Good News for LUV Stock?
Southwest Airlines Co (NYSE:LUV) is usually a reliable bet. But right now, Southwest stock may be an even more interesting proposition than usual. Southwest has been trading not far from its all-time high of $49.41, set last December. Its good financials and growing traffic suggest LUV stock could easily set new record-highs this year. A $50.00 price target is surely within range and this represents a 20% increase based on Southwest Airlines stock’s current price.
Southwest avoids the high U.S. dollar problems that have lowered earnings for those with a significant international traffic component. International routes mean that airlines have to repatriate revenue in different currencies. The high U.S. dollar has hurt those conversions.
Moreover, by limiting its international reach, Southwest can fight off competition with good management. International-intensive airlines like United or Delta have to compete on service and appointments. They face very tough competition from Asian carriers, for example, which can offer many more amenities than their North American rivals. Southwest stock does not depend at all on luxury or foreign currency issues.
Meanwhile, Southwest continues to deliver bullish quarterly reports. Southwest Airlines carried 8.7 million passengers in February, 11.4% more than in the same month of 2015, according to the company’s quarterly release. Southwest also flew 11.1% more flights in February 2016 compared to a year earlier. In the last 12 months (February 2015 to February 2016), Southwest Airlines carried 11.4% more passengers. (Source: “Southwest Airlines Reports February Traffic,” Southwest Airlines Co, March 8, 2016.)
Southwest Airlines was founded in 1971 in Texas and it started to thrive in the post-deregulation years after 1978. Southwest is the third-largest airline in the U.S. (after Delta and American Airlines), but it is the world’s largest domestic flights airline.
If its current pace of growth persists in the coming years, Southwest could reach a market of 150 million passengers, which is the number served by Delta so far in 2015. In 2014, Southwest flew 135 million passengers.
Southwest was the first airline to overturn the traditional airline service model, offering little by way of passenger amenities or special class categories (there’s only coach class). It even offers fewer amenities than the slew of low-cost airline competitors that it inspired. Consider the fact that there isn’t even assigned seating on Southwest flights. Yet the original low-cost airline has maintained a consistent stronghold over the low-cost market to the delight of those owning Southwest Airlines stock.
High expectations may be the main problem for LUV stock. In 2014, Southwest achieved a record profit of $1.1 billion, an increase of more than 50% compared to 2013, its previous record year. (Source: “Southwest Airlines tops $1 billion in annual profits for first time,” Airline Biz Blog, January 22, 2015.) After such records, it will be difficult to match the same level of performance for LUV stock, even if passenger traffic is increasing.