We recently published a list of The 10 best airline stocks to buy, according to short sellers. In this article, we take a look at the position of Southwest Airlines Co. (NYSE:LUV) compared to other airline stocks.
The impact of the COVID-19 pandemic on travel led to an alarming 54.1% drop in the airline industry’s revenue, from $838 billion in 2019 to $384 billion in 2020, according to the International Air Transport Association (IATA). However, the industry has grown significantly since then, with annual revenues estimated to reach $996 billion by 2024, representing 18.8% growth over 2019 and a 159% recovery from the pandemic low.
On the other hand, the Business Research Company predicts that the global airline market will grow at a compound annual growth rate of 8.2%, from $523.04 billion in 2023 to $566.06 billion in 2024. In the coming years, the airline industry size is expected to expand significantly at a CAGR of 8.8% to reach $794.61 billion in 2028. According to the above study, the increase in the number of air passengers is driving the growth of the airline industry. For example, in March 2023, the U.S. government’s Bureau of Transportation Statistics reported that the number of passengers carried by U.S. airlines increased by 30% from 658 million in 2021 to 853 million in 2022. Regionally, Asia Pacific was the world’s largest airline market in 2023 and is expected to be the fastest growing region in the airline market study throughout the forecast year.
In addition, the booming airline market is also driven by the growing tourism market. For example, in December 2022, New Zealand’s Ministry of Business, Innovation and Employment reported that tourism spending in the country reached $26.5 billion, up 2.7% from $704 million the previous year. Most importantly, the number of foreign visitors to New Zealand increased by 335.3% to 229,370.
Consumer confidence in leisure travel remains high. Aircraft leasing and US airline analyst Jamie Baker explains: “Our prevailing thesis is that demand for premium and international air travel remains at the forefront.” Nevertheless, limited capacity and lower costs are two challenges facing airlines worldwide. In China, on the other hand, domestic passenger levels are expected to remain high, while outbound tourism levels are expected to rise in the coming months. IATA has raised the industry’s 2024 profit forecast in Asia-Pacific by almost 18%. According to its longer-term forecasts, Asia-Pacific will have the fastest growing air travel growth in the world, with an average annual passenger increase of 5.3% over the next 20 years.
Meanwhile, U.S. airlines have placed an emphasis on deleveraging, which should help strengthen their balance sheets and credit ratings over time. The domestic industry reported total debt of $143 billion at the end of 2023, down about 15% from 2021 levels. Investors who take a long-term view and diversify their portfolios could benefit from the industry’s revival and expansion in the coming years.
Methodology:
We combed through the holdings of airline ETFs and online rankings to come up with an initial list of 20 airline stocks. Then we selected the 10 stocks that had the lowest percentage of short selling. The stocks are sorted in ascending order of the lowest percentage of short selling. We also mentioned the number of hedge funds that have long positions in these stocks in the second quarter of 2024.
Why do we care about the stocks hedge funds invest in? The reason is simple: Our research shows that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (See more details here)
A commercial Boeing 737 aircraft with the well-known SWABIZ logo flies in the sky.
Southwest Airlines Co. (NYSE:LOVE)
Percentage of shares sold short: 7.33%
Number of hedge fund owners: 23
Southwest Airlines is the largest national carrier in the United States by passenger volume and is known for its low-cost flights. The airline has nearly 800 aircraft in its all-Boeing 737 fleet. Although it also offers some longer routes and some business travel benefits, the airline primarily specializes in short-haul and leisure flights operated in a single cabin with open seating on a point-to-point basis.
The company is under pressure from investors and difficult business conditions and is currently undergoing a major transformation. The airline, known for its open seat policy since the 1970s, has said it will abandon this signature feature as part of a larger re-orientation campaign. Boeing’s delivery delays have increased sales and cost constraints, further weighing on Southwest’s profits.
LUV is also facing pricing pressure due to industry-wide overcapacity in the domestic market, which has caused the company’s stock value to fall by 30% over the past two years, while the S&P 500 rose by 37% during that time. As a result, the stock lost 67% of its market value.
Elliott Investment Management, an activist investment firm, is advocating for a change in leadership at Southwest, claiming that new ideas are needed for the company to remain competitive. In response, CEO Bob Jordan emphasized the company’s commitment to change, pointing to the introduction of assigned seating and premium seats with more legroom, features desired by 86% of prospective passengers.
Despite these difficulties, Southwest shares rose 6% after releasing its second-quarter 2024 results. In addition, the airline said it would begin offering night flights and taking reservations for new cabin layouts in February 2025, subject to FAA approval. The Dallas-based carrier announced record revenue of $7.35 billion for the second quarter of 2024, up 4.5% year over year. However, profitability fell more than 46% to $367 million. A key pricing indicator for the airline, revenue per available seat mile, fell 3.8%.
However, analysts remain skeptical; Thomas Fitzgerald of TD Cowen predicts significant losses for the past quarter and a break-even result for the fourth quarter of 2024.
However, only 7.33% of the shares are shorted. In addition, Insider Monkey observed that 23 of the 912 hedge funds held a position in Southwest Airlines Co. (NYSE:LUV) at the end of the second quarter of 2024. Paul Singer’s Elliott Management is the largest shareholder in the company with 6,000,000 shares valued at $171.66 million.
Total LUV ranks 10th on our list of the best airline stocks to buy according to short sellers. While we recognize LUV’s potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than LUV but trades at less than 5x earnings, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
