2023-07-31 14:57:02 ET
Southwest Airlines Co. ( NYSE: LUV ) shrugged off a downgrade from Bernstein to rise 1.9% on Monday.
There is “no clear-cut exit” from near-term headwinds, Bernstein analysts David Vernon and Justine Laufer wrote in a note.
“We have lost confidence in the earnings trajectory of LUV as margin recovery is lower than expected,” the analysts said, downgrading shares to Market-Perform from Outperform and lowering its price target to $32 from $41.
Last week, LUV warned that the recent trend of lower unit revenue and higher costs could continue. The Dallas-based carrier reported a 10% drop in net income for the second quarter and revenue per available seat mile down 8.3%.
LUV’s slump comes as Americans prioritize travels abroad and fares in the U.S. fell 19% in June. Earlier this month, Alaska Air Group, Inc. ( ALK ) forecast revenue that missed expectations.
On the other hand, United Airlines Holdings ( UAL ), Delta Air Lines ( DAL ) and American Airlines Group ( AAL ) have benefited from the international demand and have reported strong results for the second quarter.
TKTKT
“Without international and premium revenue to help manage cost inflation, and seemingly bent on restoring the network before optimizing it, the next twelve months are going to be challenging,” Bernstein said of Southwest ( LUV ).
The firm had expected a recovery to 2019 levels of profitability, and now has lost confidence of that happening in the near term. Labor costs are also rising and the carrier doesn’t have access to premium revenue the way its bigger rivals do.
That’s not all. “The company has a sub-optimal fleet, which is leading to too much capacity growth and load factors that are lagging peers,” Bernstein said. “There will come a day when the company has to think differently about capacity and raise fares.”
Delays in airplane deliveries from Boeing ( BA ) are also hurting.
Shares are down 9.8% over the past 12 months. UAL and DAL are up 43% each in that time, while AAL rose 17% .
More on Southwest:
- Southwest Airlines Has Clipped Wings Ahead Of Q2 Earnings
- Airline turbulence: Southwest Airlines and peers fall after cost outlook rattles investors
- Southwest Airlines tallies record revenue in Q2 off strong leisure demand
For further details see:
Southwest bucks Bernstein downgrade that sees 'no clear-cut exit'