Our airline industry plays a pivotal role in how we conduct business. Unfortunately, the novel coronavirus deeply cut into the sector. Even discount specialists like Southwest Airlines (NYSE:LUV) were not immune from the troubles. But finally, the worst may be behind LUV stock.
Yes, I know — you’ve heard this before. Starting from mid-May up into early June, LUV stock soared thanks to receding coronavirus cases. In addition, dramatically positive employment metrics suggested that a V-shaped recovery wasn’t just a fanciful idea: It had real substance backing it.
But just as everyone was making their summer vacation plans, the Covid-19 outbreak in the U.S. took an ugly turn. Daily cases surged as did hospitalizations and deaths. Suddenly, Southwest found itself struggling to stay afloat.
Fortunately, LUV stock corrected but never cratered. This alone should be an encouraging sign that the worst of the bleeding occurred in April and May. From here on out, Southwest and its peers should start moving convincingly higher.
For one thing, data from the Centers for Disease Control and Prevention clearly show a downward trend in coronavirus cases since late July. Further, as a recent Barron’s article pointed out, the airline industry has recently enjoyed a significant burst of bullish sentiment. In addition to receding infections, the sector responded positively to reports that a coronavirus vaccine could receive a fast-tracked approval.
Still, Southwest Airlines isn’t allowing itself to be a spectator in its business. Instead, management has aggressively launched promotional offerings, with some short flights going for as low as $39. Again, this is another indicator that confidence is returning to the friendly skies.
LUV Stock Is Well Matched for a War of Attrition
Of course, the criticism against promotions is that they kill margins. At a time when the airline industry is already bleeding cash, this move may raise eyebrows. However, investors should appreciate the broader context for LUV stock.
As mentioned earlier, Southwest is a discount specialist. So, the company is much more used to driving down prices to stay competitive. While the coronavirus is a net negative, the premium airliners are playing Southwest’s game, not the other way around. Therefore, if a war of attrition occurs in this space, you’ll want to have some LUV.
Further, LUV stock isn’t encumbered by the necessary costs to maintain a robust international schedule. Plus, the European Union and other top travel destinations across the globe have temporarily banned U.S. travelers. Obviously, this doesn’t do any favors for the industry’s alpha dogs. But for Southwest, the impact is minimal.
On a related note, more people are flying, which should have a rising tide effect. However, the total number of miles flown has declined precipitously. Likely, the numbers have risen since the last time the government tallied data. However, it may still be low relative to passenger growth. Not only is the rest of the world banning Americans, business travel has all but died.
Logically, this means the present return of air travel mostly favors shorter routes. And this puts Southwest at an advantage. After all, its business is geared largely toward domestic flights. Yes, competitors can come in, but Southwest was designed from the ground up for shorter flights. Thus, it can better afford to divvy out aggressive promotions.
No, this isn’t going to last forever. However, a shot across the bow to your competitors can be powerfully effective.
Positioned for a Substantive Recovery
Finally, LUV stock and similar discount-oriented plays in the airliner industry may be better positioned for a full recovery once society normalizes.
First, many companies may recall their workers as opposed to letting them work remotely forever. In late July, the Wall Street Journal published an article indicating that remote work posed its own undeniable challenges. For instance, projects were taking longer to complete, suggesting inefficiencies. In addition, collaboration is more difficult, as well as training new employees.
Put another way, the coronavirus might not completely upturn the business world. If so, we will see increased business travel. However, companies will be mindful of costs, suggesting higher demand for discount travel. This naturally benefits LUV stock.
Second, vacationing by air will also return. Again, the same considerations above apply. Perhaps people won’t initially go on that European vacation due to lingering concerns from the pandemic. Instead, they’ll travel domestically, further boosting Southwest Airlines.
However, the market has only just caught onto the longer-term thesis. Therefore, you should seriously think about LUV while it’s still a bargain.
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.