Southwest (LUV) shares fell 5% this past week after higher costs overshadowed progress on the company’s turnaround plans.
Much of the stock’s losses were a result of the airline warning that costs were set to accelerate in the first half of the year — echoing similar concerns raised by JetBlue (JBLU) earlier in the week — with earnings and margins expected to remain well below peak levels.
Despite some of the near-term challenges plaguing lower-cost carriers, Southwest CEO Bob Jordan remains optimistic about the company’s recovery strategy — buoyed in part by rising confidence in its fleet partner, Boeing (BA).
I spoke with Jordan following the airline’s earnings results earlier this week, and he told me he sees “a lot of progress” at the manufacturer following the firm’s recent strike resolution, though he acknowledged production constraints may take “years” to fully resolve.
Steady improvement at Boeing is critical to Southwest’s business, as the airline operates an all-Boeing fleet. For the past year, ongoing delivery delays have forced Southwest to reduce capacity, shift schedules, and spend more to maintain its existing fleet — an issue that has “hamstrung” not only the low-cost carrier but the industry at large, according to aviation consultant Michael Boyd.
Looking ahead, the outlook appears to be improving. After walking the planemaker’s factory floors earlier this month, Jordan expressed confidence in Boeing’s ability to ramp up 737 production. Jordan estimates deliveries will exceed its current target of 38 aircraft this year, with the potential to reach up to 55.
That would mark a notable step forward for Boeing, which has been plagued by a series of setbacks over the past year, including the fallout after a door-plug panel blew off a 737 MAX midflight and a nearly eight-week work stoppage by the International Association of Machinists (IAM) union.
Bank of America analyst Ron Epstein echoed Jordan's optimistic take on Boeing in a note to clients.
"The company has not shared its FY25 outlook as it focuses on fully recovering from the IAM work stoppage impacts and rebuilding trust. 737 production, which resumed in 4Q, is expected to gradually increase, with deliveries already on the rise," Epstein wrote.
On the company's earnings call, Boeing CEO Kelly Ortberg told analysts that "things look encouraging so far" and said he sees the company potentially exceeding its target of producing 38 737s per month and reaching a pace of 42 per month by the end of the year.
"It's all about adhering to our safety management system and a stable factory as measured through agreed-upon key performance indicators," Ortberg said. "It's an early innings on the production ramp, and we need to stay disciplined on maintaining a stable production system."
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A rebound at Boeing would also further boost Southwest’s progress on efforts to mitigate cost inflation and become more efficient. Jordan told me “everything” in the airline’s $500 million cost-cutting plan is on track as consumer demand remains strong, citing strategic initiatives like co-brand agreements with Chase and partnerships with Icelandair (ICEAIR.IC) and MGM Resorts (MGM).
“We've got a very solid guide on the revenue front into the first quarter, and we are very focused on cost … I'm really proud of the progress,” Jordan explained. “There’s a lot more work to do, but the team is on it and we are executing.”
“Demand is strong,” Jordan added. “If you compare our unit revenue performance in the fourth quarter, we were able to beat our competitors … without having premium and international, the things that are really driving revenue production.”
Southwest shares have climbed 8% since the airline unveiled its turnaround plan in September, closing the week at $30.71 per share.
Seana Smith is an anchor at chof360 Finance. Follow Smith on X @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
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