Southwest Airlines Stock, There is a Lot to Love

Key Points

• Southwest Airlines hit record third quarter revenues of $6.2 billion.
• Southwest Airlines is profitable and reinstates its dividend in January 2023.
• The point-and-spoke routing model is key to keeping costs low versus the conventional hub-and-spoke routing model.
• It has the largest Boeing 737 fleet in the world as it only uses one model of aircraft to keep maintenance costs down.

Low-cost airline carrier Southwest Airlines Co. NYSE: LUV is the first U.S. airline to reinstate its dividend and at its pre-pandemic levels of $0.18. Shares are still trading down (-18%) on the year as the whole travel and leisure sector got hit with a wave of heavy year-end selling. Southwest is one of the few profitable airlines that have recovered from the COVID-19 pandemic with record revenues. Capacity is expected to be down (-4.5%) over pre-pandemic levels but expects to increase to 10% above pre-pandemic levels in 2023.

The labor shortage of pilots is expected to continue throughout 2023, resulting in cost headwinds operating at suboptimal productivity levels and inflationary cost pressures. Like major airline carriers, United Airlines Holdings Inc. NYSE: UAL, Delta Air Lines Inc. NYSE: DAL and American Airlines Group Inc NYSE: AAL and regional carriers like Hawaiian Holdings Inc. NYSE: HA, insiders have been selling shares. The Company stands out as it focuses on adding new routes and additional airplanes while its peers are preoccupied with managing its debt burdens from the pandemic.

Southwest Airlines Point-to-Point Routing Model

Arguably the most efficiently operated airline in the business, Southwest is a low-cost airline that operates like a regional carrier servicing over 100 destinations in 42 states, including Washington D.C. and Puerto Rico. Rather than the traditional hub and spoke routing model created by American Airlines, Southwest operates a point-to-point routing model, which results in more non-stop flights at a lower price, especially with no seating assignments.

It only operates The Boeing Company NYSE: BA 737 aircraft to keep maintenance costs down. Southwest has the world’s largest Boeing 737 fleet. The hub-and-spoke model can be efficient, but timeliness is mandatory, or connections can be missed. This is evidenced by American Airlines having the most cancellations in 2022. Point-to-point is simple but tends to incur more stops along the way, which can increase travel time. Southwest Airlines had the second most cancellation in 2022.

Monthly Downtrending Channel

The monthly candlestick chart on LUV has been in a downtrending channel since April 2021. Each bounce that tests the upper trendline has been rejected and fallen to lower lows. The most recent breakout attempt triggered a breakout through the weekly market structure low (MSL) buy trigger above $34.36 and peaked at the weekly 50-period moving average (MA) at $39.98 on Nov. 28, 2022, and proceeded to trigger a weekly market structure high (MSH) sell trigger on a breakdown below $37.15.

The weekly stochastic peaked just above the 80-band and is crossing back down. Within the monthly downtrend channel, there is a weekly rectangle trading channel between $35.84 lower trend line and $40.00 upper trendline. Pullback support levels sit at $35.08, $33.31 weekly MSL trigger, $30.20 swing low, and $28.25.

Greenback Machine

On October 27, 2022, Southwest released its fiscal third-quarter 2021 results for September 2022. The Company reported an earnings-per-share (EPS) profit of $0.50, excluding non-recurring items, versus consensus analyst estimates for a profit of $0.42, an $0.08 beat. Revenues grew 32.5% year-over-year (YoY) to $6.20 billion, missing analyst estimates of $6.22 billion.

Operating revenues per seat mile (RASM) rose 10.6%, driven by a passenger yield increase of 5.3%. Managed business revenues fell (-28%) compared to Q3 2019. The dividend of $0.18 has been reinstated.

Southwest Airlines CEO Bob Jordan commented, “We are pleased to report solid third quarter 2022 profits and record third quarter operating revenues. Following record summer leisure travel demand, revenue trends remained strong in September 2022, bolstered by improving business travel trends post-Labor Day.

Leisure and business demand remains strong, and we currently expect revenue trends to improve sequentially from the third quarter to the fourth quarter of 2022, despite lower capacity. Our fuel hedging strategy continues to provide protection against persistently high jet fuel prices, and we are 61 percent hedged in the fourth quarter of 2022 and 50 percent hedged in the full year 2023.”

Raised Guidance

Southwest provided upside guidance for Q4 2022 for operating revenues to grow 13% to 17% versus 2019, or $6.47 billion to $6.70 billion versus $6.24 billion. ASMs are expected to fall (-2%) versus 2019, CASM-X is up 14% to 18% versus 2019. ASM guidance for FY22 seeks ASMs of (-4%) compared to the prior outlook of down about 4.5% versus 2019. Full-year 2022 CASM-X is expected to grow 12% to 16% versus up 14% to 15%.

Winter in the U.S. is expected to be especially harsh. It already kicked off with a rare bomb cyclone in the U.S., affecting over 200 million people throughout the Midwest and Northwest as temperatures hit the lowest levels for Christmas in nearly 40 years.