Upbeat Air-Travel Demand Aids Southwest (LUV), Cost Woes Ail

The uptick in air-travel demand in the United States (particularly on the leisure front) bodes well for Southwest Airlines LUV. However, escalated fuel costs are limiting bottom-line growth and emerging as a key downside.

Factors Favoring LUV

The gradual improvement in air-travel demand in the United States is a huge boon for Southwest Airlines. In the second quarter of 2022, air traffic, measured in revenue passenger miles, rose 17.5% year over year. With high passenger volumes, the top line is likely to be boosted in the September quarter.

The presence of the Labor Day holiday period in the third quarter should further boost third-quarter passenger revenues. Management expects third-quarter 2022 operating revenues to increase in the 9-11% band from the third-quarter 2019 actuals.

Efforts to modernize its fleet also bode well. Southwest Airlines' liquidity position also raises optimism on the stock. At the end of the June quarter, the carrier’s cash and cash equivalents stood at $16,431 million, much higher than the current debt of $1,662 million, implying that LUV has sufficient cash to meet its short-term obligations. LUV's current ratio (a measure of liquidity) at the end of the June quarter was 1.66, much higher than its industry's 0.91.

Key Risks

Escalating fuel prices are a concern. In second-quarter 2022, fuel cost per gallon (inclusive of fuel tax: economic) surged 75% year over year to $3.36. Economic fuel costs per gallon are forecast to be $3.25-$3.35 for the third quarter, detailed results of which will be out on Oct 27.

Apart from the increase in fuel costs, higher labor and airport costs are likely to dent bottom-line growth by spiking operating expenses. Due to the rise in labor and airport costs, and lower productivity levels, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 12-15% in the ongoing quarter from the comparable period’s level in 2019. High capex may also be a headwind.

Softness in business travel is a concern. This weakness is reflected by the fact that managed business revenues declined roughly 26% and 32% in July and August, respectively, from the comparable 2019 levels. As a result, LUV, currently carrying a Zacks Rank #3 (Hold), now expects third-quarter 2022 managed business revenues to decline in the 26-28% band from the previous 17-21% range.

Stocks to Consider

Some better-ranked stocks in the Zacks  Transportation  sector are  Triton International  TRTN and  C.H. Robinson  CHRW.

Triton is being aided by the gradual increase in trade volumes and container demand. TRTN expects container demand to remain strong throughout 2022. Measures to reward its shareholders through dividends and buybacks instill confidence in the stock.

Triton has an expected earnings growth rate of 22.4% for the current year. TRTN’s bottom line outpaced the Zacks Consensus Estimate in each of the last four quarters, the average being 7.5%. TRTN currently carries a Zacks Rank #2 (Buy). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

C.H. Robinson is being aided by an improving freight scenario in the United States. Efforts to control costs also bode well. Measures to reward its shareholders instill confidence in the stock.

CHRW has a pleasant earnings track record. The bottom line surpassed the Zacks Consensus Estimate in three of the trailing four quarters (missing the mark in the remaining one). The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 17.3% upward over the past 60 days. C.H. Robinson currently carries a Zacks Rank of 2.



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