Southwest Airlines (LUV) released a memo in recent days telling employees that there are “difficult decisions” ahead as the company seeks to recover lost profitability. Investors welcomed these difficult decisions, meanwhile, and sent shares up fractionally in Monday afternoon’s trading.
Though admittedly, no one actually dragged out the L-word, Southwest has already been seen visibly making moves that would boost its profitability. For instance, it plans to go back to assigned seating, instead of letting people sit where they like. It also plans to start offering “red-eye” flights again, and also looked to sell seats with extra legroom. These are not necessarily bad moves, and may well help generate that profit.
However, none of these are “difficult decisions,” and given that Elliott Investment Management is already putting pressure on the company, layoffs might be the quickest way to drive near-term gains. It is possible that Southwest’s series of small changes will effectively snowball into profitability, but there are still plans in the works for Southwest to pare back its presence in some cities, while also requiring staff to transfer. These won’t necessarily be outright firings, but consolidations and uprooted families appear to be on the horizon.
Declining Demand
Anyone who has been grocery shopping in the last year or so already knows that inflation has a death grip on the United States economy, and it is far from alone on that front. Not surprisingly, that is also putting a crimp on travel demand. A report from traveler Robert Pizzarello noted that a United (UAL) flight from Las Vegas to Washington-Dulles had “…about 30 open seats….” This wasn’t anything Pizzarello has heard often, but seems to be the case with more and more flights.
With consumers circling the wagons and protecting their wallets—let us not forget the late May study from Lending Tree that found 78% of Americans surveyed declared fast food a luxury—travel is likely an item to suffer loss. That will leave Southwest scrambling, with its numerous small changes potentially not enough in the face of declining demand. More flights are great, but when no one wants to buy a ticket, they are only so valuable.
Is LUV Stock a Buy or Hold?
Turning to Wall Street, analysts have a Hold consensus rating on LUV stock based on three Buys, six Holds and one Sell assigned in the past three months, as indicated by the graphic below. After a 8.99% rally in its share price over the past year, the average LUV price target of $26.73 per share implies 8.9% downside risk.
