Southwest Airlines: Zacks’ Bear of the Day Play

Low fuel prices had lifted airlines’ stocks last year but the outlook has turned negative this year thanks to overcapacity, terrorist attacks, currency headwinds and plunging fares. Most airlines have reported disappointing earnings for the recent quarter.  What lies ahead for this low-cost, domestically focused airline?

About the Company

Dallas-based Southwest Airlines (LUV) is the nation’s largest carrier in terms of originating domestic passengers boarded. They serve 77 of the top 100 domestic airports, focusing primarily on short-haul, high frequency, point-to-point and low-fare services.

Lackluster Second Quarter Results

Southwest Airlines reported mixed results for Q2, missing the Zacks Consensus Estimate on earnings but beating on revenues. Adjusted earnings of $1.19 per share were short of the Zacks Consensus Estimate of $1.22.

Revenues of $5,384 million beat the Zacks Consensus Estimate of $5,372 million and were also up 5.3% year over year. Passenger revenue per available seat mile (PRASM) fell 3.5% year over year to 12.83 cents.

Shares sank about 11% after the report.

Falling Estimates

Zacks Consensus Estimates for the current and the next year have plunged to $3.95 per share and $4.15 per share, from $4.15 and $4.51 respectively before the earnings release.

The Bottom Line

While low fuel prices benefit airlines’ earnings, they also put pressure on pricing, particularly due to heavy discounting mainly by low-cost carriers. Many airlines expanded capacity in the wake of lower fuel prices which has now led to a fare war.

Airlines industry is currently ranked 247 out of 265 Zacks industries (bottom 7%). Investors looking to play this industry could look at Cathay Pacific Airways (CPCAY) which carries a Zacks Rank #1 (Strong Buy).

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