Why Southwest Is The Airline Stock To Buy For A Post-Virus World
Who will be the biggest winner among air carriers, once the virus is a bad memory? A good bet is Southwest LUV -1.1%Airlines. Here’s a value play that is well-suited to pay off. Now changing hands at $48 per share, it could well retrace its path to its 2017 peak of $65.
Overall, it’s hard to find anyone on Wall Street who thinks that airlines will be goners, post-pandemic. After their trough in May, the major carriers have seen their stocks surge back, in most cases doubling. Southwest’s shares are 92% higher since then, and is just 11% below the carrier’s year-end 2019 level.
Sure, airline finances remain deeply in the red. And domestic flights are still way down, the temporary Thanksgiving holiday surge notwithstanding. According to the U.S. Bureau of Transportation Statistics, through September, their volume has slipped 36% from the year before, which does show an improvement on 70% down in June. Southwest, which has pared its flights by a third, sank into unprofitability this year, suffering three straight quarters of losses, which total $2.6 billion.
But Southwest is strategically and financially better off than its peers, suggesting that it will be the stock to buy and own going forward. Time was that investing in airlines was folly because they always swung from boom to bust. In recent years, however, with their add-on charges and better capacity utilization, they were doing pretty well until the virus made flying an iffy experience.
Burkett Huey, a Morningstar MORN +0.3% analyst, noted that Southwest “is optimistic that the nascent recovery in passenger traffic will last until a COVID-19 vaccine allows for a much more robust recovery.”
Encouragingly, Southwest has been a better investment than its competitors, according to Morningstar data. Looking at five-year annualized total equity returns—admittedly, these are skewed by the 2020 red-ink torrent—Southwest has enjoyed the best performance, up 2%. The others are negative: American Airline Group AAL +0.6%, down 17%; United Airlines Holdings UAL 0.0%, with 4.1% lost; and Delta Air Lines DAL -1.1%, minus 0.2%.
Southwest is adding four new destinations this year, including Miami and Colorado’s ski area. Next year, it will push into six new cities, notably Chicago’s O’Hare, long dominated by United. The company made similar lucrative expansions after 9/11 and the 2008 financial crisis. Another plus: In December, Southwest will book the middle seat on its planes, which should increase revenue.
The fourth largest U.S. airline, Southwest had prospered before the pandemic as a discount carrier, focusing on leisure travel, instead of the now-woebegone business sector. Low-cost airlines like Southwest have managed costs better than the larger ones, Huey wrote in a report, because they use a single aircraft type (the Boeing 757 in Southwest’s case), favor less popular airports that have lower fees, and abjure expensive hub-and-spoke networks, preferring to fly direct to destinations.
What’s more Southwest has just a few routes abroad, and those are in the Western Hemisphere. Extensive international routes have been an additional burden for competitors during the pandemic. Smal wonder that, in the recent quarter, Southwest became the No. 2 domestic carrier by traffic. (American Airlines is top-ranked in the U.S.)
Best of all, Southwest boasts the strongest balance sheet in the industry, which puts it in better stead than the other majors. And leaves it most able to live without more federal aid: The $25 billion airline bailout ended Sept. 30. Southwest bonds have the only investment grade in the industry. The company’s total debt is just $12.6 billion. That’s roughly a third of what American, Delta and United carry on their books. Only Delta has more cash on hand, $21.5 billion to Southwest’s $14.5 billion.
As a Morgan Stanley MS 0.0% report described Southwest, “the market still does not adequately appreciate the quality of the franchise.” As a result, the firm went on, this “makes the stock very attractive at the current price.”
This article originally appeared Forbes