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Southwest Airlines (NYSE: LUV), based out of Texas, is one of the largest low-cost carriers in the world. It serves around 121 destinations in the U.S. along with ten other countries through its total fleet of 728 Boeing 737 aircraft.
The airline industry was majorly hit during the pandemic as most people were locked up in their houses. Though a recovery started taking place soon after the economies reopened, problems such as labor shortages, high debt levels, and higher fuel costs have been squeezing the industry margins.
Southwest Airlines had its own recovery journey hijacked by these factors. From a high of $55.06 in October 2021, it has now fallen to $36.18, down 17.7% so far in 2022. That said, robust demand for air travel around the world has had a positive impact on the airline operator’s earnings and the market is optimistic about its success now. So, it would not be a bad idea to be bullish on Southwest Airline stock.
Increased demand for air travel
From the looks of it, the pandemic-induced troubles in the airline industry seem to be a thing of the past (though it will take time for all airlines to fully recover from that act of God). Demand for air travel has been rising steadily. An analysis by the ReportLinker says the global airline market which was once valued at $332.6 billion in 2020 is now expected to reach $744 Billion by 2026 growing at a CAGR of 12.7% between the projected period.
Also, the passenger airlines segment might reach the $587.8 billion mark by 2026 growing at a CAGR of 15.2%. This indicates the growth opportunity for Southwest Airline will be immense in future.
Southwest Airlines has proactively taken steps to accelerate the recovery. In March, US airline operators, including Southwest, requested U.S.President Joe Biden to relax some of the testing requirements and other formalities for the ones undergoing international travel. As this request was partially accepted the demand for air travel might increase in the country further in the coming days thereby improving the company’s overall prospects even more.
Improved earnings for Southwest Airlines
Despite high fuel costs and labor shortages, the first quarter financials of Southwest Airlines was certainly better than the previous few quarters. The company had witnessed a strong rebound in its revenue trends within the first quarter despite experiencing $430 million of headwinds.
Its revenue for the quarter rose by 8.8% to $4.7 billion compared to the 2019 levels and the RASM also saw a marginal 0.4% betterment driven by the passenger yield increase of 1.1% but was also partially offset by the load factor decrease of 4 points. Notably, revenue performance from its loyalty program was strong this time which included incremental revenue from its new co-branded credit card agreement.
Moreover, the liquidity outlook of Southwest Airlines remains solid as the company had $15.7 billion worth of cash and cash equivalents against $10.7 billion of debt by the end of the first quarter. Further, the airline operator is expected to grow its revenues by 8-12% in the current quarter against 2019 levels while its earnings per share shall rise to $2.58 per share this year and to $3.82 per share by the end of next year. Therefore, as more and more opportunities start pouring in Southwest Airlines will be able to utilize the excess cash to return to profitability soon.
What next for investors?
Southwest Airlines' stock closed trading at $36.5 on July 5, and the average target price for the stock is $57.23 which is a potential upside of 58.18%.
Southwest Airlines has pretty good prospects. With the steady decline in the number of COVID-19 cases and the growing demand for air travel these days, the earnings of the airline operator are expected to gain pace going forward leading Southwest Airlines towards profitability.
Moreover, the company is already seeing a surge in travel demands across both domestic and international sectors which is a healthy sign. So, if anyone wishes to profit from the expanding aviation industry, they might think about buying Southwest Airlines stock. However, one should know before putting their money that it would still take some time for the company to fully recover from the pandemic-related injuries.
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