Having been among the quickest of the airlines to get their shares back to pre-pandemic levels, Southwest Airlines (NYSE:LUV) has struggled to keep the momentum in recent months. Their stock’s recovery peaked at the start of last summer, and shares have fallen as much as 40% in the meantime. But there are signs, both on the fundamental and technical front, that they’ve put in a low for now. Let’s take a look at the arguments for and against.
For starters, their Q4 earnings from late last month delivered a sound beat on analyst expectations. Non-GAAP EPS of $0.14 was double the $0.07 expected, while revenue was also ahead of the consensus and up more than 150% year on year. So far so good. But it appears as if the pure optimism that drove last year’s recovery has been diluted, and the airline industry will need an uninterrupted run of a few months to build up a similar head of steam.
Cautiously Optimistic
Bob Jordan, the incoming CEO, said with the results that,
"despite our fourth-quarter profit, we had a challenging start to 2022 as we continue to recover from the pandemic. While we made significant progress in 2021, the Omicron variant has delayed the demand improvement we were previously expecting in early 2022. With COVID-19 cases trending downward, the worst appears to be behind us, and we are optimistic about current bookings and revenue trends for March 2022."
Even though, after coming through what could have been considered the worst of the pandemic, a new variant could potentially stunt any new rally, with several key metrics continuing to tick back towards 2019 levels.
Last week’s results showed operating revenues per available seat mile were only down 3.8% compared to the 2019 level, driven primarily by a passenger revenue yield decrease of 4.1% and a load factor decrease of 2.1 points. This clearly shows that the gap to the pre-pandemic levels is narrowing.
Further reasons for Southwest investors to be optimistic came from management, who offered bullish guidance on the months ahead. They told investors that they expect to see losses for January and February before a return to profitability in March, adding that
"we expect to be profitable for the remaining three quarters of this year, and for full-year 2022. As demand for air travel recovers, we intend to substantially grow available seat miles to restore the majority of our route network by the end of 2023."
In a sign of how bullish they are oncoming expansion, Southwest said that they expect to add upwards of 8,000 employees over the course of 2022.
Looking Ahead
But for all that, there are still several headwinds on the map that Southwest will have to work around if they’re going to get back to consistent profitability this year. Goldman Sachs cut their rating on Southwest stock in December, with analyst Catherine O'Brien saying:
“we expect the company to see higher-than-industry inflation over the medium-term. This inflation will drive a slower-than-industry return to profitability as we expect revenue benefits from these initiatives will be offset by a weaker domestic pricing environment."
The ongoing 5G rollout has also had airline CEOs getting vocal, with concerns growing that the new communications network could interfere with aircraft equipment. The last thing the airline industry needs now is a consumer fear that planes will fall from the sky because of 5G.
But overall, there seem to be more reasons to like airlines and Southwest in general than dislike them. Last month, the team over at Morgan Stanley said they were “bullish on U.S. airline stocks” and expected normal service to resume in Q2 and to accelerate during the second half of the year to set up a strong 2023. They’re also watching each inflation print to see how it will affect costs, but that hasn’t stopped them from keeping Southwest and many of its peers at an Overweight rating.
Similarly, the team over at Deutsche Bank also has Southwest at a Buy rating and expects it to be amongst the best of the airlines in 2022. With shares trading down close to 40% since last summer, could it be the right time to start buying?