Southwest Airlines Faces a Life-Altering Choice - InvestingChannel

Southwest Airlines Faces a Life-Altering Choice

Proprietary Data Insights

Financial Pros’ Top Airline Stock Searches in the Last Month

Rank Ticker Name Searches
#1 JBLU Jetblue Airways 88
#2 LUV Southwest Airlines 19
#3 AAL American Airlines 14
#4 UAL United Airlines 9
#5 DAL Delta Air Lines 7
#ad Your Money, Your Answers: The Juice Perspective

Should You Hold Southwest Airlines (NYSE: LUV)?

Once the envy of other airlines, Southwest has struggled in recent years to keep its vaunted status.

A series of massive delays near the holidays crippled its service record. 

Its low-cost model isn’t driving significant pricing differences anymore. And the stock has failed to move higher along with its peers.

Activist investor Elliott Investment Management has taken a significant stake in Southwest, reportedly worth nearly $2 billion or about 11% of the company’s market capitalization.

They’ve put together a “Stronger Southwest” plan that includes:

  • Enhance the Board of Directors: Bring in independent directors from outside of Southwest who have best-in-class expertise in airlines, customer experience, and technology.
  • Upgrade Leadership: Oust CEO Bob Jordan and Executive Chair Gary Kelly.
  • Undertake a Comprehensive Business Review: Reestablishes best-in-class service standards, modernizes Southwest’s strategy and operations with a focus on increased customer choice, improved cost execution, and updating outdated IT systems.

The news sent search volume by financial pros and retail investors skyrocketing, according to our TrackStar data, with everyone asking the same question…

…Can Southwest return to its glory days?

Here’s what we know.

Southwest Airlines’ Business

Southwest Airlines grew from its Texas operations to become America’s largest regional carrier, renowned for its low-cost model and unique all-Boeing 737 fleet strategy. 

Some say that’s become its Achilles heel.

This approach has historically set Southwest apart, allowing for operational efficiencies and cost savings that have contributed to its long-standing success in the competitive airline industry.

But since the pandemic, it’s lagged behind its peers.

The company tried to scoop up market share but ended up oversaturating a market with cheap seats as demand shifted towards premium travel.

Southwest’s focus on point-to-point routes, rather than the hub-and-spoke model used by many competitors, has enabled it to offer more direct flights and quicker turnaround times. 

Yet, that’s also gone by the wayside as its cut routes and even considered scrapping its open seating policy.

Southwest Airlines segments its business into the following areas:

  • Passenger Revenue (93.4% of total revenues) 
  • Freight Revenue (0.7% of total revenues) 
  • Other Revenue (5.9% of total revenues) 

Southwest’s latest quarterly results, released in April 2024, showed a net loss of $231 million, highlighting the airline’s ongoing challenges. 

However, the company reported record first-quarter operating revenues of $6.3 billion, demonstrating strong demand despite operational headwinds. 

In response to these challenges, Southwest has announced several strategic initiatives to improve its financial performance, including network optimization efforts and cost control measures. The company expects these initiatives to contribute between $1.0 billion and $1.5 billion in incremental pre-tax profits for 2024.



Source: Stock Analysis

Despite revenues exceeding prepandemic levels, Southwest needs to improve its profitability.

Gross margins aren’t bad. However, the operating margins have been the lowest since the pandemic.

The key driver was labor, which was up 18.6% year over year for Q1. Maintenance was also up 50% year over year as Boeing failed to meet its delivery targets.

Thankfully, the labor contracts are now set, easing any further increases down the road.

The $2.3 to $3.1 billion in annual operating cash flow doesn’t cover the $3.0 to $3.5 billion in annual Capex. Yet, the company is still paying a 2.5% dividend. It only has $9.2 billion in debt and $10.5 billion in cash. So, coverage isn’t an issue. Plus, fewer aircraft deliveries caused management to forecast 2024 Capex to $2.5 billion.

So, the dividend is safe for now.



Source: Seeking Alpha

Compared to its peers, Southwest is expensive.

It trades at a higher price-to-cash ratio than everyone except JetBlue (JBLU), sometimes by more than 200%. The same goes for its P/E ratio.

Even its price-to-sales ratio is higher than its peers, indicating the stock is overvalued.



Source: Seeking Alpha

Airlines predict a mixed bag for 2024, with American Airlines (AAL) expecting double-digit revenue growth while the rest are in the single digits.

Yet, Southwest’s forward EBITDA growth is forecast to be a fraction of what its peers will achieve.



Source: Seeking Alpha

While the gross margins are relatively comparable, Southwest and JetBlue run awful EBIT and free-cash-flow margins.

It’s no wonder they both have the group’s lowest returns on equity, assets, and total capital.

Our Opinion 5/10

Southwest simply doesn’t stack up in value or growth to its peers.

Global airlines like American Airlines, United Airlines (UAL), and Delta Airlines (DAL) look far more appetizing in value and growth.

Elliot has its work cut out for them. Hopefully, they can help Southwest turn things around.

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