Will Southwest Airlines Stock Recover To Its Pre-Inflation-Shock Level?

LUV: Southwest Airlines logo
Southwest Airlines

Southwest Airlines stock (NYSE: LUV) currently trades at $37 per share, more than 40% below its level in March 2021, and it can see higher levels over time. Southwest Airlines, one of the largest players in the country’s airline industry, saw its stock trading at around $36 in early June 2022, just before the Fed started increasing rates, and is now 3% above that level, compared to 18% gains for the S&P 500 during this period. The slight rise in the stock over recent months has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession.

Returning to the pre-inflation shock level means that LUV stock will have to gain more than 70% from here. However, we do not believe that will materialize any time soon, and estimate Southwest Airlines’ valuation to be around $41 per share, implying over 10% gains. This is because the company has seen slower sales growth over the recent quarters than some of its peers, and its current operating margin of 2.1% is lower than 8.0% in 2021. With elevated fuel costs, the company may see slower earnings growth in the near term.

Our detailed analysis of Southwest Airlines’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

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2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how LUV stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

LUV and S&P 500 Performance During 2007-08 Crisis

LUV stock declined from nearly $15 in September 2007 (pre-crisis peak) to below $6 in March 2009 (as the markets bottomed out), implying it lost over 60% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $11 in early 2010, rising about 95% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

LUV Fundamentals Over Recent Years

Southwest Airlines’ revenue fell sharply from $22.4 billion in 2019 to just $9.0 billion in 2020 as the Covid-19 outbreak hit the airline industry hard. Revenues improved gradually over 2021 before reaching $23.8 billion in 2022, with a recovery in travel demand. Southwest Airlines’ revenue passenger miles (RPM) surged 2.3x between 2020 and 2022, while passenger revenue per available seat mile (PRASM) rose 95% over this period.

Despite higher revenue, earnings decreased from $4.28 in 2019 to $0.91 in 2022 due to higher fuel and other operating costs, weighing on its operating margin. Our Southwest Airlines Operating Income Comparison dashboard has more details. LUV reported a $5.44 per share loss in 2020 when the pandemic severely impacted its financials.

Does LUV Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Southwest Airlines’ total debt increased from $2.7 billion in 2019 to $8.1 billion in 2022, while its total cash increased from around $4.1 billion to $12.3 billion over the same period. However, the rise in cash balance is primarily due to additional debt raised. The company also garnered $3.8 billion in cash flows from operations. Given that Southwest Airlines is net debt negative, it is in a comfortable position to meet its near-term obligations.


With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Southwest Airlines (LUV) stock has the potential for solid gains once fears of a potential recession are allayed. That said, the pressure on the company’s operating margin due to elevated fuel and other costs remains a significant risk factor to realizing these gains.

While LUV stock may have some room for growth, it is helpful to see how Southwest Airlines’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Despite higher inflation and the Fed raising interest rates, LUV stock has risen 10% this year. Can it drop from here? See how low Southwest Airlines stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jul 2023
MTD [1]
YTD [1]
Total [2]
 LUV Return 2% 10% -26%
 S&P 500 Return 0% 16% 99%
 Trefis Multi-Strategy Portfolio 1% 20% 275%

[1] Month-to-date and year-to-date as of 7/5/2023
[2] Cumulative total returns since the end of 2016

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