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Southwest Airlines Stock Plunges 15.4% in 6 Months: Buy the Dip?
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Shares of Dallas, TX-based airline heavyweight Southwest Airlines Co. (LUV - Free Report) ) have not had a good time on the bourses of late, declining in double-digits over the past 180 days. The disappointing price performance resulted in LUV underperforming its industry in the said time frame as well as the S&P 500, of which the airline is a key member. Additionally, LUV’s price performance compares unfavorably with that of fellow U.S. airline operators United Airlines (UAL - Free Report) and Alaska Air Group, Inc. (ALK - Free Report) in the same time frame.
Six-Month Price Comparison
Image Source: Zacks Investment Research
Currently trading at $28.74, the stock rebounded 31.17% from its 52-week low of $21.91 on Nov. 1, 2023. However, it still reflects a significant 18.30% discount from its 52-week high of $35.18, reached on Feb. 22, 2024.
In fact, Southwest Airlines shares have plummeted 45.1% over the past five years.
Given the significant pullback in LUV’s shares currently, investors might be tempted to snap up the stock. But is this the right time to buy LUV? Let’s find out.
LUV's Bearish RASM Guidance for the Current Quarter
Last month, despite reporting better-than-expected earnings and revenues in second-quarter 2024, Southwest Airlines witnessed a year-over-year decline in earnings. The downfall was owing to the challenges faced by LUV in managing demand across booking curves aimed at addressing the load factor underperformance. As a result, LUV ended up booking too many seats for the peak summer travel period too early in the booking curve.
With domestic capacity outpacing demand and challenges faced by LUV in transitioning to a modernized Origin and Destination (O&D) revenue management system, revenue per available seat mile (RASM) fell 3.8% to 15.90 cents in second-quarter 2024. For third-quarter 2024, RASM is anticipated to be flat to down 2% from the year-ago reported figure.
To this end, LUV is planning to hire a chief revenue officer to look into its revenue management and pricing.
Rising Expenses Weigh on Southwest Airlines Stock
Apart from the unit revenue woes, a rise in labor and airport costs is also likely to dent bottom-line growth by resulting in a spike in operating expenses. Evidently, operating expenses were up 11.8% during the first half of 2024.
The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on salaries, wages and benefits increased 12.8% in the same period over 2022 actuals. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 5.5% year over year to 11.86 cents in the first half of 2024.
For third-quarter 2024, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 11-13% in the third quarter from the comparable period in 2023. For 2024, CASM, excluding fuel, oil and profit-sharing expenses, and special items, is anticipated to increase 7-8% from 2023.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well. Notably, the economic fuel cost per gallon increased 6.2% in second-quarter 2024 to $2.76. For 2024, economic fuel costs per gallon are estimated to be between $2.70 and $2.80.
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
Upbeat Air Travel Demand: A Major Tailwind
Strong passenger volumes bode well for LUV. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by the air travel demand strength, LUV’s top line increased 7.4% year over year in the first half of 2024. This uptick was due to a 7.9% rise in passenger revenues.
To meet the upbeat demand, LUV is boosting capacity. For third-quarter 2024, the company expects capacity to increase 2% from third-quarter 2023 actuals. For 2024, LUV expects capacity to improve 4% from the 2023 level.
From a valuation perspective, LUV is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of B.
Image Source: Zacks Investment Research
To Conclude
It is understood that LUV stock is attractively valued and upbeat passenger revenues are contributing to LUV’s top line. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #3 (Hold) stock until the company demonstrates substantial improvement in its performance. We believe investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
Image: Bigstock
Southwest Airlines Stock Plunges 15.4% in 6 Months: Buy the Dip?
Shares of Dallas, TX-based airline heavyweight Southwest Airlines Co. (LUV - Free Report) ) have not had a good time on the bourses of late, declining in double-digits over the past 180 days. The disappointing price performance resulted in LUV underperforming its industry in the said time frame as well as the S&P 500, of which the airline is a key member. Additionally, LUV’s price performance compares unfavorably with that of fellow U.S. airline operators United Airlines (UAL - Free Report) and Alaska Air Group, Inc. (ALK - Free Report) in the same time frame.
Six-Month Price Comparison
Currently trading at $28.74, the stock rebounded 31.17% from its 52-week low of $21.91 on Nov. 1, 2023. However, it still reflects a significant 18.30% discount from its 52-week high of $35.18, reached on Feb. 22, 2024.
In fact, Southwest Airlines shares have plummeted 45.1% over the past five years.
Given the significant pullback in LUV’s shares currently, investors might be tempted to snap up the stock. But is this the right time to buy LUV? Let’s find out.
LUV's Bearish RASM Guidance for the Current Quarter
Last month, despite reporting better-than-expected earnings and revenues in second-quarter 2024, Southwest Airlines witnessed a year-over-year decline in earnings. The downfall was owing to the challenges faced by LUV in managing demand across booking curves aimed at addressing the load factor underperformance. As a result, LUV ended up booking too many seats for the peak summer travel period too early in the booking curve.
With domestic capacity outpacing demand and challenges faced by LUV in transitioning to a modernized Origin and Destination (O&D) revenue management system, revenue per available seat mile (RASM) fell 3.8% to 15.90 cents in second-quarter 2024. For third-quarter 2024, RASM is anticipated to be flat to down 2% from the year-ago reported figure.
To this end, LUV is planning to hire a chief revenue officer to look into its revenue management and pricing.
Rising Expenses Weigh on Southwest Airlines Stock
Apart from the unit revenue woes, a rise in labor and airport costs is also likely to dent bottom-line growth by resulting in a spike in operating expenses. Evidently, operating expenses were up 11.8% during the first half of 2024.
The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on salaries, wages and benefits increased 12.8% in the same period over 2022 actuals. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 5.5% year over year to 11.86 cents in the first half of 2024.
For third-quarter 2024, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 11-13% in the third quarter from the comparable period in 2023. For 2024, CASM, excluding fuel, oil and profit-sharing expenses, and special items, is anticipated to increase 7-8% from 2023.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well. Notably, the economic fuel cost per gallon increased 6.2% in second-quarter 2024 to $2.76. For 2024, economic fuel costs per gallon are estimated to be between $2.70 and $2.80.
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
Upbeat Air Travel Demand: A Major Tailwind
Strong passenger volumes bode well for LUV. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by the air travel demand strength, LUV’s top line increased 7.4% year over year in the first half of 2024. This uptick was due to a 7.9% rise in passenger revenues.
To meet the upbeat demand, LUV is boosting capacity. For third-quarter 2024, the company expects capacity to increase 2% from third-quarter 2023 actuals. For 2024, LUV expects capacity to improve 4% from the 2023 level.
From a valuation perspective, LUV is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of B.
To Conclude
It is understood that LUV stock is attractively valued and upbeat passenger revenues are contributing to LUV’s top line. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #3 (Hold) stock until the company demonstrates substantial improvement in its performance. We believe investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.