No Demand Means LUV Stock Is in the No-Fly Zone

Until the consumer gets off the ground, all airliners are risky

Initially starting out as a global health scare, the coronavirus from China has rapidly devolved into an existential economic threat. Perhaps no other industry best demonstrates this than the fallout in the airliner industry. In particular, Southwest Airlines (NYSE:LUV), despite having a relatively strong financial backing, has suffered badly. Even with a surge in momentum following an unprecedented U.S. governmental response, LUV stock is down more than 30% for the year.

Source: Felipe_Sanchez /

I know that some of my InvestorPlace colleagues view LUV stock as a speculative bet. Historically, no outbreak has ever disrupted the economy for an appreciable length of time. In addition, several states have now issued mandatory stay-at-home orders. As you’re probably all too aware, many folks are simply getting cabin fever. Wanna get away? For most, the answer is a resounding yes.

But when it comes to the economy, there’s big difference between “want” and “demand.” With all due respect, I believe the optimists are not fully appreciating the tsunami that is ravaging America. And that’s my biggest apprehension regarding LUV stock.

Yes, airliners have suffered prior headwinds that have temporarily choked demand. Back in 2010, an Icelandic volcano spewed ash, disrupting the most efficient routes to Europe. Of course, the big one is 9/11. That act of terror forever changed air travel. Now, we must endure myriad inconveniences – and sometimes egregious violations – due to a few nutcase extremists.

Yet the broader argument for LUV stock and the airliners is that we have learned to adapt to these circumstances. Further, President Trump signed a historic $2 trillion stimulus package into law. This includes $50 billion earmarked for airlines.

Sounds good, right? Well, not really.

Demand, Not Stimulus, Is Key for LUV Stock

Though the government’s industry bailout is a needed boost of confidence, it doesn’t fix the root of the problem. Rather, the stimulus is merely a bandage to mitigate the hemorrhaging. The only real solution is putting passengers back into those planes.

Unfortunately, this is easier said than done. Despite airline companies desperately cutting fares to bare-bone rates, most travelers are “fearful at any price.” Currently, this is a “want” problem – travelers have the funds but don’t want to board a flight. Eventually, if current trends persist, the industry will have a demand problem; that is, unaffordable at any price.

Last week, more than three million Americans filed for unemployment benefits. According to data compiled by the New York Times, the past two weeks claim will have likely pushed the unemployment rate to 5.7%.

Just like many people dismissed the coronavirus as “just like the flu,” the same individuals may not appreciate the “econovirus” that’s destroying this country. In my view, this will have a huge negative impact on LUV stock.

Primarily, the U.S. economy was nowhere near as healthy as the Trump administration claimed it was prior to this mess. Of course, the headline numbers looked great until you performed a deeper dive.

When you do, you’ll realize that in holistic terms, many American families were falling behind. For instance, wages have only increased by a compound annual growth rate (CAGR) of 0.67% between the years 2007 and 2018.

Real wages vs. housing costs
Click to Enlarge
Source: Chart by Josh Enomoto

During the same time frame, though, average annual housing expenditures jumped from $16,920 to just over $20,000. That’s a CAGR of 1.57%.

So yes, Trump is right: pre-coronavirus unemployment figures (when not including discouraged workers) have dropped to multi-year lows. But discretionary income has also dropped, which hurts LUV stock.

Southwest Is No Beacon

I will concede that compared to rivals such as United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL), Southwest is superior. For starters, Southwest mostly flies domestic routes. Therefore, the global downturn – especially as it relates to Chinese tourism – theoretically won’t impact LUV stock as much.

Second, Southwest has a better financial profile. Thus, the company might not take the bailout in exchange for operating the airliner the way management sees fit.

I don’t find this a convincing argument because it all goes back to demand. Without passengers, Southwest will simply bleed cash to overhead costs. Sure, the company has a healthy cash balance. But that won’t last long with a skeleton crew of a consumer base.

On a longer-term view, who knows what changes the air travel industry will impose because of the coronavirus. One thing’s for sure: we can’t have another economic crisis like this. But at what cost will we ensure the safety of tomorrow’s air travelers?

Hastily installed coronavirus checks brought airports virtually to a grinding halt. Are we going to have these checks when the next virus attacks us? What will that do to the economy or society at large?

Honestly, there’s just too many questions surrounding this industry. For that reason, I’m sidelining LUV stock until further notice.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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