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How to Play Southwest Airlines Stock Post Elliott-Induced Board Revamp
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Giving in to continuous calls for a strategic overhaul from activist investor Elliott Investment Management,Southwest Airlines (LUV - Free Report) overhauled its board. Under the plethora of changes, the Dallas-based low-cost carrier’s former CEO and current executive chair Gary Kelly and several board members announced their decision to step down. The board revamp resulted in LUV stock declining 1.6% to close the trading session on Sept. 10 at $29.25 per share.
Per a regulatory filing, LUV announced that six of its board members are set to retire following the current-year board meeting (currently scheduled for Nov. 21, 2024). Additionally, chairman Gary Kelly announced his decision to “voluntarily retire” from his position following the airline’s annual meeting in 2025.
Elliott’s Pressure Results in Board Reshuffle
Elliott Investment Management, which holds a significant percentage of LUV’s common stock, had been demanding a revamp of LUV’s board following its unsatisfactory performance of late. Elliott was also demanding a change at the helm for LUV. Southwest Airlines’ CEO Bob Jordan appears to have saved his job for now as the board reiterated its support for him.
Giving in to Elliott’s demand for a board revamp, the airline presented the changes to the hedge fund and invited it to be part of the company’s turnaround. Elliott, one of the world's most prominent investors, termed the scenario of multiple resignations at LUV’s board as “unprecedented.” The firm issued a statement expressing approval, “We are pleased that the board is beginning to recognize the degree of change that will be required at Southwest, and we hope to engage with the remaining directors to align on the further necessary changes.”
Following the resignations, LUV intends to name four new, independent directors going forward. For the new entrants, the airline will consider Elliott’s board candidates apart from other prospective nominees identified by the company’s search team. The tenure of a board member will be reduced to 2.5 years from the current 7.3.
Rising Expenses Weigh on Southwest Airlines Stock
Apart from the leadership woes highlighted by Elliott, the airline also suffers from high operating costs, which are hurting its bottom line. Operating expenses were up 11.8% during the first half of 2024. The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on salaries, wages and benefits increased 12.8% in the same period over 2022 actuals. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 5.5% year over year in the first half of 2024.
For third-quarter 2024, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 11-13% in the third quarter from the comparable period in 2023. For 2024, CASM, excluding fuel, oil and profit-sharing expenses, and special items, is anticipated to increase 7-8% from 2023.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well. Notably, the economic fuel cost per gallon increased 6.2% in second-quarter 2024 to $2.76. For 2024, economic fuel costs per gallon are estimated between $2.70 and $2.80.
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
Upbeat Air Travel Demand: A Saving Grace
Strong passenger volumes bode well for LUV. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Taking advantage of the upbeat air-travel demand scenario, LUV recently announced that it performed very well during the summer season (May 24-Sept. 2, 2024). During the period, LUV operated more than 414,000 flights, carrying a record 54 million passengers. Reflecting the highly impressive on-time performance, the completion factor (percentage of scheduled flights completed without cancellation or diversion) during summer was 99.3%.
Driven by upbeat air travel demand, the Zacks Consensus Estimate for revenues for the remaining quarters of 2024 as well as for full-year 2024 exhibit year-over-year growth.
Image Source: Zacks Investment Research
LUV Stock Attractively Valued
From a valuation perspective, LUV is trading at a discount compared with the industry. Its forward 12-month price-to-sales, a commonly used multiple for valuing airline stocks, reading is also below its median over the last five years. The company has a Value Score of B.
Image Source: Zacks Investment Research
LUV’s valuation, however, reads unfavorably to that of other airline heavyweights like Delta Air Lines (DAL - Free Report) and United Airlines (UAL - Free Report) .
