Southwest Airlines Is the Best of the Worst

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Over the weekend, airline stocks took a beating as investing legend Warren Buffett expressed concern about the sector as a whole. Southwest Airlines (NYSE:LUV) was one such victim, with the share price falling nearly 10% over the past few days. LUV stock has lost more than half of its value since February due to the novel coronavirus pandemic.

Southwest Airlines Is the Best of the Worst
Source: Eliyahu Yosef Parypa / Shutterstock.com

But just because Buffett is abandoning airlines doesn’t mean everyone should. Airline travel isn’t going away forever. It might be changed forever, but it’s not going to evaporate completely. That means there’s money to be made in airline stocks if you have a long timeline and a stomach for risk.

Southwest stock looks like the best pick in the beaten-down airline sector as it will likely be one of the first companies to make a recovery.

LUV Stock Will Be First to Recover

Southwest Airlines is sitting in a great spot when it comes to pulling off a post-pandemic recovery. That’s because the firm is a leader in domestic travel— a segment of airline travel that will probably recover faster than international travel.

Ryanair (NASDAQ:RYAAY), a low-cost European carrier, is planning to start resuming some of its flights this summer. However, the company will struggle to reopen all of its routes as neighboring countries take different approaches to lifting coronavirus lockdown restrictions.

In the U.S., while states will take differing approaches to reopening their economies, none will completely seal off their borders. That will allow for a much faster return to normalcy for Southwest.

Southwest Has the Strongest Finances

Another reason LUV stock is a top pick in the airline sector is the firm’s financial strength. None of the airlines are making money right now, but Southwest is getting through the storm with far less damage because the company already had a strong balance sheet going into it.

The firm’s first quarter results showed that it has been building up a war chest of liquidity that should see it through a few months of soft demand. In addition to cutting costs and securing government aid, Southwest also managed to raise $5.2 billion in debt financing. That is expected to get the company through the end of Q3 assuming air travel remains depressed.

What’s Next

Beyond Q3, it’s anyone’s guess what will happen. There are a few different scenarios to work off of. The first and most promising for LUV stock would be the introduction of a viable vaccine. That would change the impact of the pandemic dramatically and allow airlines to resume as normal much sooner.

The second is a much slower course of recovery in which smaller, second waves of the coronavirus make social distancing measures a necessary part of life. That would be detrimental to the airline industry for a long time to come because it would significantly reduce their passenger numbers.

For Southwest, scenario two could be problematic. As Ryanair’s Michael O’Leary put it, trying to enforce social distancing on planes and in airports is essentially impossible. Even if it were possible, airlines can’t operate profitably if they can’t carry a full passenger load.

In the third, worst-case scenario, a second coronavirus outbreak would eclipse the first, forcing even stricter quarantine measures. This outcome is notably unlikely, but it would wreak havoc on the airline industry if it did come to pass.

The Bottom Line on Southwest

The outcome for all airlines is closely tied to the outcome for coronavirus. As long as the virus is a risk, the number of people flying is going to be smaller than normal. For that reason, I wouldn’t take a huge position in any airline stock— even a quality one like Southwest.

But if you are willing to take some risk and you can stand to wait through the uncertainty, LUV stock is undoubtedly the best of the bunch. As the only airline to receive an investment-grade rating from all three major ratings agencies, it’s just about as safe as you can get in that sector.

Southwest’s strong financial position going into the pandemic, coupled with its advantageous position as a leader in domestic air travel means the company is likely to recover sooner than its peers.

Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/southwest-airlines-luv-stock-best-of-the-worst/.

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