Can Southwest Airlines Stock Lead A Bull Market Rally?

LUV: Southwest Airlines logo
Southwest Airlines

The shares of Southwest Airlines (NYSE: LUV) observed a just 5% decline since April, much lower than the monumental 15% contraction in broader markets. Rising energy costs coupled with skyrocketing inflation have spooked investors in recent times, but strong air travel demand and Southwest’s high operating margins have been key positives for the stock. The company also has a hedge position on almost 60% of the targeted fuel consumption for 2022. While the geopolitical uncertainty due to the Russia-Ukraine war is jeopardizing global economic growth and triggering measures such as new energy security alliances, passenger numbers at TSA checkpoints are a positive indicator for the airline industry. Our interactive dashboard on Southwest Airlines valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022.

How did Southwest perform in 2021 and Q1 2022?

In 2021, Southwest Airlines reported $15.7 billion of total revenues and $2 billion of operating cash assisted by PSP-2 and PSP-3 (payroll support program) proceeds. Rising air travel demand during the latter part of the year pushed the company’s operating metrics to pre-pandemic levels. In H1 2021, the company’s ASMs (available seat miles), occupancy rate, and yield (cents) were 56k, 75.3%, and 12.41, respectively. For the full-year, ASMs (available seat miles), occupancy rate, and yield (cents) reached 132k, 78.5%, and 13.58, respectively. While the demand factors improved during fall and winter, inflationary pressures from the Russia-Ukraine war and supply chain hurdles created macroeconomic headwinds for the airline industry.

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In Q1 2022, the company reported $4.7 billion in revenues – just 8.8% lower than Q1 2019. Rising benchmark prices, staffing issues, and the resurgence of coronavirus infections augmented operational challenges. Notably, CASM-Ex (cost per available seat miles excluding fuel expense) surged by 18% when compared to Q1 2019, largely due to inflation in labor rates and incentive pay offered to operations employees. Thus, Southwest booked a net loss of $278 million for the quarter.

Inflation moving in sync with benchmark oil prices

The consumer price index for urban consumers (CPI-U) observed an 8.3% (y-o-y) jump in April 2022, primarily from rising energy costs, which are having ripple effects across the economy. Inflation in key items such as food, energy, other commodities, shelter, medical services, and airline fares was 9.4%, 30.3%, 9.7%, 5.1%, 3.5%, and 33.3%, respectively. Given the 40% increase in benchmark oil prices in the past year, increasing airfares is the only option for airlines to bolster their bottom line. Interestingly, the Brent benchmark is likely to trend downward from $103 in 2022 to $97 in 2023 according to EIA. Similarly, the World Bank expects Brent crude to observe a decline from $100 in 2022 to $92 in 2023 and $80 in 2024 – raising hopes of a return to normalcy as geopolitical tensions ease in various parts of the world. (related: Pick This Stock Over American Airlines As The Dip Ends)

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Returns May 2022
MTD [1]
YTD [1]
Total [2]
 LUV Return -6% 2% -12%
 S&P 500 Return -5% -18% 75%
 Trefis Multi-Strategy Portfolio -5% -21% 215%

[1] Month-to-date and year-to-date as of 5/20/2022
[2] Cumulative total returns since the end of 2016

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