![]() ![]() Southwest's fundamental position is problematic, but not excessively so. Southwest Is Losing Its Defensive Premium Still, its liquidity position is healthier than before 2020 as the company took advantage of 2020's attractive borrowing conditions. Thus far, it has not needed to raise debt or sell significant equity to raise cash to offset negative free-cash-flow however, its nearly $9B positive working capital in early 2022 has dwindled to ~$2.9B in Q2, indicating a considerable deterioration in liquidity. However, Southwest's FCF has fallen to ~-$1.5B over the past year, nearly equal to its 2020 minimum level. All three of its peers have positive free cash flow. Lower operating margins and higher CapEx equals much lower free cash flow. While its operating margins are historically stronger than its peers, it lost tremendous ground this year as its operating margin fell to 2% while its peers rose to over 9%. The company's union also expects an overhaul of its scheduling system, which has been blamed for pilot fatigue and flight delays, indicating the company may need to increase its CapEx spending to improve outdated systems.Īccordingly, Southwest is seeing a massive increase in capital costs and a significant decrease in its operating profit margin. As such, Southwest will likely need to offer a similar deal or risk facing a strike. American Airlines (AAL) recently ratified a new contract that will increase pilot compensationby 46% over the next four years, immediately increasing pay by 21%. ![]() Southwest is also stuck in a standstill with its pilots union, which is prepared to strike. Hawaiian Airlines (HA), down 16% over the past month, will likely face the most significant impact among airlines, with Southwest second. The stock's recent decline of around 10% in the past month may be partly attributable to the Maui fires, which will temporarily shut down one significant sales avenue for the firm however, it should not be a major long-term issue. This change may be partly due to immense negative publicity surrounding its December 2022 operational meltdown, indicating the company's technical infrastructure or labor levels were not up to par, causing it to lose many would-be customers. ![]() Thus far, its 2-year-ahead sales estimate has only declined by 2.3% however, that is an initial indication that the company is facing some demand-side pressure compared to its peers. However, Southwest is the only one with a negative trend in its sales outlook over the past six months. Over the past three months, all four major airlines have seen their sales growth outlooks slow. Sharp deterioration in LUV Sales Growth Outlook.pngĪirline Forward Sales Estimate Changes (YCharts) Southwest's changes to its sales outlook two years ahead are shown below: This includes the firm's current, following, and two fiscal year sales outlook. Of course, if consumer spending power continues to wane, Southwest and other airlines may face significant issues on both fronts.įor one, Southwest has had more significant adverse changes to its revenue growth estimates than its larger peers. In other words, the airline's most significant risks today have more to do with labor and materials costs than a lack of customers. Further, Southwest's ability to reduce risk compared to peers may be more limited as risks shift from demand to supply. Notably, the price ratios of LUV to its larger peers have fallen back to pre-COVID levels, indicating that Southwest is simply losing its "defensive premium" received in 2020. In 2023, LUV has contracted significantly, while most of its peers have risen to varying degrees. See LUV's price ratio to its primary competitors Southwest is facing some trouble today, mainly because it has underperformed its weaker peers recently. Major airlines face considerable risks today due to a potential rebound in fuel costs combined with a growing decline in consumer discretionary spending capacity. Southwest's operational advantages are diminishing, and it may lose its valuation premium to peers, potentially leading to further stock price deterioration. Southwest Airlines has seen a significant decline in enterprise value as it faces challenges in revenue growth, labor negotiations, and infrastructure needs. Southwest Airlines: Losing Its 'Operational Premium' Compared To Larger PeersĪirline stocks remain below pre-COVID levels despite some recovery in 2021, mainly due to significant debt growth and rising labor costs. ![]()
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