Categories Analysis, Industrials

Southwest is looking northside as lockdown restrictions ease

After weeks of consecutive declines, the airline industry is finally seeing a recovery during the long weekend

When Warren Buffett dumped airline stocks suffering massive losses three weeks ago, he probably overlooked one key aspect about the industry – that no amount of restrictions will kill people’s will to travel.

According to data released by Transportation Security Administration, there was a spike in traveler throughput the last weekend, which included the Memorial Day holiday. Though the number of travelers continue to be significantly lower than last year, the increasing number of air travelers offers enough confidence in fast revival of the industry.

Southwest Airlines Q1 2020 earnings IG.

The Dow Jones Transportation Average, which comprises six airline companies, rose 5.5%  on Tuesday, as almost all airline companies pared some of their losses incurred over the last couple of months.   

Southwest Airlines (NYSE: LUV) was at the forefront of the airline rally, gaining over 13% during intra-day trading.  The company has a relatively stable balance sheet and is expected to be among the earliest to recover. Separately, lack of exposure to international markets and some of its key markets remaining relatively immune to the pandemic should help the company achieve a clean take off.

Low-cost travel to pick up

Earlier during the post-earnings conference call, CEO Gary C. Kelly had projected that the low-cost travel would gain momentum in the aftermath of the crisis, which in turn would align with Southwest’s operational strategy. Meanwhile, CFO Tammy Romo added on the cash position:

Our goal is to add capital in a way that protects the balance sheet and our investment grade rating, while addressing liquidity issue, so that we are prepared for any scenario well into 2021.”

These factors have prompted Myles Walton of UBS to give a bullish outlook on the stock.

Industry recovery

Given that the government is keen on breathing life back into the aviation sector through CARES and other packages, we might be looking at some well-discounted stocks ready for recovery.

If history is any indication, aviation stocks have performed well post-catastrophic events in the past. Some airline stocks had even doubled in valuation a few months after the 2008 financial meltdown. This also probably explains the increasing insider buying of airline stocks.

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For more insights about Southwest Airlines, read the latest earnings transcript here. It’s free.

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