Southwest Airlines (NYSE:LUV) stock fell 4% overnight as investors processed the impact of its Christmas weekend flight cancellations. A major winter storm caused delays and cancellations across the industry, but Southwest customers seem to have been particularly hard hit.
Indeed, Southwest canceled 70% of its flights on Dec. 26 after canceling 48% on Christmas Day. The airline plans to cancel at least 60% on Tuesday. The U.S. Department of Transportation has announced it will be looking into the “unacceptable” number of delays and cancellations.
The stock is currently expected to open at $34.60 on Dec. 27, representing a market capitalization of $20.5 billion.
The Fall of LUV Stock
Southwest has long been America’s most popular airline. But since the Covid-19 pandemic began in 2020, the stock’s performance has been no better than its rivals.
Southwest rose to prominence with no-frills service, simple pricing and a route structure that kept planes in the air. But in recent years, rivals have adopted some of its policies, new entrants have undercut it on price, and cracks have started to show in its performance.
In the past, Southwest was an easy stock to recommend. I did it in April 2021, when the shares were trading for $63. Like everyone else who approved of it then, I look foolish.
Southwest famously flew just one aircraft, the Boeing (NYSE:BA) 737. Boeing’s 737 Max scandal delayed deliveries and sowed consumer doubt.
Southwest is increasingly facing labor troubles. There are labor shortages throughout the industry.
All this has caused Southwest to hike prices aggressively. When system-wide troubles occur, as they did in the last week, consumers are less forgiving.
Many stock analysts have yet to get the message. TipRanks still lists six of seven Southwest analysts as buyers. But rival airlines, especially Delta Airlines (NYSE:DAL), are now catching up. The latest Southwest downdraft puts Delta’s market cap ahead of Southwest’s.
What Happens Next?
The problems at Southwest seem fundamental and will leave a long-lasting mark. The steady succession of insiders like current CEO Robert Jordan may be a thing of the past. The habit of recommending Southwest stock as “best of breed” among airlines may end in 2023.
Southwest is still selling for over 25 times earnings, Delta is starting to make money, and Southwest is no longer special. I can’t recommend any airline stock until the industry’s operations improve. But if forced to buy one, it would be the Atlanta one.
On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.