After Shares of Southwest Airlines Slump, Is It Now a Value Play?
Discount airline company Southwest Airlines (LUV) - Get Report has gotten hammered this week on an earnings miss and a computer outage Wednesday that continues to ground hundreds of flights.
This is the kind of big decline that investors can ride to massive returns on the way back up, but the question is, will the stock rebound?
First let's take a look at the earnings report.
Southwest Airlines reported second-quarter revenue of $5.38 billion, up from $5.11 billion a year earlier, but falling short of the consensus analyst estimate of $5.40 billion.
The company posted earnings of $1.28 a share, up from 90 cents a year earlier. But when non-recurring items are excluded, earnings fall to $1.19 a share, below the $1.21 forecast.
Moving forward, management thinks that Southwest Airlines will see revenue per available seat mile, a big metric in the airline business, decline by 3% to 4%.
Furthermore, management thinks that costs will increase by about 2% in the third quarter.
Cowen analyst Helane Becker thinks that this may result in the first earnings-per-share decline year over year since 2012.
From an industry standpoint, management's belief that costs will increase in this quarter and RASM will fall, means that other airlines will likely see similar results. For instance, Southwest Airlines noted that the increase is due to jet fuel costs rising, something that directly affects the other airlines as well.
As for the computer issues that have caused so many flight delays and cancellations, it certainly seems that this one event could affect this quarter's results. More than 700 flights were canceled on Wednesday, at least 335 on Thursday and several hundred more so far on Friday.
The airline company typically has more than 3,900 flights daily, so though these outages affect a small percentage of the total number, these cancellations will still cost a lot of money.
Southwest Airlines will still have to pay the flight crew, grounds crew and other service staff members who were set to work those flights.
It will have likely paid for some passengers to take flights on other airlines. There is also the cost of upgrading passengers when they do fly and perhaps putting some in hotels for the night and giving them food vouchers.
In addition, there is the potential cost of losing customers entirely because of their bad experience with the airline.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.