is resizing its fleet structure and has taken several efforts to improve the quality of its fleet including interior redesigning, offering of technology-based facilities and more entertainment options. We believe this is the right strategy by the company to reduce non-fuel costs and improve profitability.

However, the company remains vulnerable to economic situation and the current softness within the U.S. economy has affected the company. We believe if the current macroeconomic situation fails to improve, the company’s might not be able to achieve its goal of a 15% pre-tax return on the invested capital.

Further increase in non-fuel costs like salaries and wages, airport cost, AirTran integration cost and deferred advertising are expected to affect the company’s profitability. Stiff competition from another economic airline, JetBlue Airways Corp. (JBLU - Analyst Report) and heavy investments remain detrimental to the upside potential of the stock.

For the third and fourth quarters of 2013, the Zacks Consensus Estimates for earnings are 27 cents and 24 cents per share, respectively. This reflects year-over-year growth of 105.38% and 166.67%, respectively.

Other Stocks

Other stocks worth mentioning within this sector are U.S. Airways Group Inc. and Republic Airways Holdings Inc. (RJET - Snapshot Report). LCC currently carries a Zacks Rank #1 (Strong Buy) while RJET holds a Zacks Rank #2 (Buy).

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