Southwest Airlines Co (NYSE: LUV) is in focus this morning after announcing plans of shrinking its service to and from Atlanta.
The move will enable the air carrier to lower costs as it cuts as many as 200 flight attendants and 140 pilots in the capital of Georgia next year.
LUV told its employees in a memo today:
We simply can’t afford continued losses and must make this change to help restore our profitability.
Shares of Southwest Airlines are currently down some 15% versus their year-to-date high in early March.
Here’s what it means for Southwest Airlines stock
The announcement that Southwest Airlines made this morning reiterates its commitment to cutting costs in pursuit of boosting shareholder value amidst a looming proxy fight with activist investor Elliott Investment Management.
But it doesn’t necessarily make LUV shares attractive for investment.
That’s because poor utilization of ground service and uneconomic routes are hurting profitability. In fact, Southwest Airlines recently forecast a 2.0% decline in its unit revenue and a 13% increase in nonfuel costs for its current financial quarter.
The airline has also proposed cabin reconfiguration as means of boosting premium revenue, but its “plans to add pitch to the front without taking anything away in the back looks difficult to contemplate, which could complicate the company’s commercial transformation,” as per analysts at Bernstein.
The investment reiterated its market perform rating on Southwest Airlines stock in its recent note but lowered the price target to $24 that warns of a 20% downside from here.
Should you invest in Southwest Airlines in September?
Southwest Airlines recently made changes to its board as pressure mounted from Elliott Management that currently has about an 11% economic interest in the air carrier.
But the changes look more like strategic tweaks and not an attempt to reinvent the company’s direction, as per Stephen Trent.
That’s why the activist investor is expected to call a special meeting as soon as next week.
The Citi analyst also rates LUV at “neutral” and sees downside in its share price to $28 as he expects the air carrier to remain in loss in its current financial quarter.
Southwest Airlines stock currently pays a dividend yield of 2.39% that makes it somewhat more exciting at least for the income investors.
But as long as it doesn’t sufficiently address the concerns mentioned above at its investor day scheduled for September 26, its shares are likely to remain a risky investment.
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