Shares of low-cost carrier Southwest Airlines (NYSE: LUV) have advanced 10.5% so far this year. A recovery in travel demand following the easing of COVID-19 restrictions has given several airlines confidence that they will generate improved financials in the upcoming quarters, despite ongoing concerns over high fuel prices and labor challenges.
Earlier this week, Southwest and several other airlines announced that they will no longer enforce the wearing of masks after a ruling by a federal judge in Florida ended the Centers for Disease Control and Prevention’s (CDC) mask mandate on flights and other public transport.
However, on Wednesday, the Department of Justice (DOJ) filed a notice of appeal seeking to overturn this ruling as the CDC believes that “masking in the indoor transportation corridor remains necessary for the public health.”
Mask or no mask, airlines are currently optimistic about a continued recovery as the year progresses.
Better Days Ahead
Southwest is scheduled to announce its first-quarter results on April 28. The recently reported upbeat guidance issued by Delta Airlines (DAL) and United Airlines (UAL) reflects the strong demand environment in the industry, building hopes that Southwest might also issue a favorable outlook.
Last month, Southwest upgraded its Q122 forecasts, citing improved business trends in March after Omicron impacted bookings and led to trip cancellations in January and February. The carrier expects Q122 revenue to be down 8%-10% compared to 2019. Previous guidance indicated a 10%-15% fall in revenue from pre-pandemic levels.
Despite an expected net loss in Q122, Southwest expects to be profitable in the remaining three quarters of 2022 and on a full-year basis.
Wall Street’s Take
Last month, Argus analyst John Staszak lowered his price target on Southwest to $50 from $58 as he trimmed his FY23 EPS guidance by $0.10 to $1.30 to reflect the impact of the Omicron variant, increased fuel costs, and higher wages.
That said, Staszak reaffirmed a Buy rating as he believes that Southwest is among the best low-cost carriers backed by a solid balance sheet and a strong management team.
Also, Deutsche Bank analyst Michael Linenberg noted that Alaska and Southwest are better placed than other carriers to deal with rising fuel prices, given “their formidable fuel hedge positions.”
On TipRanks, Southwest scores a Moderate Buy consensus rating based on seven Buys, five Holds, and one Sell. The average Southwest Airlines price target of $50.50 implies 6.7% upside potential over the next 12 months.
Conclusion
Robust leisure travel and improvements in business travel have revived hopes of a recovery in the airline industry. However, the uncertainty associated with COVID-19, higher fuel prices amid the Russia-Ukraine conflict, and staffing challenges could impact business and limit the upside potential for Southwest and other airline stocks.
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