Company Reports

On April 25, Southwest released first-quarter 2024 results and updated expectations for 2024, in which prolonged delays from Boeing and ongoing cost growth have caught up with the airline's aggressive capacity plans. With a revised 2024 capacity target of just 4% growth, largely because it will have fewer planes to deploy than anticipated, Southwest's unit costs are set to grow nearly 8%, making a full-year loss likely, in our view. While we are retaining our fair value estimate of $19 per share, our forecast includes thin margins and is predicated on eventual market share gains from a distressed lower-cost competitor.

Southwest is the largest domestic carrier in the U.S. by passenger volume. Southwest has stuck to its strategy of streamlining airline operations to maintain lower unit costs than its full service rivals, which it passes on to customers in the form of cheaper tickets and a low-frills experience.

On Jan. 25, Southwest released 2023 results and initial expectations for 2024, and we were surprised by the escalation in costs throughout the airline's accounts. While we are retaining our fair value estimate of $19 per share, our forecast includes thin margins and is predicated on market share gains from a distressed low-cost competitor.

The U.S. Department of Transportation levied a $140 million fine against Southwest Airlines, citing insufficient customer support in the wake of the airline's massive wave of canceled flights in the holiday travel rush of 2022. While the amount for such a fine is a new record for the U.S. DOT against an airline, on top of more than $600 million of customer reimbursements and other costs the airline has already incurred, it has almost no effect on our fair value estimate, which remains $19.

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.

Southwest is a leisure-focused, low-cost airline and the largest domestic carrier in the U.S. by passenger volume. Southwest has stuck to its strategy of streamlining airline operations to maintain lower unit costs than its full service rivals, which it passes on to customers in the form of cheaper tickets and a low-frills experience.

We've lowered no-moat Southwest Airlines' fair value estimate to $36 from $39 to reflect lower yields over the coming season and slightly higher average fuel costs in 2024 than we previously anticipated. The biggest impact to our valuation comes from lowering our estimate of the average selling price of a ticket for Southwest in the coming travel season, which, combined with elevated fuel costs that airlines would normally seek to pass on to customers in the form of higher average ticket prices, puts a further crimp on Southwest's near-term profitability.

Southwest is a leisure-focused, low-cost airline and the largest domestic carrier in the U.S. by passenger volume. Southwest has stuck to its strategy of streamlining airline operations to maintain lower unit costs than its full service rivals, which it passes on to customers in the form of cheaper tickets and a low-frills experience.

Southwest Airlines reported record quarterly revenue and double-digit operating margin in the second quarter of 2023, but updates to management's longer-term growth plans gave us pause. As a result of less-steep capacity growth than we expected, and permanent increases in the company's cost structure, we've lowered no-moat Southwest Airlines' fair value estimate to $39 from $42.90.

Southwest is a leisure-focused, low-cost airline and the largest domestic carrier in the U.S. by passenger volume. Southwest has stuck to its strategy of streamlining airline operations to maintain lower unit costs than its full service rivals, which it passes on to customers in the form of cheaper tickets and a low-frills experience.

We've taken a fresh look at North American airlines and instituted an industry-based demand model for air travel, capacity, and airline revenue yields. As a result, we've lowered no-moat Southwest Airlines' fair value estimate to $42.90 from $54.

Southwest is a leisure-focused, low-cost airline and the largest domestic carrier in the U.S. by passenger volume. Southwest has stuck to its strategy of streamlining airline operations to maintain lower unit costs than its full service rivals, which it passes on to customers in the form of cheaper tickets and a low-frills experience.

As we expected, Southwest Airlines reported a first-quarter net loss due to extra costs and $325 million of lost revenue in January and February related to the firm’s disruptive cancellation of more than 16,700 flights in late December. After reviewing Southwest’s first-quarter results and adjusting for a revised 2023 outlook, we’ve lowered our fair value estimate approximately 2% to $54 per share.

Southwest is a leisure-focused low-cost carrier and is the largest domestic carrier in the U.S. We believe Southwest’s customer-friendly tactics benefit the firm by providing the closest thing to a brand asset in the airline industry. We point to the fact that over 85% of Southwest's sales are through its own distribution channel, where prices among carriers are difficult to compare, while other carriers have a higher reliance on third-party distributors to earn customers.

As we expected, Southwest Airlines reported a fourth-quarter net loss due to costs related to the firm’s widespread operational issues that caused over 16,700 flight cancellations in late December. Expenses tied to travel expense reimbursements, disbursement of rapid rewards travel points (to build customer goodwill), and increased employee compensation totaled $800 million during the quarter, which was within management’s guidance (announced on Jan. 6). Furthermore, management noted that the firm will likely realize another net loss during its fiscal first quarter.

Southwest is a leisure-focused low-cost carrier and is the largest domestic carrier in the U.S. We believe Southwest’s customer-friendly tactics benefit the firm by providing the closest thing to a brand asset in the airline industry. We point to the fact that over 85% of Southwest's sales are through its own distribution channel, where prices among carriers are difficult to compare, while other carriers have a higher reliance on third-party distributors to earn customers.

On Jan. 6, 2023, Southwest Airlines disclosed that 16,700 flights were canceled between Dec. 21-31, 2022, which reduced fourth-quarter available seat miles by roughly 6% compared with the same period in 2019 (previous guidance was for a 2% reduction). Management estimates that the combination of lost revenue ($400 million-$425 million) and higher expenses tied to travel expense reimbursements, disbursement of rapid rewards travel points (to build customer goodwill), and increased employee compensation will reduce pretax income by $725 million-$825 million. As such, management now expects the firm will report a fourth-quarter net loss.

Southwest is a leisure-focused low-cost carrier and is the largest domestic carrier in the U.S. We believe Southwest’s customer-friendly tactics benefit the firm by providing the closest thing to a brand asset in the airline industry. We point to the fact that over 85% of Southwest's sales are through its own distribution channel, where prices among carriers are difficult to compare, while other carriers have a higher reliance on third-party distributors to earn customers.

Southwest Airlines’ stock traded lower on Dec. 27 as the no-moat carrier struggled to normalize its operations after a wave of systemwide flight cancellations and delays. While inclement winter weather was certainly a main contributor to Southwest’s issues, other U.S. airlines reported far fewer cancellations, which suggests company-specific factors may be involved. In our view, this event demonstrates a weakness of Southwest’s point-to-point service model as opposed to the hub-and-spoke model employed by most other U.S. airlines. However, we’ve heard other explanations as well, from overbooking to inadequate operating systems. Southwest’s disruptions were significant enough to draw the attention of the U.S. Department of Transportation, which said it will review the root cause of the issues. Nevertheless, our long-term outlook for Southwest is unaffected by these current woes. We continue to model revenue exceeding $28 billion by 2026 with an operating margin improving to around 14.5% (compared with our estimate of $24 billion of revenue in 2022 with about an 8%-9% operating margin). We are maintaining our $56 fair value estimate and continue to believe the stock is undervalued.

Southwest is a leisure-focused low-cost carrier and is the largest domestic carrier in the U.S. We believe Southwest’s customer-friendly tactics benefit the firm by providing the closest thing to a brand asset in the airline industry. We point to the fact that over 85% of Southwest's sales are through its own distribution channel, where prices among carriers are difficult to compare, while other carriers have a higher reliance on third-party distributors to earn customers.