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Southwest Airlines' Shares Fall 25% in a year: Here's Why

Zacks Equity Research

Shares of Southwest Airlines Co. LUV have lost 24.6% compared with the industry's 44.2% decline in a years’ time. The disappointing performance was primarily caused by the coronavirus-induced low air traffic demand apart from the prolonged grounding of the 34 Boeing 737 MAX jets in its fleet.

Let’s take a detailed look into the factors hurting the stock.

Southwest Airlines witnessed a sharp fall in passenger bookings due to the coronavirus outbreak. The carrier recently issued a bearish view on revenue per available seat miles (RASM: a key measure of unit revenues) for first-quarter 2020. The company now anticipates first-quarter TRASM to either dip 2% or inch up to 1% from the year-ago quarter’s figure.

Moreover, drop in traffic demand is expected to persist for the rest of March, given the rapid spread of COVID-19. Consequently, first-quarter operating revenues are expected to decline $200-$300 million.  To tackle the low-demand scenario, the carrier aims to reduce capacity by a minimum 20% in the Apr 14-Jun 5 period.  

Since the carrier has 34 Boeing 737 MAX jets in its fleet, prolonged grounding since March 2019 is significantly hurting the company. Apart from incurring high non-fuel unit costs, the carrier’s operating income was hurt to the tune of $828 million in 2019. Also, Southwest Airlines expects the jets to remain grounded through early August 2020.

Zacks Rank & Stocks to consider

Southwest Airlines carries a Zacks Rank #3 (Hold).

Few better-ranked stocks in the Zacks Transportation sector are GATX Corporation GATX, Ryanair Holdings plc RYAAY and Spirit Airlines, Inc. SAVE. GATX sports a Zacks Rank # 1 (Strong Buy), whereas Ryanair and Spirit Airlines carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings per share (three to five years) growth rate for GATX, Ryanair and Spirit Airlines is pegged at 15%, 16.6% and 12.5%, respectively.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
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