Southwest Airlines Faces Headwinds Amid Declining Profitability

Southwest Airlines (NYSE: LUV) is struggling with declining profitability and rising costs, resulting in a 10% drop in stock value since January 2023. Despite strong revenue growth, investors remain cautious amid a challenging macroeconomic environment, leading to a potentially negative outlook.

Date: 23-09-2024

AI Rating: 4

According to the report, Southwest Airlines has faced a significant decline in stock price, dropping 10% since January 2023 even as the S&P 500 saw a 45% increase. This underperformance can primarily be linked to a decrease in the price-to-sales (P/S) ratio from 0.8x to 0.6x over the same timeframe. While the airline did experience sales growth of 14%, from $24 billion to $27 billion, this increase has not translated into improved profitability.

Key metrics indicate a worrying trend for the airline's financial health. The operating margin has plummeted from 10.9% in 2021 to just 0.9% in 2023, and further to -1% in the past twelve months. Consequently, reported earnings have also decreased, falling from $1.64 per share in 2021 to $0.78 in 2023, largely due to soaring fuel costs, which rose by 87% during that period.

In Q2 2024, Southwest reported operating sales of $7.4 billion, reflecting a 4.5% year-over-year increase. However, the company faced elevated maintenance expenses and wage costs, resulting in earnings dropping to $370 million from $758 million year-over-year. Notably, the adjusted profit per share plummeted by 51% to $0.58 from the previous year's $1.19.

Despite the revenue growth driven by a post-pandemic recovery in travel demand, the airline's performance is overshadowed by its ongoing operational challenges. The report mentions the impending restructuring of the board due to Elliott Management’s investment, signaling potential future changes. While a refreshed board may eventually benefit the company, immediate pressures from escalating costs and fewer aircraft deliveries pose significant risks for investors.

In summary, the report suggests that investors should approach LUV with caution, as the current headwinds are likely to impede performance in the near term, making it more prudent to wait for better pricing before investing.

Stocks: LUV