Southwest Airlines: Other Airlines Should Follow This Strategy

Ticker: LUV

Rating: Overweight

Price Target: $50

Target Date: 6/2020

Overview:

Southwest Airline’s (LUV) Q3 loss came in better than expected and load factors should improve after the new year. We’ve detected a notable change of gear – both in words and actions like lifting the middle-seat block, new routes, and cost savings initiatives – that indicate that LUV may be playing offense for the rebound. The following strategy/takeaway’s are extremely notable from their recent report, on a go forward basis.

🔑 Key Takeaways

1. LUV is the only airline this quarter to beat street expectations on revenue so far. Total revenue was up 4% QoQ driven by strong PRASM numbers (see note on Delta for more detail). Their management noted a return in corporate travel – something we will look at very strongly. This is highly encouraging as corporate travel accounts for the bulk of industry spend.
2. Management said Q4 could be an inflection point – a date, most people to date have not anticipated. This is in large part due to their actions regarding lifting restrictions on a middle seat – which signals the strength of the market if they are willing to do this. Management also noted that they are seeing bookings further out and stronger than anticipated bookings into the holiday season. This is another factor that LUV, relative to the other airlines, are seeing and others are not!
3. Balance Sheet liquidity is remaining solid. At current cash burn rates, they still have 3 years+ before having to create additional liquidity by means of cost cutting. This is very strong, as we anticipate a vaccine to be widely distributed before then.Given the above, as well as our historical thesis on LUV, we remain overweight the stock. LUV is started to see/anticipate a rebound where other major US airlines are not. This speaks to the strength of their business as well as their customer loyalty. If overall airline traffic rebounds more than anticipated, LUV will be one of the strongest names to recover relative to the industry. This is one of our top long term picks as we look for an eventual rebound in this depressed sector.