On Nov 12, 2013, we maintained our Neutral recommendation on
Southwest Airlines Co.
) based on the introduction of various customer friendly
programs, network expansion, fleet restructuring and capacity
management. The passenger airline holds a Zacks Rank #2
Why Kept at Neutral?
Southwest has taken a number of initiatives that are expected
to generate high revenues and reduce costs over the next several
quarters. The company's All-New Rapid Rewards program, increased
ancillary product offerings such as EarlyBird check-in, fleet
modernization effort, pet fees and the introduction of
international reservation system are expected to support its top
and bottom-line growth.
Southwest continues to optimize its combined networks with the
introduction of domestic and international services across
various locations. In an attempt to tap the opportunities in the
Caribbean, Central America, Latin America and Mexican markets,
the company is building a new facility in the Houston airport,
which will accommodate these flights from 2015.
The integration of the AirTran acquisition is providing
substantial opportunities for future growth. Southwest expects to
generate net synergies of more than $400 million by the end of
2013. Additionally, Southwest is resizing its fleet structure and
has taken several efforts to improve the quality of its fleet
with interior redesigning, offering of technology-based
facilities and more entertainment options. We believe this is a
strategic move by the company to reduce non-fuel costs and
However, the company remains vulnerable to economic situations
and the current softness within the global economy is a concern.
We believe that if the current macroeconomic situation fails to
improve, the company might not be able to achieve its goal of a
15% pre-tax return on the invested capital.
Further increase in non-fuel costs like salaries and wages,
airport cost, AirTran integration cost and deferred advertising
are expected to affect the company's profitability. Stiff price
competition from major carriers and heavy investments remain
detrimental to the upside potential of the stock.
Other stocks that are worth considering within this sector are
U.S. Airways Group Inc.
Spirit Airline Inc.
Alaska Air Group Inc.
). LCC and SAVE currently hold a Zacks Rank #1 (Strong Buy),
while ALK carries a Zacks Rank #2 (Buy).
ALASKA AIR GRP (ALK): Free Stock Analysis
US AIRWAYS GRP (LCC): Free Stock Analysis
SOUTHWEST AIR (LUV): Free Stock Analysis
SPIRIT AIRLINES (SAVE): Free Stock Analysis
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