Southwest Airlines Shares Drop About 3% as Rising COVID-19 Cases Stall Revenue Improvement

Southwest Airlines, the world’s largest low-cost carrier, said modest improvements in passenger demand and bookings seen in the past few months were fading due to recent surge in COVID-19 cases, sending its shares down about 3% in pre-market trading.

The U.S. low-cost carrier forecasts its fourth-quarter 2020 capacity to decline about 40% year-over-year. Southwest Airlines recently adjusted its January 2021 published flight schedule, and currently estimates its January 2021 capacity to dip in the range of 35% to 40% year-over-year.

“While the Company expected the election to impact trends, it is unclear whether the softness in booking trends is also a direct result of the recent rise in COVID-19 cases. As such, the Company remains cautious in this uncertain revenue environment,” Southwest added.

Southwest Airlines shares fell about 3% to $41.98 in pre-market trading on Thursday; the stock is down about 20% so far this year.

Southwest Airlines Stock Price Forecast

Thirteen equity analysts forecast the average price in 12 months at $47.40 with a high forecast of $59.00 and a low forecast of $40.00. The average price target represents a 9.67% increase from the last price of $43.22. From those 13 analysts, nine rated “Buy”, three rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $59 with a high of $90 under a bull-case scenario and $29 under the worst-case scenario. The firm currently has an “Underweight” rating on the world’s largest low-cost carrier’s stock. Southwest Airlines had its price objective increased by UBS Group to $52 from $48.

Several other analysts have also recently commented on the stock. Bernstein raised their price target to $44 from $29. Barclays increased their target price on shares of Southwest Airlines to $40 from $35. Wolfe Research cut shares to a peer perform rating from an outperform. Citigroup cut their price target to $36 from $38 and set a neutral rating.

Analyst Comments

“Southwest Airlines (LUV) is arguably the highest quality airline in the U.S. with a good balance sheet and high margins. As a largely US domestic medium-haul airline, we believe its network is in a sweet spot for a COVID rebound and it has one of the attractive loyalty programs with a loyal customer base,” said Ravi Shanker, equity analyst at Morgan Stanley.

“All of these make LUV the most resilient at the bottom and well-positioned for a recovery, especially being able to capitalize on share gain or M&A opportunities as other Airlines falter/lag.”

Upside and Downside Risks

Risks to Upside: 1) COVID Vaccine timing. 2) Industry Consolidation. 3) Industry Rationalization & Fare Stability – highlighted by Morgan Stanley.

Risks to Downside: 1) COVID Second Wave. 2) Alliance/Partnership Disruption/Breakage.

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