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Southwest (LUV) Gets Mired in Headwinds: Time to Dump Stock?

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Southwest Airlines Co (LUV - Free Report) is grappling with coronavirus-induced travel-demand woes. Due to weak air-travel demand, the carrier is suffering significant loss of passenger revenues. With passenger revenues declining 55.5% year over year in the first six months of 2020, the airline’s top line plunged 52.6%. In July, Southwest’s operating revenues plunged 70-75% year over year. The same is expected to have declined 70-75% in August as well. Meanwhile, for September, operating revenues are estimated to decline 65-75% year over year. With coronavirus concerns continuing unabated, revenues are expected to remain under pressure.

To match network with the low-demand scenario, the airline reduced capacity by 31.6% in the first six months of 2020. For the third quarter, capacity is expected to decline 30-35%. To allow passengers to maintain social distancing, the carrier plans to keep middle seats vacant (for customers not traveling together) through at least Oct 31, 2020. This significant reduction in capacity is likely to result in significant increase in third-quarter unit costs.

Additionally, the company continues to be plagued by Boeing 737 MAX-grounding issues. Absence of the fuel-efficient MAX jets is a concern for the company. Southwest suspended the MAX aircraft from its schedule through mid-December 2020.

Due to these headwinds, shares of the company have declined more than 27% so far this year.


The fact that the Zacks Consensus Estimate for 2020 bottom line is  pegged at a loss of $6.39 per share highlights the negativity surrounding the stock. In fact, the loss estimate has widened by 50% over the past 60 days.

Given this bleak backdrop, we believe investors should discard  Southwest stock from their portfolios now, as is suggested by its Zacks Rank #4 (Sell).

Key Picks

Some better-ranked stocks in the broader Transportation sector are Landstar System Inc (LSTR - Free Report) , Knight-Swift Transportation Holdings Inc (KNX - Free Report) and Canadian Pacific Railway Limited (CP - Free Report) . While Landstar and Knight-Swift sport a Zacks Rank #1 (Strong Buy), Canadian Pacific carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Landstar, Knight-Swift and Canadian Pacific have rallied more than 15%, 26% and 17% respectively so far this year.

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