What’s Behind The 15% Fall In Southwest Airlines Stock Earlier This Week?

Southwest Airlines (NYSE: LUV) stock plunged around 15% in Tuesday’s trading, after it announced that it will trim its capacity plans and revisit the financial forecast for 2024. This can be attributed to fewer expected deliveries from Boeing. The Federal Aviation Administration (FAA) reportedly found dozens of issues with Boeing’s 737 MAX production. Boeing failed 33 of 89 audits conducted by the FAA. ^[1] Southwest will likely get 46 Boeing 737 MAX planes in 2024, compared to 58 planned earlier. It’s not just Southwest, Alaska Airlines also stated that its 2024 capacity expansion is likely to be impacted.

Looking at LUV stock, it has suffered a sharp decline of 35% from levels of $45 in early January 2021 to around $30 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Notably, LUV stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -8% in 2021, -21% in 2022, and -14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that LUV underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LUV face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, LUV stock looks like it has little room for growth, despite its recent fall. We estimate Southwest Airlines’ Valuation to be $31 per share, compared to its current market price of around $29. Our forecast is based on 0.7x sales for Southwest, aligning with the stock’s average over the last two years.

Southwest expects its Q1 2024 operating revenue per available seat mile to be in the range of flat to up 2% y-o-y. This compares with its previous estimate of up 2.5% to a  4.5% rise. This can partly be attributed to lower than expected leisure passenger volume. Southwest Airlines’ revenue of $6.8 billion in Q4 reflected a 10.5% y-o-y rise, driven by a solid 21.4% rise in available seat miles. The company’s adjusted operating margin stood at 2.7% in Q4’23 versus -5.6% in the prior-year quarter. However, Southwest now expects its fuel costs per gallon to rise to $2.95 to $3.00 in Q1’24, compared to its previous estimate of $2.70 to $2.80, and $3.00 in Q4’23. Lower than expected volume and higher fuel costs are some of the factors that will weigh on Southwest’s near-term performance, and it did not sit well with the investors, evident from the fall in LUV stock yesterday. 

[1] Returns as of 3/13/2024
[2] Cumulative total returns since the end of 2016

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1. F.A.A. Audit of Boeing’s 737 Max Production Found Dozens of Issues, Mark Walker, Mar 11, 2024, The New York Times [↩]