Shares of Southwest Airlines Co (NYSE:LUV) gained last month after the company reached a tentative agreement with its pilots association.
The Dallas-based company is likely to report its full year 2023 earnings at around half of the Street’s expected $3+ per share, while 2024 could prove to be a “transitional year,” according to Bernstein.
The Southwest Airlines Analyst: Bernstein’s David Vernon downgraded the rating for Southwest Airlines from Market Perform to Underperform, while raising the price target from $77 to $90.
The Southwest Airlines Thesis: The 2024 outlook could be worse than anticipated as the company is facing several headwinds, Vernon said in the downgrade note.
The analyst mentioned the challenges as:
- New pilot contract
- Secular cost headwinds
- Fleet constraints “that are adding to network costs”
- Shifts in demand “that are stressing the companies traditional point to point network model”
“These are proving to be difficult to offset with the current lack of a premium and international offering,” he added.
While management’s decision to lower capacity in 2024 seems to be “a step in the right direction,” it could take time to “plan out a new strategy and optimize the current network that has been expanded into unprofitable lanes and shift into maximizing revenue capture through segmentation and network optimization,” Vernon further stated.