Could Southwest Airlines Be Ready for a Rebound?

It looks like Southwest Airlines (NYSE:LUV) is trying to find a bottom. On May 14, Southwest CEO Gary Kelly says that air travel will not likely return to pre-pandemic levels for six to 12 months. That sent LUV stock tumbling to six-year lows.

Could Southwest Airlines Be Ready for a Rebound?
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But it is becoming more evident that airlines may start to get at least some passenger traffic sooner rather than later. And that is leading some analysts to believe the worst may be over for LUV. This includes my InvestorPlace colleague Chris Tyler who makes a technical case for LUV stock.

The News Is Less Bad

In March, when the nation was initiating its efforts to flatten the curve of the novel coronavirus, I wrote an article saying that Southwest might be the best of the airline stocks. At that time, I didn’t call a bottom, but I thought the stock would trade sideways.

I was wrong. About a month after I wrote my bullish case for Southwest, I had to backpedal. The company reported dreadful earnings. And the company’s forward guidance was even worse.

At that time, Dr. Deborah Birx, the White House Coronavirus Task Force coordinator, said social distancing measures would likely remain in place through the summer. But the broader message was that the national lockdown was going to continue much longer than the airlines were forecasting.

Now, the news may not be great, but it’s less bad. There appear to be increasing optimism that a vaccine will be available. It may not happen in 2020, but it seems that it will be available on the shorter-term end of the scale.

But until then, Americans who are willing to travel will have to make decisions on how they get from here to there. And Southwest may have a couple of advantages over other major carriers.

Southwest Has Two Potential Catalysts

First the bad news: the International Air Transport Association (IATA) has come out with a gloomy forecast for air travel. While most of the news is following the broad consensus that it will take until 2023 for air travel to get back to normal, there is a nugget that works in Southwest’s favor.

According to the report, 58% of passengers intend to fly domestically, even when international travel restrictions are lifted. That works well for Southwest which relies almost exclusively on domestic destinations.

And when they do seek out domestic flight, Americans will likely be seeking cheap fares. The unemployment rate is going to take a while to unwind. Many businesses that were shut down may not reopen. And we are facing an uneven reopening. While many states are already moving to a second or even third phase of reopening, other states are still virtually locked down.

All of this is creating economic uncertainty. And that means many Americans who are on the fence may be attracted by the allure of a low price…Southwest is well-known for being a low-cost carrier and therefore will likely be a choice for both recreational and business travel.

Will Passengers Trade Amenities for Price?

One thing that makes me interested about the future of air travel is the innovation that’s bound to come. After 9/11, the airlines had to make changes to stimulate demand. However, many of those changes happened before passengers got on the plane. The actual configuration of the plane didn’t change.

That will not be the case in a post-pandemic environment. Social distancing, in one form or another, is probably going to exist in some form or fashion in our society for a long time. But Southwest and other low-price carriers have relied on a model that relies on packing as many passengers on a plane as they can.

But with a growing demand for a premium economy segment, there is an ongoing arms race to design in-flight experiences that focus on health and wellness. Southwest has a premium economy segment titled Southwest Business Select. However, it looks to be a little behind the curve of other carriers.

To grow this segment will require a much more significant financial commitment. And it could force Southwest to deviate from being a low-cost carrier. It’s a situation that bears watching particularly for value investors.

LUV Stock Is Worth a Closer Look

An investment in any airline at this point is an investment in the future. Some airlines may not make it through to the other side of this. For that reason, I don’t imagine any airline stock will be a great buy for the rest of the year.

But it is starting to appear that traffic will be coming back in the second half of the year. And when it does, investors should begin to get a more realistic, and perhaps more optimistic outlook for 2021 and beyond. When it does, I suspect Southwest may still turn out to be a good investment.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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