Last week Southwest Airlines Co (NYSE:LUV) hit some unexpected turbulence. Yes, the company issued a warning. The result was that LUV stock dropped from $61 to $57.
The main issue? Well, as is common for the airline industry, Southwest is starting to feel the pressures of competition. In the company’s latest announcement, it indicated that the revenue per available seat mile (RASM) will flatline for the first quarter.
Keep in mind that the prior guidance was for an increase of 1% to 2%. By comparison, United Continental Holdings Inc (NYSE:UAL) and Delta Air Lines, Inc. (NYSE:DAL) have recently indicated revenue growth.
The competitive environment is not the only issue. Note that LUV has had issues with the transitioning of its fleet of Boeing Co (NYSE:BA) aircraft. Although, this is likely to be temporary.
OK then, so what now for LUV stock? Might there be a buying opportunity here?
Well, interestingly enough, there is buzz that Warren Buffett may want to make a play for Southwest stock. In a recent interview on CNBC, he noted he might buy an airline. In fact, he already has a $3-billion stake in the company.
Yet I still think investors should be cautious. The fact is that there are few signs that low-cost rivals like Spirit Airlines Incorporated (NYSE:SAVE) will let up anytime soon, and this is likely to mean continued pressures on margins. Keep in mind that the larger carriers, such as UAL, DAL and American Airlines Group Inc (NASDAQ:AAL), have also been getting more aggressive on pricing.
But there are other nagging challenges, which are likely to weigh on LUV stock. Note that more airlines are moving to boost capacity. Just look at UAL. In late January, the company jolted its investors when it announced an increase in capacity — through new routes and domestic hubs — of 4% to 6% a year through 2020 (on the news, the shares plunged 11%).
But UAL was not the only one. AAL has also said it will increase capacity in 2018 by 3%.
This should not be a surprise, though. There continues to be strength in passenger traffic as the global economy has remained in growth mode. According to the U.S. Transportation Department, there was a 3.4% increase for U.S. domestic and international flights for 2017, hitting a record 965 million passengers.
So it is reasonable for there to be capacity increases. Although, history has also shown that this can get out of hand, which could lead to lower ticket prices.
Something else: Costs are starting to rise throughout the airline industry. In light of the tight labor market, unions have been emboldened to get more concessions.
Given all this, is it any wonder that investors are getting antsy about LUV stock? Definitely not.
Bottom Line on LUV Stock
It’s true that Southwest is a solid company and should be able to manage through the challenges. Hey, it has posted profits for the past 43 years. No airline has come even close.
LUV also has a great brand, an extensive network of routes, a disciplined cost structure and strong customer service. The company will also benefit from its new revenue management system, which should help to improve the RASM.
However, despite all this, the airline industry remains in a state of flux, with rising costs, lower prices and growth in capacity. So in the near term, there is likely to be more volatility. In other words, it’s probably better to wait on LUV stock for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
