Bearish Southwest Airlines Analyst Says This Company Decision Is 'A Step In The Right Direction'

Shares of Southwest Airlines Co LUV gained last month after the company reached a tentative agreement with its pilots association.

The Dallas-based company is likely to report its full year 2023 earnings at around half of the Street’s expected $3+ per share, while 2024 could prove to be a “transitional year,” according to Bernstein.

The Southwest Airlines Analyst: Bernstein's David Vernon downgraded the rating for Southwest Airlines from Market Perform to Underperform, while raising the price target from $77 to $90.

The Southwest Airlines Thesis: The 2024 outlook could be worse than anticipated as the company is facing several headwinds, Vernon said in the downgrade note.

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The analyst mentioned the challenges as:

• New pilot contract
• Secular cost headwinds
• Fleet constraints “that are adding to network costs”
• Shifts in demand “that are stressing the companies traditional point to point network model”

“These are proving to be difficult to offset with the current lack of a premium and international offering,” he added.

While management’s decision to lower capacity in 2024 seems to be “a step in the right direction,” it could take time to “plan out a new strategy and optimize the current network that has been expanded into unprofitable lanes and shift into maximizing revenue capture through segmentation and network optimization,” Vernon further stated.

LUV Price Action: Shares of Southwest Airlines had risen by 0.03% to $29.15 at the time of publication Monday.

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Image: Southwest