Rating downgrade adds to woes of Southwest Airlines; stock falls

Southwest Airlines (LUV) suffered a double whammy this week when a rating downgrade by Goldman Sachs deepened the setback caused by widespread flight cancellations and delays. The stock plunged more than 5% Wednesday morning after the brokerage firm slashed its rating on the company to sell from neutral and lowered the price target to $54 from $66.

The primary reason for the downgrade is the delay in commencing the much-awaited Hawaii service, which according to the analyst might force the company to sell tickets at lower fares due to a reduction in the number of selling days. It is estimated that the new service to the islands, which was launched earlier this month, is unlikely to generate profit in the near future, though the long-term outlook is positive.

The reason for the downgrade is the delay in commencing the Hawaii service, which might force the company to sell tickets on lower fares

Considering the headwinds facing the company due to flight disruptions and faltering ticket sales, the bank also revised down its earnings forecasts for fiscal 2019 to $4.45 per share from the earlier guidance of $4.70 per share. Meanwhile, the positive outlook on the stock’s long-term performance has come as a relief to investors. The analyst is particularly concerned about the pressure on the airline’s margins and its potential impact on market value.

Earlier, Southwest in a statement said the ongoing slump in flight bookings, caused mainly by the travel crisis triggered by the government shutdown, will have a negative impact of up to $60 million on its first-quarter revenues. The estimate is much higher than the $10-$15-million impact the management had predicted earlier. The company also lowered its revenue growth guidance for the March quarter to 3-4% from the previous projection of 4-5%.

The announcement came on the heels of Southwest tendering an apology to customers after it was forced to cancel hundreds of flights in the recent weeks due to issues related to aircraft maintenance. The company’s operations head blamed it on the mechanics union, which according to him is notorious for causing disruptions.

Though Southwest shares made steady gains in the first half of last year and hovered near its peak, the rally was short-lived and the stock retreated. After maintaining the downtrend since then, the stock regained momentum this year and has gained about 15% so far.

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