To Sum Up
Agreed that the stock is attractively valued and upbeat passenger revenues are serving LUV well. However, given the uncertainty due to the tussle with Elliott Investment Management as highlighted in the write-up and the other headwinds, we believe that investors should not rush to buy this Zacks Rank #3 (Hold) stock currently. Instead, they should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
Image: Bigstock
How to Play Southwest Airlines Stock Post Elliott-Induced Board Revamp
Giving in to continuous calls for a strategic overhaul from activist investor Elliott Investment Management,Southwest Airlines (LUV - Free Report) overhauled its board. Under the plethora of changes, the Dallas-based low-cost carrier’s former CEO and current executive chair Gary Kelly and several board members announced their decision to step down. The board revamp resulted in LUV stock declining 1.6% to close the trading session on Sept. 10 at $29.25 per share.
Per a regulatory filing, LUV announced that six of its board members are set to retire following the current-year board meeting (currently scheduled for Nov. 21, 2024). Additionally, chairman Gary Kelly announced his decision to “voluntarily retire” from his position following the airline’s annual meeting in 2025.
Elliott’s Pressure Results in Board Reshuffle
Elliott Investment Management, which holds a significant percentage of LUV’s common stock, had been demanding a revamp of LUV’s board following its unsatisfactory performance of late. Elliott was also demanding a change at the helm for LUV. Southwest Airlines’ CEO Bob Jordan appears to have saved his job for now as the board reiterated its support for him.
Giving in to Elliott’s demand for a board revamp, the airline presented the changes to the hedge fund and invited it to be part of the company’s turnaround. Elliott, one of the world's most prominent investors, termed the scenario of multiple resignations at LUV’s board as “unprecedented.” The firm issued a statement expressing approval, “We are pleased that the board is beginning to recognize the degree of change that will be required at Southwest, and we hope to engage with the remaining directors to align on the further necessary changes.”
Following the resignations, LUV intends to name four new, independent directors going forward. For the new entrants, the airline will consider Elliott’s board candidates apart from other prospective nominees identified by the company’s search team. The tenure of a board member will be reduced to 2.5 years from the current 7.3.
Rising Expenses Weigh on Southwest Airlines Stock
Apart from the leadership woes highlighted by Elliott, the airline also suffers from high operating costs, which are hurting its bottom line. Operating expenses were up 11.8% during the first half of 2024. The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on salaries, wages and benefits increased 12.8% in the same period over 2022 actuals. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 5.5% year over year in the first half of 2024.
For third-quarter 2024, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 11-13% in the third quarter from the comparable period in 2023. For 2024, CASM, excluding fuel, oil and profit-sharing expenses, and special items, is anticipated to increase 7-8% from 2023.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well. Notably, the economic fuel cost per gallon increased 6.2% in second-quarter 2024 to $2.76. For 2024, economic fuel costs per gallon are estimated between $2.70 and $2.80.
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Upbeat Air Travel Demand: A Saving Grace
Strong passenger volumes bode well for LUV. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Taking advantage of the upbeat air-travel demand scenario, LUV recently announced that it performed very well during the summer season (May 24-Sept. 2, 2024). During the period, LUV operated more than 414,000 flights, carrying a record 54 million passengers. Reflecting the highly impressive on-time performance, the completion factor (percentage of scheduled flights completed without cancellation or diversion) during summer was 99.3%.
Driven by upbeat air travel demand, the Zacks Consensus Estimate for revenues for the remaining quarters of 2024 as well as for full-year 2024 exhibit year-over-year growth.
LUV Stock Attractively Valued
From a valuation perspective, LUV is trading at a discount compared with the industry. Its forward 12-month price-to-sales, a commonly used multiple for valuing airline stocks, reading is also below its median over the last five years. The company has a Value Score of B.
LUV’s valuation, however, reads unfavorably to that of other airline heavyweights like Delta Air Lines (DAL - Free Report) and United Airlines (UAL - Free Report) .
To Sum Up
Agreed that the stock is attractively valued and upbeat passenger revenues are serving LUV well. However, given the uncertainty due to the tussle with Elliott Investment Management as highlighted in the write-up and the other headwinds, we believe that investors should not rush to buy this Zacks Rank #3 (Hold) stock currently. Instead, they should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.