Southwest Airlines Earnings: Cutting Valuation to $19 From $36 on Yields, Expenditure, and Risk

Southwest Airlines turned in record third-quarter revenue and fairly thin operating margins below 2%. More importantly, the no-moat carrier provided a preview of its capacity plans for 2024 and an updated order book for hundreds of new Boeing 737 MAX jets. We incorporated Southwest's announced plans into our industry model, which lowered our forecasts for the company's profitability for the near and medium term compared with our prior estimates. We also adjusted the discount rate we use to value Southwest's cash flows to place it in line with the best U.S. industry peers. These changes result in a 47% reduction in our fair value estimate to $19 from $36.