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Is Turbulence Coming for Southwest Airlines (LUV) Stock?
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Virgin Group founder Richard Branson once said that “If you want to be a millionaire, start with a billion dollars and launch a new airline.” He was referring to how difficult it is to turn a profit in the airline industry compared to how easy it is to lose money.
Recently, Southwest Airlines (LUV - Free Report) has done a great job of proving Mr. Branson right, piling enough problems on its plate to make any frequent buffet visitor jealous. From unhappy unions to earnings misses and ever-growing competition, LUV is certainly lowering their altitude.
Is LUV flying south for the winter, or is it headed for greener pastures?
Danger of the Unions
On Monday, the Southwest Airlines Pilots’ Association (SWAPA) called for the replacement of CEO Gary Kelly, citing discontent about the nationwide computer outage that grounded hundreds of flights. The union argues that the outage was due to “misguided focus” on cost control and stock performance. They also called for COO Mike Van de Ven to step down.
LUV spent $700 million on stock buybacks in Q2, part of the company’s $1.5 billion program. The board of directors also approved another $2 billion worth of buybacks in May, a move that upset many employees, who believe the money is better off reinvested into the airline and personnel instead.
Last year, LUV’s pilots and flight attendants rejected contract agreements, and along with the mechanics, are currently in the process of renegotiating. SWAPA president Jon Weaks stated that “As tenured employees and frontline leaders of this company, we can no longer sit idly by and watch poor decision after poor decision deeply affect our customers and Southwest Airlines.”
Continued discontent among employees could be a major source of concern for LUV in the near future.
Outdated Technology and Stalled Growth
As recently as July 20th, LUV halted all flight departures temporarily as it worked to resolve issues with multiple technology systems. Problems continued, and over the next few days the company cancelled hundreds and delayed thousands of flights across the country.
Part of employee discontent stems from these outages, which they believe can be attributed to the management’s overconcentration on Wall Street performance rather than updating antiquated technology.
Stagnating growth is becoming another issue for LUV, which has seen a year-to-date price change of -13%. It currently sits at a Zacks Rank #5 (Strong Sell) due to unfavorable earnings estimate revisions in the last 60 days.
Estimates for the current quarter stand at $0.93 per share, down noticeably from the $1.08 estimate of 60 days ago. Estimates are also down for next quarter, this fiscal year as well as the next, reflecting the shift in analyst confidence in the stock.
LUV posted Q2 earnings on July 21st, in which it missed estimates by $0.03 for a surprise of -2.46%. With tech issues and disgruntled staff, outlook for LUV is bleak.
The Wrath of Competition (and Oil)
The recent oil glut has also had an effect on the airline industry, forcing LUV to lower ticket prices. In its recent earnings report, LUV stated that it expects revenue from each seat flown a mile to fall between three and four percent this quarter.
Other airliners, such as Delta Airlines (DAL - Free Report) and United (UAL - Free Report) also expect lower revenue for the same reasons, and while American Airlines (AAL - Free Report) beat earnings expectations, it cannot escape the realm of lowering ticket prices as well.
The rise of discount airliners such as Spirit (SAVE - Free Report) , JetBlue (JBLU - Free Report) , and Allegiant (ALGT - Free Report) also pose danger to LUV, which had otherwise continued its profitability by offering lower prices than those of industry competition. LUV’s current internal issues along with the current macroeconomic environment are putting the company on track to fall behind its industry peers.
Bottom Line
The airline industry has never had a glamorous reputation to investors, and for good reason. There are hard-hitting consequences for mistakes, and little upside when well-run. LUV may return to its status as the industry sweetheart in later years, but for the foreseeable future has many hurdles to clear.
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Is Turbulence Coming for Southwest Airlines (LUV) Stock?
Virgin Group founder Richard Branson once said that “If you want to be a millionaire, start with a billion dollars and launch a new airline.” He was referring to how difficult it is to turn a profit in the airline industry compared to how easy it is to lose money.
Recently, Southwest Airlines (LUV - Free Report) has done a great job of proving Mr. Branson right, piling enough problems on its plate to make any frequent buffet visitor jealous. From unhappy unions to earnings misses and ever-growing competition, LUV is certainly lowering their altitude.
Is LUV flying south for the winter, or is it headed for greener pastures?
Danger of the Unions
On Monday, the Southwest Airlines Pilots’ Association (SWAPA) called for the replacement of CEO Gary Kelly, citing discontent about the nationwide computer outage that grounded hundreds of flights. The union argues that the outage was due to “misguided focus” on cost control and stock performance. They also called for COO Mike Van de Ven to step down.
LUV spent $700 million on stock buybacks in Q2, part of the company’s $1.5 billion program. The board of directors also approved another $2 billion worth of buybacks in May, a move that upset many employees, who believe the money is better off reinvested into the airline and personnel instead.
Last year, LUV’s pilots and flight attendants rejected contract agreements, and along with the mechanics, are currently in the process of renegotiating. SWAPA president Jon Weaks stated that “As tenured employees and frontline leaders of this company, we can no longer sit idly by and watch poor decision after poor decision deeply affect our customers and Southwest Airlines.”
Continued discontent among employees could be a major source of concern for LUV in the near future.
Outdated Technology and Stalled Growth
As recently as July 20th, LUV halted all flight departures temporarily as it worked to resolve issues with multiple technology systems. Problems continued, and over the next few days the company cancelled hundreds and delayed thousands of flights across the country.
Part of employee discontent stems from these outages, which they believe can be attributed to the management’s overconcentration on Wall Street performance rather than updating antiquated technology.
Stagnating growth is becoming another issue for LUV, which has seen a year-to-date price change of -13%. It currently sits at a Zacks Rank #5 (Strong Sell) due to unfavorable earnings estimate revisions in the last 60 days.
Estimates for the current quarter stand at $0.93 per share, down noticeably from the $1.08 estimate of 60 days ago. Estimates are also down for next quarter, this fiscal year as well as the next, reflecting the shift in analyst confidence in the stock.
LUV posted Q2 earnings on July 21st, in which it missed estimates by $0.03 for a surprise of -2.46%. With tech issues and disgruntled staff, outlook for LUV is bleak.
The Wrath of Competition (and Oil)
The recent oil glut has also had an effect on the airline industry, forcing LUV to lower ticket prices. In its recent earnings report, LUV stated that it expects revenue from each seat flown a mile to fall between three and four percent this quarter.
Other airliners, such as Delta Airlines (DAL - Free Report) and United (UAL - Free Report) also expect lower revenue for the same reasons, and while American Airlines (AAL - Free Report) beat earnings expectations, it cannot escape the realm of lowering ticket prices as well.
The rise of discount airliners such as Spirit (SAVE - Free Report) , JetBlue (JBLU - Free Report) , and Allegiant (ALGT - Free Report) also pose danger to LUV, which had otherwise continued its profitability by offering lower prices than those of industry competition. LUV’s current internal issues along with the current macroeconomic environment are putting the company on track to fall behind its industry peers.
Bottom Line
The airline industry has never had a glamorous reputation to investors, and for good reason. There are hard-hitting consequences for mistakes, and little upside when well-run. LUV may return to its status as the industry sweetheart in later years, but for the foreseeable future has many hurdles to clear.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>