Southwest Shares Dip Following Missed Boeing 737 Inspections
NEW YORK TheStreet) -- Southwest (LUV) - Get Report briefly grounded 128 of its Boeing 737-700s late Tuesday after it determined that it had failed to inspect backup rudder control systems, leading to a mild selloff Wednesday morning.
Southwest shares were down 72 cents to $44.63 in premarket trading on Wednesday.
In a report issued early Wednesday, Stifel analyst Joseph DeNardi viewed the occurrence as a potential buying opportunity. "We would be buyers on weakness," he wrote.
The carrier canceled about 80 flights on Tuesday. It also reached a deal with the Federal Aviation Administration for the planes to continue flying while the inspections are performed. The inspections take about two hours.
"Given the plan to return the aircraft to service, we see only a modest impact financially to Southwest from the disruption and any potential fine from the FAA," DeNardi wrote. Applying metrics from a previous incident that occurred in 2009, he estimated the fine would be about $21 million. "Our model assumes 2015 cash flow from operations of roughly $4.5B," he noted.
DeNardi has a buy rating and a $65 price target on the shares.
Cowen & Co. analyst Helane Becker estimated the impact of the event at $195 million including lost revenue, maintenance overtime and fines of $128 million.
However, Becker wrote, "We believe once the inspections are done and the aircraft returned to service, the shares should recover." She has an outperform on Southwest and a $55 price target.
In a prepared statement issued Tuesday evening, Southwest said that it "discovered an overdue maintenance check required to be performed on the standby hydraulic system, which serves as a back-up to the primary hydraulic systems. As a result of this discovery, 128 -700 aircraft were identified as having overflown a required check.
"Once identified, Southwest immediately and voluntarily removed the affected aircraft from service, initiated maintenance checks, disclosed the matter to the FAA, and developed an action plan to complete all overdue checks. The FAA approved a proposal that would allow Southwest to continue operating the aircraft for a maximum of five days as the checks are completed."
Southwest said about "80 cancellations occurred today (Tuesday) as a result of the events and the airline is anticipating a very minimal impact to their operations (Wednesday)."
Southwest operates a fleet of 665 Boeing 737s including 447 737-700s.
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-- Written by Ted Reed in Charlotte, N.C.
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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.
