Should You Buy Southwest Airlines Now?

PHOTO CREDIT: Southwest Airlines

OVERVIEW

Southwest Airlines Company is an airline based in the United States. Southwest currently operates over 700 Boeing 737 airplanes with hundreds more on order. The company has hubs at Dallas Love Field, Houston Hobby, Denver, Atlanta, Baltimore, and a lot more. The airline operates to over 100 destinations in 40 states and other international countries like Puerto Rico, Mexico, and many others.

Why You Should?

1. Southwest Airlines will benefit from the return of the Boeing 737 MAX, which might return in the 4th Quarter of 2020. This will allow the airline to operate a more efficient fleet and help it phase out older aircraft, ultimately to reduce cash burn due to the Pandemic. This will benefit the airline's future growth.
2. Southwest Airlines will see its stock price rise further in the event of positive COVID-19 Vaccine News, and ultimately, a COVID-19 Vaccine. This will cause a spike in demand for air travel as people go back out again and continue to travel. COVID Stimulus for the airline industry will further prop up the company’s strength and stock price.
3. Southwest operates an all Boeing 737 fleet since it started. This helps the company be more efficient and reduce cash-burn as an all Boeing 737 fleet helps keep operating costs low. This will benefit the company’s future growth.
4. Southwest Airlines unique business models made it one of the best low-cost carriers in the world. Being a low-cost carrier, Southwest Airlines gave every paying customer 2 free checked bags, something that no other U.S. airline would do for domestic and medium-haul international flights. They also had no change-fees and ran on the model of “Transparency”, a quality which few other airlines did. This accompanied by low fares made Southwest a force to be reckoned with in the past as any market that they entered saw a drop in overall fares as competitors tried to match Southwest. It was dubbed the “Southwest Effect” as travel to that market would increase due to factors previously mentioned. The most recent time in which this effect was felt was when the airline inaugurated service to Hawaii markets, including inter-island travel as well as flights to and from the mainland. This caused demand for flights to Hawaii to increase in Southwest as well as a drop in fares. All of this will help the company come out of this pandemic with a stronger and more loyal customer base who will continue to fly with Southwest over other airlines.
5. Southwest Airlines has cut flights due to a drop in demand, especially the demand for business travel. However, they have announced several new routes to capitalize on leisure demand during this pandemic. They announced that they were entering the Miami market as well as increasing the capacity for flights to a ski-resort town as well as Palm Springs. The company will benefit from the return of leisure demand. The company reported revenues of around 22.4 billion and profits of 2.3 billion in the financial year of 2019. In the financial year of 2018, the company reported lower revenues of around 21.96 billion but higher profits at around 2.46 billion. This helped the company build a stronger balance sheet and will help the company get out of these tough times.

PHOTO CREDIT: Yahoo Finance

Why You Should Not?

1. Southwest Airlines faces tough competition from both domestic as well as other international carriers. Airlines like Delta, Alaska, Jetblue, United, and American all have a strong domestic and international presence. This might hurt the company’s future sales and growth in an extremely price-sensitive market.
2. The COVID-19 Pandemic has adversely impacted the entire airline industry, including Southwest Airlines. The airline has had to ground airplanes, cut staffing, cut routes with little to no demand, and face a possible future with less demand for business travel. All of this has caused the stock price to fall as the company reported losses in both the first and second quarter.
3. Though the airline was seeing strong revenues and profits over the past couple of financial years, the Boeing 737 MAX grounding as well as the pandemic will likely put an end to the company’s solid performance for the years to come. This weakens the company’s balance sheet and will limit its future growth plans, which will cause the company’s stock price growth to slow.

MY OPINION

In my opinion, I think that Southwest Airlines is positioned well to come out of this pandemic. The company aims to capitalize on higher demand for leisure travel using a more efficient fleet and lower its cash burn in the future. However, the impacts of the COVID-19 Pandemic might linger for years to come and tough competition might hurt the company in the future.