Jim Cramer has had it with Southwest Airlines (NYSE:LUV). He’s not alone. There are a growing number of unhappy customers. LUV stock investors? Not so much. The stock has rolled over in October, but only by 5%. This despite having to cancel 28% of its flights over the most recent weekend.
Southwest blamed bad weather in Florida and a shortage of air traffic controllers. Critics tried to blame vaccine mandates. Pilots and Texas Governor Greg Abbott oppose the mandates, but Southwest management is backing the federal government.
Is it time to throw in your Southwest Air shares, as CNBC’s Cramer suggests, and move your airline investment to Delta Air Lines (NYSE:DAL) instead? I don’t think so.
Short Term, Long Term on LUV stock
A lot depends on whether this is a short-term problem or a sign of things to come.
Industry analysts aren’t so sure. They say the airline cut too far during the worst of the pandemic. Now that air travel is returning to normal, there isn’t enough slack in the system to handle even minor hiccups.
What both sides agree on is that Southwest needs more staff to meet its schedule. The company has plans to hire 13,000 people. It will cancel more flights if it can’t get them.
Southwest is also going through a leadership change. CEO Kelly is retiring in February, to be replaced by Robert Jordan. Jordan leapfrogged President Tom Nealon for the top spot, and Nealon promptly retired. Transitions in their Dallas offices are normally more orderly. Expect an update next week when management holds its conference call following the Oct. 21 release of third-quarter results.
Southwest retains advantages over its rivals. It doesn’t use a hub-and-spoke route system, so its planes spend more time in the air. It flies just one plane, although that’s the Boeing (NYSE:BA) 737. The 737-MAX scandal put Southwest in the industry doghouse for a time.
Southwest’s big disadvantage was the loyalty of its employees. This meant it had an older, better-paid workforce than other airlines. Hiring new people means that disadvantage should also go away.
None of the major airline stocks has fully recovered from the pandemic, but Southwest continues to outperform its peers. Shares are up 26% over the last five years, which is just one-quarter of the gain in the S&P 500 index. But Delta is up only 8% in that time and American Airlines (NASDAQ:AAL) is down by nearly half.
At its Oct. 13 price of $52 a share, Southwest is worth $31 billion, on 2020 revenue of just $10 billion. In a normal year, and 2022 is expected to be a normal year, sales are more than twice that. About 10% of revenue hit the net income line in 2019. That should mean a forward price to earnings ratio of 15, based on 2019 figures.
Before the pandemic Southwest was also a dividend stock, but don’t expect a quick return there. The company took on $9 billion in long-term debt to stay alive during the pandemic. It had $9.2 billion of debt at the end of June. In a normal year it generates about $4 billion in operating cash flow.
The Bottom Line
Despite everything, Southwest is still the best airline stock you can buy. It’s in better financial shape than rivals and should be in better operating shape by next spring.
The question is why buy an airline stock at all. These stocks are highly volatile. LUV stock sports a five-year monthly beta of 1.2. The volatility metric on AAL stock and DAL stock is 1.71 and 1.35, respectively. Those stocks make up more than 30% of the holdings of . Airline exchange-traded fund U.S. Global Jets ETF (NYSEARCA:JETS) has a beta of 1.82. Those stocks make up more than 30% of the ETF’s holdings.
Add to that, the fact that airlines often show low margins. It’s a tough business. I would rather not have my money in a tough business, subject to weather, inflation, and all manner of potential disaster. Give me a nice software stock.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.