There seems to be little to no good news coming out of Southwest Airlines Inc. (NYSE: LUV) lately for its investors. There is record summer air travel happening at this time, but Southwest is lagging behind compared to other airlines. Southwest has just lowered revenue per available seat mile guidance. Southwest blamed weaker bookings after adapting revenue management to booking patterns. The carrier even called this a dynamic environment with uneven demand. That is even despite, or maybe in spite of, record nationwide air travel statistics happening right now.

Southwest’s recent flow of news might all sound like it is figuratively unable to fly straight. And, somehow, it now looks like Southwest Airlines’ stock appears to be at or nearing an attractive buying range for tactical investors looking to juice their returns. There are of course absolutely no guarantees that this stock will rise from current levels. Southwest’s stock has suffered waves of bad news, but its stock has so far just refused to keep punishing investors after a big slap in the face earlier this year.

This airline may also have an image problem. Southwest is not really considered as a discount carrier any longer by investors. Many media reports still call it a discount carrier. Just don’t forget there are extra risks for airline stocks most sectors do not have. We all know airlines are just a single disaster or just one domestic/international incident away from serious investor pain that can last for a very long time.

Investors who are viewing Southwest Airlines from a tactical bullish stance may choose to go beyond just buying the stock. They might choose to buy call options, or they might even choose to sell at-the-money or out-of-the-money put options. Some tactical strategies are risky, and some can be accomplished with very low capital actually at-risk. Again, just remember that there are no guarantees at all this stock rises from the present level.

Tactical Bulls is laying out the case of why Southwest’s stock now looks attractive. How you interpret the news and how you choose to invest is solely your own decision. Please read a personal disclaimer and disclosure below right before the stock chart. Here goes…

SUFFERING SHAREHOLDERS… RIGHT?

Buying stocks under clouds of bad news can be dangerous for investors. After all, there are so many S&P 500 stocks that are still rising at the present time. Southwest’s stock is down almost 2% YTD in 2024 and its stock was last seen down 16% from this time last year. This marks more than a half-dozen warnings on revenue quality in less than 2 years. And still its stock is looking more like a Buy than a Sell for tactical investors.

BIG ACTIVIST TARGET

Southwest’s problems are large enough that activist investment manager Elliott Investment Management has amassed a large stake of about 11% to force changes within Southwest. Activist investors have often chosen to ignore airlines because their problems can be quite unique compared to many other sectors and industries. Elliott wants new leadership along with seats on the Board of Directors, as well as core operational changes.

WHAT SOUTHWEST SHOULD HAVE SAID

While this was more than just another guidance on revenue quality, Southwest is still expecting record results for operating revenue this quarter. Because Southwest had trouble predicting overall demand trends, it has not sold the number of seats it was planning to sell. The airliner should have focused on the record operating revenues. After all, the company has been unable to boost its fleet of Boeing planes due to the aerospace giant’s ongoing manufacturing woes. And FAA certification issues have prevented Southwest from being able to have as much flexibility to adjust capacity to more easily suit changes in ticket demand. This might give Southwest more room to point at least some fingers elsewhere, although with activists in the picture that may be a tougher sale than before.

HOW ELLIOTT MANAGEMENT RESPONDED…

Elliott’s John Pike and Bobby Xu issued a fairly scathing statement regarding Southwest and its revenue guidance reduction:

Today’s announcement marks the eighth guidance reduction at Southwest Airlines in the last 18 months with RASM (revenue per available seat mile) now expected to decline 4% to 4.5% in the second quarter, a significant reduction relative to the guidance that Southwest’s management team provided only two months ago. Southwest’s industry-trailing revenue performance is clearly continuing along the same disappointing trend line, despite management’s repeated promises for improvement and today’s empty statement that the Company is focusing on “delivering operational excellence.”

Southwest is led by a team that has proven unable to adapt to the modern airline industry; the Company’s release today seems to admit as much by stating that the revenue guidance reduction was the result of “complexities in adapting” to the current environment — complexities that Southwest’s peers seem able to adapt to. Unfortunately, this is yet another example that fundamental leadership change is urgently needed at Southwest. Elliott is committed to delivering the leadership changes that the Company requires.

ANOTHER ACTIVIST TOO?

The Global Value investment team at Artisan Partners LP, which owns about 1.82% of the shares collectively with its discretionary investment management clients, sent a tag-along announcement to Southwest after Elliott’s efforts were made public. Artisan said that has made many of the same points to Southwest’s executive chairman over the past several months. Artisan also stated that it is urging the Board to reconstitute itself and upgrade its leadership AND — this process needs to commence immediately.”

U.S. TRAVEL TRENDS COULDN’T BE STRONGER!

