Southwest Airlines Gets an Upgrade

DALLAS (TheStreet) - Southwest  (LUV) got an upgrade Thursday, as Bank of America Merrill Lynch analyst Glenn Engel said the tide may be turning in Southwest's favor.

Engel upgraded Southwest, the fourth-largest airline, to buy from neutral, with a price target of $23. In a note issued Thursday, he said the carrier will benefit next year from growth at Love Field, as the Wright Amendment's restrictions on Love Field flying expire, and from expanded international flying.

Moreover, Engel said that "travel industry bookings show better momentum in small business and leisure flying," where Southwest is strong, than in large corporate travel. At the same time, the growth supply in domestic capacity is rising only about 1% to 2%, while international capacity is expanding 4% to 5%.

Thus, demand for seats in Southwest's marketplace is rising more quickly than demand in its competitors' marketplace, while the supply of seats in Southwest's marketplace is rising less slowly than in its competitors' marketplace, Engel said.

Also, Southwest has seen its cost advantage over its competitors diminish over the past decade, but Engel said the situation stabilized in 2013 and could start to expand again as "growth resumes, new labor contracts improve flexibility and wages at other carriers catch up to LUV levels." He also anticipated accelerating buybacks and dividend increases.

Southwest shares closed Wednesday at $17.97, down 61 cents. Shares are up 75% year-to-date. Analysts surveyed by Thomson Reuters estimate 2014 EPS to be $1.25. Engel raised his estimate to $1.25 from $1.15 and raised his price objective to $23 from $18.

Written by Ted Reed in Charlotte, N.C.

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