Although discount airliner Southwest Airlines (NYSE:LUV) is up nearly 11% year-to-date, this is a name that peaked too soon. At the beginning of February, the LUV stock price had gained 24% from January’s opening volley. However, shares spent much of the year mired in a bearish trend channel since then.
Of course, investors aren’t terribly surprised at the underperformance of Southwest Airlines stock. For starters, the U.S.-China trade war has weighed heavily on the markets. And though the ratcheting up of trade tensions don’t directly affect the airline, they do cloud consumer sentiment. Unfortunately, that does take a bite out of the broader transportation industry.
Secondly, Southwest Airlines delivered a mixed earnings report for the second quarter of 2019. While the company delivered a beat on per-share profitability, it came up short on revenue. Against a consensus estimate of $5.93 billion, the airline rang up just under $5.91 billion. Wall Street didn’t care for the sales miss and the LUV stock price fell sharply after the disclosure.
Adding to the woes was the grounding of the Boeing (NYSE:BA) 737 Max 8 jetliner. After two fatal accidents involving the popular plane, a harsh spotlight glared on the once-respected company. At fault was a stabilization system that required grounding all Max 8 jets for inspection and repair.
Boeing’s woes are particularly troublesome for Southwest Airlines stock because the underlying company is the world’s biggest operator of the Max 8, with 34 in its fleet of about 750 planes. American Airlines Group (NASDAQ:AAL) and Air Canada (OTCMKTS:ACDVF) are tied for second place at 24 planes.
With such dependency on a disgraced jetliner, does LUV stock offer a realistic chance to break out of its rut?
LUV Stock is a Diamond in the Rough
I understand investors’ hesitation with Southwest Airlines stock. Not only is it heavily levered to the 737 Max 8, other airliners have outpaced it. For example, Delta Air Lines (NYSE:DAL) dealt with the same economic and geopolitical headwinds, yet its shares are up 20% YTD.
In addition, trade tensions and other macro-headwinds have brought about fears of a wider correction or even a major tumble. Certainly, the present environment doesn’t inspire a risk on attitude.
That said, I believe LUV stock offers a rational bull argument for the risk-tolerant speculator. Amid the mixed Q2 earnings report, management delivered a less ambiguous piece of good news: a resumption of their Hawaiian route expansion strategy.
In March, the company debuted a flight from the continental U.S. to Hawaii. A little more than two months later, LUV was flying six round trips between the two regions daily. It also featured 16 daily flights within Hawaii.
However, the 737 Max 8 grounding hit Southwest Airlines stock just as the underlying company was gaining serious traction. To counter this unforeseen turbulence, management made the decision to cancel all flights to Newark Airport, freeing up equipment to accommodate the Hawaii routes.
It stinks to say this but it’s the right decision for the company, the consumers, and LUV stock. After all, who in their right mind would go to Newark over anywhere in Hawaii?
Secondly, it’s not just domestic demand that will benefit the LUV stock price. It may have become an almost farcical stereotype, but Japanese tourists really love Hawaii. Not only that, many of these tourists are paying ridiculous premiums to travel there.
With LUV offering cheap routes to the mainland U.S., I see synergies that can eventually lift Southwest Airlines stock.
Another Big Route in the Works
While Q2 may have been a disappointment for some observers, LUV stock may benefit from a recoil effect. That is, investors were initially taken aback by the Max 8 grounding. However, when the Max eventually resumes normal operations, its associated revenue channels will also come back online.
When it does, this may have a disproportionately positive impact on Southwest Airlines stock. Remember, this is the company that has the most of the currently embattled jetliner.
And the route that I’m especially paying attention to is the San Diego-Hawaii route. Why San Diego? Aside from it being the best city in the known universe, it hosts the U.S. offices of several major multinational companies, including Japanese firms, such as Sony (NYSE:SNE).
What you have in Southwest Airlines stock is a possible goldmine. Southern California is already a gateway for Japanese tourists, and many of them will undoubtedly make the trip south down the coast. Moreover, you have thousands of constantly rotating Japanese professionals on work visas living in San Diego.
Southwest can easily convert this consumer base to full flights to Hawaii. Because let’s face it: this is a route that sells itself, which is why buying LUV stock isn’t as crazy as it first sounds.
As of this writing, Josh Enomoto is long SNE.