The number of Americans traveling by air is literally in the stratosphere and this summer is now expected to be the busiest summer ever for air travel. According to the most recent Transportation Security Administration (TSA) data, a single-day record of passengers screened reached 2.99 million passengers at U.S. airports across the country on Sunday. Similar news was issued at the start of summer and some reports indicate that the number of air passengers is only going to grow — to more than 3 million plane passengers going into the week for the July 4th Independence Day holiday. This is expected to be a total gain more than 5% for the first six-week period Summer 2024 versus the same period in 2023.

The number of Americans taking to the skies is up substantially when compared to last summer, with the TSA predicted to scan 32 million between Jun. 27 and Jul. 8 — an increase of 5.4% on those days last year. According to industry group Airlines for America, the total U.S. plane fleet from air carriers is anticipated to operate over 26,000 daily flights over the June 1 to August 31 (2024) period. If this holds true, it will be a gain of more than 5.5% versus the same timeframe for 2023. That might not translate to taking off and landing on time, but that’s another story.

THE LONG-TERM INVESTOR HOPE

Here is more relative data on why Southwest may be a tactical buy for long-term investors. This stock (down almost 2% YTD and down 16% in a year) is actually down by about 25% over the last 2 years. Air carriers like Delta and United have seen their stocks rise by a respective 55% and 25% over the last two-year period.

STOCK REACTION ON WARNINGS

When Southwest’s news changed for the worse here is how the stock’s reactions have gone:

• In March, the stock fell from $34 to $28 in a few days…
• Then in April, call it $29.50 down to $26…
• Then again in May, call it $28 to $25.50 before a month-end snap back to $27…
• And finally in June, from $28.51 down to about $27.50 overnight — but closing down only 6-cents at $28.45 on the first day of the news and then closing up 2-cents at $28.47 on the second day after the news.

IS BAD NEWS NOW GOOD NEWS FOR INVESTORS?

If you track the above stock reactions, despite all the negativity, this stock has managed to hold on to $28 after 3 more waves of negativity. And it has operating problems. It’s not a safe bet thinking that Elliott Management cannot make change. How many activist investors can win naval ships from foreign governments in bankruptcy court?

While this stock is still quite far under its $34 levels in March, look at how much more bad news it has absorbed. And then look at “LUV” shares. This stock is hanging in there for all practical purposes, almost in spite of all the bad news.

RELATIVE VALUATIONS

It’s hard to cheer P/E ratios in the airline industry. But what about book values by evaluating all assets and liabilities to try to recreate a carrier from scratch… Delta Air Lines, Inc. (DAL) is valued at 2.8-times book. Southwest is valued at about 1.65-times book, versus about 1.8-times book for United Airlines Holdings Inc. (NYSE: UAL). These are not perfect metrics in all fairness, but investors have to focus on something besides earnings and cash flow and returns on equity when companies are having problems.

DOES A DIVIDEND MATTER?

Southwest does have the highest dividend of all major U.S. air carriers at 2.67%. American and United don’t pay dividends and carriers like Alaska and Delta yield less than 1%.

MANY OTHER PROBLEMS

Southwest used to have stable labor relations and used to be the best fuel-hedger of them all. It has recently reached agreements with at least two of its unions. Now Southwest has made plans to exit what it deems non-core markets rather than continuing to try to find growth and expansion. Southwest also hasn’t been a true discount carrier for quite some time. Many media reports still refer to Southwest as a discount airliner, but the rates are very similar to other carriers now for the same markets. Current management isn’t given the same respect as its old guard and founding team was known for. Its relatively flawless flight incident reputation is no longer what it used to be.

PERSONAL DISCLOSURE & DISCLAIMER

As this report is mostly one-sided, even acknowledging the obvious problems, I recently sold off Southwest in one account during a rebalance for more interest rate-sensitive stocks, bonds and funds. I held on to the shares in another trading account. Over the next week or two, based on how the stock is reacting to recent “bad news” with hardly any new sell-offs holding for long, I plan to add more shares, buy call options, and/or sell put options opportunistically with a varying short-term and longer-term outlooks in mind. Those outlooks can of course change in a split second.

This is not a recommendation to buy or sell a stock. Just because I want to buy doesn’t mean you should also. And for every share I buy someone is on the other side selling their shares to yours truly because they don’t want to own the shares. Every investor has the same access to the information that was used in this report and how you decide to proceed with the decision to buy, sell or hold is solely your own decision. You should discuss your own investment and tax strategies with your own financial advisors and professionals. There, you have been warned.

THE CHART

Below is a chart from StockCharts.com. Long-term investors may also want to take note that both the 50-day and 200-day moving averages are both just under the $28 handle.

Southwest LUV chart courtesy of StockCharts.com