We recently compiled a list of the 11 Worst Aviation Stocks to Buy According to Analysts. In this article, we are going to take a look at where Southwest Airlines Co. (NYSE:LUV) stands against the other aviation stocks.
The aviation industry has been one of the most important segments of the market in the 20th and 21st centuries. The future of aviation is closely tied to the broader landscape of mobility, which is important for economic growth, social connectivity, and access to services like trade, healthcare, and education.
According to the International Air Transport Association (IATA), the airline industry has made a strong recovery from the COVID-19 crisis, with global traffic surpassing pre-pandemic levels by February 2024. Domestic travel rebounded first, which reached pre-Covid levels by spring 2023, while international travel followed more recently.
However, the global network has shifted since 2019. China’s international travel recovered slowly due to the delayed easing of restrictions, economic uncertainties, and geopolitical issues. On the other hand, domestic travel in China hit record highs, driven by internal tourism. Routes between Asia and Europe continue to be affected by the war in Ukraine.
Most regions are expected to exceed 2019 traffic levels in 2024, with global passenger numbers forecasted to grow 10.4% year-over-year.
The report states that Asia Pacific is the fastest-growing region, which is projected to contribute over half of global passenger growth by 2043 and it is led by India and China. Despite risks like geopolitical conflicts and climate policies, improved economic conditions may boost demand.
Air connectivity, a main driver of global economic growth, is set to hit a record in 2024 with over 22,000 unique city pairs, aided by declining ticket fares. Meanwhile, air cargo demand has rebounded, driven by e-commerce and shipping disruptions. The global capacity is expected to increase further, though the cargo load factor will likely decrease as capacity exceeds demand.
Use of AI in the Industry
Like most industries of today, airlines are also implementing AI to improve the efficiency of their operations. According to an August report by CNBC, these companies are using AI for tasks like ground control, customer service, and optimizing flight routes.
American Airlines introduced its AI-powered “smart gating” system at its Dallas-Fort Worth control center. The tool automatically assigns gates to incoming flights, which cut runway taxi time by around 20%, or two minutes per flight, across five airports. The system also helps passengers, baggage, and crews make quicker connections, which improves overall efficiency.
Alaska is using AI to streamline flight paths and optimize aircraft turnaround times at gates. Its tool is described as “Waze for the skies,” and it uses AI to plan faster routes, which saves fuel and reduces delays. Additionally, the system monitors ground operations as it tracks when fuel, catering, and baggage trucks arrive and depart, which allows agents to address delays immediately.
United has implemented generative AI for customer service, especially during flight disruptions. The AI generates detailed, empathetic messages explaining delays, which has increased customer satisfaction by 4% since its rollout on 6,000 flights.
Despite these advancements, the airlines said that AI is not replacing jobs but is improving operational efficiency. AI tools allow airlines to improve areas where humans may struggle to handle complex tasks as efficiently. These things, like reducing flight delays or cutting minutes off turnaround times, aim to improve overall service without completely automating operations.
Our Methodology
For this article, we used stock screeners and ETFs to identify 65 companies above $50 million market cap that have significant operations in the aviation industry. We narrowed our list to 11 companies where less than 50% of the analysts that have covered the stock have Buy-equivalent ratings. In addition, we skipped stocks with an average analyst price target upside above 15%. The stocks are listed in descending order of their average analyst price target upside.
We also added the hedge fund sentiment around each stock which was taken from our database of over 900 elite hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A commercial Boeing 737 aircraft flying in the sky with the well-known SWABIZ logo on it.
Southwest Airlines Co. (NYSE:LUV)
Average Analyst Price Target Upside as of September 16: -12.40%
Number of Hedge Fund Holders: 23
Southwest Airlines Co. (NYSE:LUV) is a major passenger airline operating scheduled flights across the United States and several international destinations. With a fleet of over 800 Boeing 737 aircraft, the airline serves nearly 120 destinations domestically and 10 international countries, including Mexico, Costa Rica, Belize, Jamaica, and others.
The airline’s financial performance has been pressured by delays in aircraft deliveries from Boeing, which have worsened cost issues. The ongoing industry-wide overcapacity in the domestic market has led to pricing pressures and lower airfares. The company is in discussions with Boeing regarding compensation for these delays, which may come in the form of price reductions.
It tops our list of the worst aviation stocks to buy according to analysts. Out of 21 analysts, 12 have given the stock a Hold rating, 2 keep an Underweight rating and 4 have a Sell rating on it. The average price target of $25.00 implies a downside of 12.40% from the present levels, as of September 16.
Despite the challenges, in the second quarter, the company achieved a new revenue record of $7.35 billion, which is nearly a 5% increase from the same period in 2023. The growth was driven by a strong demand for air travel. However, despite this revenue boost, the company’s adjusted net income dropped by 51% to $370 million, or $0.58 per share.
The decline in earnings was partly due to a 3.8% decrease in unit revenue compared to the second quarter of 2023. The drop was influenced by a greater increase in domestic capacity relative to the demand, leading to revenue management issues. The airline also faced challenges from selling too many seats too early for the busy summer travel season, which negatively impacted revenue.
Southwest Airlines (NYSE:LUV) has projected capital expenditures of around $2.5 billion for 2024, including about $1 billion for aircraft purchases. The company expects to take delivery of approximately 20 to 28 aircraft this year and to continue making payments for its 2025 aircraft orders.
For the third quarter, it expects a potential 2% decline in unit revenue year-over-year and expects nonfuel costs to rise by up to 13%. These higher expenses could continue to weigh on the airline’s financial performance through the end of 2024.
However, on September 3, Evercore ISI analyst Duane Pfenningwerth upgraded Southwest Airlines (NYSE:LUV) to Outperform from In Line rating with a price target of $35, up from $30. The upgrade shows anticipated improvements in capacity management and new revenue initiatives that the company plans to unveil, such as assigned seating and premium economy options. The analyst also noted the strong underlying value of the airline’s fleet, which may become more apparent through future transactions.
In the second quarter, 23 hedge funds held positions in Southwest Airlines (NYSE:LUV), worth $429.489 million. As of Q2, Elliott Management is the most dominant shareholder in the company after it initiated a position and has a stake worth $171.660 million.
Overall LUV ranks 1st on our list of the worst aviation stocks to buy. While we acknowledge the potential of LUV as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LUV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.