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Dallas-based low-cost carrier, Southwest Airlines Co. (LUV - Analyst Report) is one of the most renowned names in the U.S. airline industry with market capitalizations of $22.87 billion. However, this well-established airline stock has been under pressure in recent times, as evidenced by its Zacks Rank #4 (Sell). The stock has lost more than 9% of its value this year, further highlighting the tough times it is going through.

Multiple Headwinds

The carrier, like its peers, has been facing a number of headwinds like the surge in terror attacks, uncertainty following the Brexit vote, unit revenue issues, capacity woes and technological glitches.

This July, the carrier suffered a technology outage, which impacted its worldwide operations for almost three days and resulted in several flight delays and cancellations. This is expected to hurt third-quarter results.  Following the disruption, the carrier mentioned that it expects total revenue per available seat mile (RASM) to decline in the band of 3.5–4.5% from an earlier range of 3–4%. In fact, unit revenue issues have been adversely affecting the entire space for quite some time and Southwest Airlines’ results are no exception to the trend.

Declining air fares are further denting the top-line growth of carriers, including Southwest Airlines. Capacity overexpansion is being viewed as a major reason behind falling airfares. The August traffic reports of many carriers, such as Southwest Airlines, American Airlines Group (AAL - Analyst Report) , United Continental Holdings (UAL - Analyst Report) and Alaska Air Group, Inc. (ALK - Analyst Report) , highlighted the prevalent capacity woes. The August load factor (percent of seats filled with passengers) of these companies declined as capacity expansion outweighed traffic growth.

Earlier this year, Southwest Airlines announced its decision to delay the delivery of 67 new Boeing 737 Max jets by almost six years to manage capital spending. These planes, which were initially expected between 2019 and 2022, will now be delivered between 2023 and 2025. As a result, the company’s capital expenditure will be reduced by $1.9 billion. However, the announcement was not received well by investors as the stock declined.

Additionally, the carrier has seen unrest on the labor front this year with some of its labor groups demanding the removal of the carrier’s top executives. Moreover, the surge in terror attacks adds to the woes. This is because such terrorist activities often lead to air travel demand slackening on account of security fears.

A Turbulent Third Quarter Ahead?

Southwest Airlines had reported lower-than-expected earnings in the second quarter of 2016 and things do not look very rosy for the third quarter either. Detailed results are scheduled to be announced on Oct 26. Our proven model does not conclusively show that the company is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.  Southwest Airlines has a Zacks Rank #4 and Earnings ESP of -1.14%. Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement.

In view of the above headwinds, the Zacks Consensus Estimate for the third quarter has been slashed by 15 cents over the last 90 days to the current level of 88 cents.

How to Identify the Outperformers?

Not only Southwest Airlines but the entire sector is reeling under the threats posed by the above headwinds.  The bearish Zacks Industry Rank of 176 (among more than 260 groups) carried by the Transportation-Airline division further highlights the hard times the sector has fallen in. Hence, it is by no means an easy task to arrive at winning stocks in the space.

Though it is a daunting task to find the most attractive picks at the moment, Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

3 Airline Winners

Copa Holdings (CPA - Snapshot Report) is a leading Latin American airliner that operates through its subsidiaries – Copa Airlines and AeroRepublica. The carrier sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. The Panama City-based carrier has been an impressive performer this year with its shares surging more than 84%, year to date.

The carrier has a robust earnings history. It outpaced the Zacks Consensus Estimate in three of the last four quarters with an average beat of 37.04%. The Zacks Consensus Estimate for 2016 has climbed 10 cents to $4.55 per share over the last seven days.

SkyWest, Inc. (SKYW - Snapshot Report) operates as one of the larger regional airlines in the United States.  The Zacks Rank #2 carrier is headquartered at St. George, UT.

The company’s estimated earnings growth rates for the current and next quarter are 14.08% and 13.27%, respectively. Earnings are expected to grow by 33.84% in 2016. The 2016 Zacks Consensus Estimate has climbed 4.7% to $2.65 per share over the last 60 days.

Ryanair Holdings plc (RYAAY - Snapshot Report) is an Irish, low-fare airliner that primarily operates from Europe. The carrier has a Zacks Rank #2. It has a market cap of $18.61 billion and its shares have appreciated 10.9% over the last three months

The company has a PEG ratio of just 0.35. Investors should note that a company with a PEG ratio of less than 1 is generally considered to be undervalued. The 2016 Zacks Consensus Estimate has climbed 4 cents to $5.99 per share over the last seven days.

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