We may still have a long way to go before the novel coronavirus pandemic is no longer an issue. But, the recovery has already started for hard-hit names like Southwest Airlines (NYSE:LUV) stock. After hitting multi-year lows due to outbreak-driven depressed air traffic, shares have bounced back more than 50%.
And that’s no surprise. Since mid-May, the airlines have started clawing their way back towards pre-pandemic air traffic levels. Granted, a look at TSA checkpoint travel numbers still shows travel levels remain far blow where they were a year back.
However, things are moving in the right direction. And, given public sentiment remains largely pessimistic, coronavirus tailwinds remain more than priced into airline stocks.
Yet, if the pandemic cools down sooner than expected, names in the sector stand to make substantial additional gains. And, it’s low-cost airlines like LUV stock that stand to gain the most.
How so? With a stronger balance sheet than its legacy rivals, Southwest is in a much better place financially. Also, the carrier is projected to recoup a much larger share of its pre-pandemic revenue than the three “old school” major airlines. To top it all off, the carrier could leverage these strengths to gain substantial market share while rivals struggle to bounce back.
In short, Southwest remains one of the best airline stocks out there, and a buy as it makes a recovery.
LUV Stock Vs. Legacy Carriers
Granted, a sooner-than-expected comeback for air travel bodes well for airline stocks across-the-board. But, there are many reasons why low-cost carriers like Southwest remain airline comeback plays.
Firstly, Southwest is in a stronger place financially. Yes, like the other major airlines, this carrier has experienced tremendous cash burn, as well as borrowed billions under the U.S. Government’s CARES Act to shore up its balance sheet.
Yet, in terms of liquidity, the carrier can outlast many of its rivals. As announced back in June, Southwest has enough cash to carry on for nearly two years.
Secondly, this airline is second to only another favorite of mine, Spirit Airlines (NYSE:SAVE) in terms of potential recovery speed. What do I mean? As I discussed earlier this month, Spirit and Southwest are the only carriers projected to recover more than 75% of their 2019 revenue in 2021.
Compare that to all three legacy carriers. American Airlines (NASDAQ:AAL), Delta Airlines (NYSE:DAL) and United Airlines (NASDAQ:UAL) all have 2021 revenue projections that are below 65% of their respective 2019 revenue levels.
Sure, at first glance the gap between 65% and 75% doesn’t look that large. But, when you consider the high fixed costs of the aviation industry, ten percentage points make a big difference. In other words, while the three “old school” carriers could continue hemorrhaging cash well into next year, Southwest may find itself leaps and bounds ahead.
And this could benefit LUV stock not just in the short-term, but long-term as well.
A Faster Road to Recovery
There is good reason why Southwest could do more than just “return to normal” as we slowly exit the pandemic. Namely, if the carrier bounces back much sooner than the old school airlines, it could aggressively go after market share.
In fact, the airline was already making such bold moves in the midst of the outbreak. Back in late June, Southwest slashed fares and increased capacity. Granted, as the coronavirus lingers, the airline is walking back from these prior aggressive plans.
But, that doesn’t mean they can’t make a bold move again, once the pandemic is fully in the rear-view mirror. Once revenues stabilize, Southwest will be well-positioned to aggressively go after legacy airline market share.
The current consensus calls for a full air travel recovery by 2023. But, with the above-mentioned factors at play, Southwest’s revenues could bounce back much sooner. Probably not this year. But, it’s possible revenues retrace the high water mark by 2022.
With this in mind, buying LUV stock today, while the stock remains far below its pre-pandemic prices ($55 per share) looks like a shrewd move.
Southwest Remains a Solid Buy
As air travel makes a slow and uneven path to recovery, the sector as a whole should head higher from today’s prices. But, among individual airline stocks, low cost names like LUV stock remain the best names in the sector.
With substantial advantages over legacy carriers like American, Delta and United, this airline could see its revenue bounce back much sooner than the overall industry. And, with a quicker road to recovery, Southwest’s stock could see much more rapid appreciation in a shorter period of time.
Bottom line: with more solid recovery prospects, LUV stock remains one of the best of the bunch. Shares remain a buy as they start trending higher.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.