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Based in Dallas, TX, Southwest Airlines (LUV - Free Report) is a low-cost airline provider mainly servicing the United States and “ten near-international” markets. Southwest provides short-haul, high-frequency, point-to-point, low-fare services. The company’s point-to-point route structure includes services to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, and Ft-Lauderdale-Hollywood.
Low Cost = Low Performance
Low-cost carriers like Spirit Airlines (SAVE - Free Report) and Southwest Airlines have been dramatically underperforming their larger peers such as United Airlines (UAL - Free Report) .
What is Behind the Underperformance?
Unprofitable and moving in the wrong direction: In Q4, Southwest Airlines swung to a loss for the first time in three quarters. The 38-cent loss was wider than the Zacks Consensus Estimate of 3 cents. Adding to the disappointment, Southwest earned 14 cents a year ago.
Operational Disruptions: Massive flight cancellations due to extreme winter weather conditions adversely impacted Southwest’s operations. Because Southwest is more focused on one part of the globe when compared to its larger counterparts, the company suffered more. Nearly 17,000 flights were cancelled in the last ten days of 2022 – equating to a pre-tax negative impact of approximately $800 million.
In Fighting & Bad Publicity: Southwest is known and loved by its customers because of the laid-back nature of its flight attendants and employees. This laissez faire attitude is that Southwest management has found that many customers appreciate a less stuffy environment. However, that may change soon. Southwest management and some 18,000 union workers have been in a contract dispute for months. In an era where workers are in high demand, this is not an encouraging sign for Southwest. Until management and the union come to an agreement, the stock is likely to be under pressure. Furthermore, even if an agreement is reached, the low-cost carrier will likely face reputational damage and low employee morale.
Margins are Being Squeezed: Rising fuel and labor costs are causing Southwest’s financial efficiency to take a significant hit. In fact, LUV’s return-on-equity of 6.7% pales in comparison to the S&P 500 Index’s 26.2%.
Relative Weakness: When it comes to the stock market, price action = truth. Over the past six months, United Airlines is up 41.0%, while Southwest is down 10.4%
Image Source: Zacks Investment Research
Conclusion
Prospective airline investors should avoid low-cost carriers, such as Southwest and instead opt for larger players such as United Airlines. Southwest has slower growth, shrinking margins, and notable reputational damage to contend with. Furthermore, the price action is disheartening when compared to the market and the airline group.
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Bear of the Day: Southwest Airlines Co
Overview
Based in Dallas, TX, Southwest Airlines (LUV - Free Report) is a low-cost airline provider mainly servicing the United States and “ten near-international” markets. Southwest provides short-haul, high-frequency, point-to-point, low-fare services. The company’s point-to-point route structure includes services to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, and Ft-Lauderdale-Hollywood.
Low Cost = Low Performance
Low-cost carriers like Spirit Airlines (SAVE - Free Report) and Southwest Airlines have been dramatically underperforming their larger peers such as United Airlines (UAL - Free Report) .
What is Behind the Underperformance?
Unprofitable and moving in the wrong direction: In Q4, Southwest Airlines swung to a loss for the first time in three quarters. The 38-cent loss was wider than the Zacks Consensus Estimate of 3 cents. Adding to the disappointment, Southwest earned 14 cents a year ago.
Operational Disruptions: Massive flight cancellations due to extreme winter weather conditions adversely impacted Southwest’s operations. Because Southwest is more focused on one part of the globe when compared to its larger counterparts, the company suffered more. Nearly 17,000 flights were cancelled in the last ten days of 2022 – equating to a pre-tax negative impact of approximately $800 million.
In Fighting & Bad Publicity: Southwest is known and loved by its customers because of the laid-back nature of its flight attendants and employees. This laissez faire attitude is that Southwest management has found that many customers appreciate a less stuffy environment. However, that may change soon. Southwest management and some 18,000 union workers have been in a contract dispute for months. In an era where workers are in high demand, this is not an encouraging sign for Southwest. Until management and the union come to an agreement, the stock is likely to be under pressure. Furthermore, even if an agreement is reached, the low-cost carrier will likely face reputational damage and low employee morale.
Margins are Being Squeezed: Rising fuel and labor costs are causing Southwest’s financial efficiency to take a significant hit. In fact, LUV’s return-on-equity of 6.7% pales in comparison to the S&P 500 Index’s 26.2%.
Relative Weakness: When it comes to the stock market, price action = truth. Over the past six months, United Airlines is up 41.0%, while Southwest is down 10.4%
Image Source: Zacks Investment Research
Conclusion
Prospective airline investors should avoid low-cost carriers, such as Southwest and instead opt for larger players such as United Airlines. Southwest has slower growth, shrinking margins, and notable reputational damage to contend with. Furthermore, the price action is disheartening when compared to the market and the airline group.