More often than not, ambition is rewarded in business. You’d be forgiven for not picking up on that after Southwest Airlines Co (NYSE:LUV) stock took an 8% beating for the crime of planning to expand its flights by 7% to 8% this year.
Analysts promptly condemned the move, claiming LUV’s busier schedule could prove detrimental to all airline stocks, inciting a price war.
Way to Ruin the Party, Southwest
Stifel analyst Joseph DeNardi characterized the move as “frustrating” for LUV stock and its competition because the more limited passenger capacity is, the less pressure airline stocks will feel. Cowen and Co.‘s Helane Becker also lamented the fact that LUV may have ruined the party for AAL, DAL and others, who may be forced to compete more fiercely on pricing.
The U.S. Global Jets ETF (NYSE:JETS), which launched earlier this month as the one and only exchange-traded fund focused specifically on airline stocks, is off more than 4% today.
Although LUV stock was the catalyst behind today’s move, further pressure was added by an adverse decision by regulators not to halt the U.S. expansion of three Arabian Gulf carriers. UAL, AAL and DAL requested that the Feds stop Emirates, Qatar Airways and Etihad Airways from expanding U.S. routes, as the three airlines have allegedly received more than $40 billion in government subsidies from Qatar and the UAE.
AAL CEO Doug Parker claimed that those three airlines had increased passenger capacity to the U.S. by 25% since the joint grievance was filed in January. “If it’s allowed to continue or proliferate, there is real risk to the U.S. aviation industry. It’s not hyperbole. It’s a fact,” he said.
Though LUV stock got pounded by analysts today — Buckingham Research downgraded shares from a “buy” to “neutral” rating Wednesday — I think AAL stock is most at risk from today’s developments. That’s because, on top of the industry-wide jump in capacity, AAL doesn’t hedge against rising fuel prices. While that strategy has proven quite lucrative over the past year as oil prices hit a wall, energy has been rebounding, and the price of crude oil was up as much as 1.4% today.
Southwest airlines knows a thing or two about hedging strategies. In fact, Southwest’s decision to hedge against rising oil prices heavily in the decade following the 9/11 attacks was one of the main factors that put LUV stock on the map and freed up the airline’s ability to expand.
So it doesn’t surprise me that Southwest is zigging yet again while its competitors zag. After all, that strategy has worked well in the past. I doubt today’s knee-jerk reaction is the harbinger of long-term underperformance for LUV stock. As the first one to seriously increase capacity, LUV actually has a leg up on competitors.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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