Southwest Hit by Boeing’s 737 MAX Troubles

Boeing (BA) has had its share of troubles recently, particularly over the 737 MAX jet. However, new reports emerged recently that suggest one other airline may have been involved, and to a much greater degree than some would expect.

That airline is Southwest (LUV), who reports note had a surprisingly strong hand in training pilots to operate the 737 MAX. The move contributed to losses for both companies in the premarket.

I remain bearish on Boeing. Boeing has struggled so hard for so long that it’s going to take a good while to dig itself out. Meanwhile, I’ve pulled to neutral on Southwest, to see what kind of impact this news has on its operations for at least the next quarter.

The last 12 months for Boeing have had their ups and downs, but for the most part, the company has been trending down for that entire time. Southwest has seen a similar slope, but with some deeper valleys and higher peaks in the meantime.

It’s the latest news that might prove disastrous, at least for Southwest. A recent legal filing, featuring internal documents from both companies, reveals that Southwest had a strong hand in training procedures.

In fact, the reports noted, Southwest agreed that Boeing should remove sections of 737 MAX pilot manuals referring to the automated flight control systems.

Investigators later blamed that system for two separate nosedives. Southwest was a “launch customer” for the plane, meaning that it would be buying — and flying — some of the earliest models. Thus, it had a hand in their development, one that led to quite a few problems for Boeing itself.

Wall Street’s Take

Southwest has a Moderate Buy consensus rating on TipRanks. That’s based on nine Buys, six Holds, and one Sell assigned in the past three months. The average Southwest price target of $54.20 implies 28.6% upside potential.

Analyst price targets range from a low of $34 per share to a high of $72 per share.

Investor Sentiment Offers Hope, Trouble

Southwest has a Smart Score of seven out of 10, which puts it at the highest end of neutral. That suggests it’s only a little better than even odds it will outperform the market going forward.

The individual indicators help paint that bleak picture. Hedge fund involvement — as denoted by the TipRanks 13-F Tracker — has been in continual decline since March of 2020. The latest quarter proved no exception as hedge funds pulled back once more between September 2021 and December 2021.

Insider trading at Southwest, meanwhile, is strongly weighted to the sell side. In the last three months, all insider trades have been selling, even if it was only one sell trade recorded. The last 12 months are actually worse. While there were seven buy transactions recorded over the last 12 months, there were also 13 sell transactions.

Retail investors that hold portfolios on TipRanks are increasingly bearish on Southwest as well. The number of portfolios holding Southwest dropped 1% in the last seven days, and 1.1% in the last 30 days.

Making a Bad Situation Only Incrementally Worse

Southwest made a great reputation for itself over the years by being customer-centric. Prices for everything are on the rise. That’s going to make many potential travelers willing to sacrifice service for lower prices.

Southwest has long done well by customers on that front. In fact, the company recently planned to roll out a whole new fare class, dubbed “Wanna Get Away Plus” sometime this quarter. It’s slightly more expensive, but it offers extra flexibility like transferable credits, and a better earnings rate on airfares.

Southwest may not be much at risk here. Customers may well not care that the company had a hand in modifying flight instructions and the like. They may just demand the cheapest fares to get where they want, or need, to go.

In fact, the picture is so complex that it likely can’t be reduced down into a solid counter-marketing push by other airlines like United (UAL) or Delta (DAL). Any attempt to do so might ultimately do more harm than good to the competing airline that tried it.

Concluding Views

Southwest’s involvement in Boeing’s 737 MAX issues is difficult to parse, and may not be all that noteworthy anyway. Depending on how certain legal matters go, it may turn out to be much worse in the end.

Right now, though, Southwest was really just an early customer, pointing out some potential design points.

While that could easily amplify over the months ahead, for right now, the impact is likely to be minimal. Granted, the Federal Aviation Administration (FAA) may take a dim view of so-called efforts to “outflank” the FAA’s training requirements. That’s unclear at this point, though. Worse, both Southwest and Boeing may have bigger problems to address right now.

Thus I remain bearish on Boeing. It’s got a long way to go to get out of its hole.

I’m also neutral on Southwest, which may be in for a lot of legal trouble ahead. Or may not. Soaring fuel prices and hesitant customers are more likely problems the company has to face in the short term.

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