LUV

Shares of Southwest Airlines have been able to keep only 5% gains on the closing price from their initial double-digit percentage jump in the first few minutes after the opening bell on Thursday. The bullish market response followed an announcement on turning around the carrier's suffering business strategy. Attractive vacation packages for passengers and sale-leaseback deals for planes were listed among priority steps. Southwest management noted that the measures are going to bring nearly $4 billion of earnings before interest and taxes in three years, additionally giving a 10% operating margin, 15% payback on an invested capital unit and at least $1 billion in free cash flow.

The Texas-based airline heavyweight wasted 32.5% of its market cap in five months from early March to early August, as its business underperformed, reportedly due to managing demand troubles across booking curves, as the company reserved too many seats for the peak travel season. Southwest fleet's current capacity surpassed demand, so that the major parameter of revenue per available seat mile (RASM) lost 3.8% in Q2. Besides, the U.S. government penalized Southwest in December 2023 by $140 million for numerous violations of consumer protection laws during a set of operational failures which led to cancellation of nearly 17,000 flights in 2022. Now Southwest is planning to meet challenges in several ways, including warnings for its employees of "difficult decisions" ahead to cut costs, creating new premium seats with assigned extra-legroom space by reducing seat pitch on over half of its planes, some route changing with starting overnight flights and launching a partnership with Icelandair for transatlantic connectivity. The carrier also revealed its $2.5 billion share buyback program.

These measures are still criticized by activist investor Elliott Management, who wants a shakeup of top management, when saying the plans are "filled with long-dated promises of better performance" but called for "credible leadership", now representing "another promise of a better tomorrow from the same people who have created the problems we face today". This is probably why the positive market dynamics stopped literally in the middle of the road to the upside. However, a further march forward from the current $30 to $35 per share looks realistic against these cramped conditions. A common rise in labour and airport costs still pressures the whole market segment. But other U.S. top carriers are clearly returning to their former splendour.

Delta (DAL) is coming so close to its pre-pandemic peaks, quickly adding another 6% on its weaker Southwest rival's progress, repeatedly touching its major resistance area well above $50 per share, as its all-time highs were located around $60 in 2019-2020. Citigroup reaffirmed its Buy rating on Delta stock, targeting at $65 and raising its forecast for the nearest quarterly earnings per share (EPS) from $1.37 to $1.51 and its full-year estimate for Delta's EPS to $6.05 from $5.98 in 2024, plus betting on $7.19 and $8.42 for the next couple of years. City sees a reduction in non-operating expenses and possible improvements in costs per available seat mile excluding fuel, which could be a good sign for resuming the broader airline stocks' rally before Christmas with traditionally increased activity of vacation flights.

Meanwhile, United Airlines (UAL) stock is soaring to its new three-year high at $58.85, after a 8.75% one-off jump the same day on September 26. A couple of weeks ago, United Airlines said it was ready to offer free Starlink Wi-Fi by SpaceX satellites on flights. The service will start later this year, and then the entire fleet of over 1,000 planes used by United Airlines will be equipped with the technology in the coming years. Climbing higher to approach the price range from $65 to $70 may be attempted.

Record-breaking summer travel numbers in North America may be expanded to cover this autumn and winter season as well, which may support the upward rally for various airline operators to repeat last year's bullish wave which was a memorable feature in the same period of 2023.