3 Better Picks Than Southwest (LUV) In The Airline Sector
Zacks Investment Research | Sep 27, 2016 10:21PM ET
Dallas-based low-cost carrier, Southwest Airlines Co. (NYSE:LUV) 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 (NASDAQ:AAL) , United Continental Holdings (NYSE:UAL) and Alaska Air Group, Inc. (NYSE:ALK) , 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 (NYSE:BA) 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 Zacks Investment Research
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