Dallas, TX-based airline heavyweight Southwest Airlines Co. (LUV) has been benefiting from improvements in air travel demand, consistent shareholder-friendly initiatives, cost-cutting measures and fleet modernization techniques. The decline in oil prices bodes well for bottom-line growth of airline stocks, and it is no different for Southwest Airlines.
The positive sentiment surrounding the stock is evident from the fact that the Zacks Consensus Estimate for LUV's earnings has been revised upward in the past 90 days.
Image Source: Zacks Investment Research
Let’s delve deeper.
Upbeat Air Travel Demand: A Major Tailwind
Improvement in air-travel demand, following the end of the pandemic and normalization of economic activities, bodes well for Southwest Airlines’ top line. Driven by the air travel demand strength, LUV’s top line increased 6.7% year over year in the first nine months of 2024. This uptick was due to a 7.2% rise in passenger revenues.
Given that travel demand remains healthy, LUV anticipates fourth-quarter 2024 unit revenues or revenue per available seat mile (RASM) to increase 3.5-5.5% on a year-over-year basis. The upside shows that LUV is benefiting from its revenue management actions, which include network optimization and capacity moderation, marketing and distribution evolution. As a result, LUV is focusing on improving yields from its best-performing flights. The fourth-quarter 2024 RASM guidance indicates an improvement from the year-ago quarter’s figure.
Some Other Tailwinds Working in Favor of LUV Stock
LUV’s cost-saving initiatives (which include minimizing hiring, optimizing scheduling, improving corporate efficiency and capitalizing on supply-chain opportunities) are expected to generate $500 million in run-rate cost savings in 2027. LUV’s fleet modernization initiatives are also encouraging.
Meanwhile, a decline in oil prices (due to multiple geo-political reasons) should boost the company’s bottom line, as fuel expenses represent a key input cost for any transportation player.Fuel cost per gallon (including fuel tax: economic) fell 8.3% to $2.55 in the third quarter of 2024. For the fourth quarter, oil prices are expected to be in the range of $2.25-$2.35, down sequentially as well as on a year-over-year basis.
On a shareholder-friendly note, under the $2.5 billion share repurchase program authorized by LUV’s board of directors in September 2024, LUV plans to launch an initial $250 million accelerated share repurchase (ASR) program as early as possible (fourth-quarter 2024 ASR program). Apart from share buybacks, LUV has returned $431 million to its shareholders through dividend payments during the first nine months of 2024. With the quarterly dividend of 18 cents per share (annualized 72 cents per share), LUV's dividend yield is currently pegged at 2.27%. Such shareholder-friendly moves indicate the company’s commitment to creating value for shareholders and underline its confidence in its business.
LUV’s Price Performance Soars High
LUV has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters and missed the mark in the other, delivering an average surprise of 111.62%. Driven by this upbeat earnings performance and the positives mentioned above, LUV’s shares have risen 22% over the past three months, outperforming its industry as well as the S&P 500, of which the company is a key member.
However, LUV’s price performance in the same time frame compares unfavorably with that of fellow U.S. airline operators like JetBlue Airways Corporation JBLU and Alaska Air Group ALK.
Three-Month Price Comparison
Image Source: Zacks Investment Research
LUV’s Impressive Q3 Earnings
Southwest Airlines reported third-quarter 2024 earnings of 15 cents per share, which outpaced the Zacks Consensus Estimate of 5 cents. Revenues of $6.87 billion surpassed the Zacks Consensus Estimate of $6.79 billion and improved 5.3% year over year. The uptick resulted from solid demand trends, quarterly record passengers carried, higher passenger revenues and ancillary revenues. Further, managed business revenues continued to improve on a year-over-year basis. Almost 35,516 passengers traveled on LUV flights in the third quarter, up 0.5% year over year.
Impressive Valuation Picture for LUV Stock
From a valuation perspective, LUV is trading at a discount compared to the industry, going by the forward 12-month price-to-sales ratio. The reading is also below its median over the past five years.
Image Source: Zacks Investment Research
How Should Investors Approach LUV Stock?
It is understood that LUV stock is attractively valued, and upbeat air travel demand is contributing to LUV’s top line. We believe that the positives surrounding the stock (as highlighted throughout the write-up) outweigh the concerns regarding Boeing’s BA delivery delays, escalating labor costs and near-term pressures from Hurricane Milton. We, therefore, suggest investors to add LUV stock to their portfolios for healthy returns. The company’s Zacks Rank #1 (Strong Buy) further supports our thesis.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
