Southwest Airlines Stock (NYSE: LUV) Down 50% Over 3 Years, What You Need To Know

Shares of Southwest Airlines (NYSE:LUV) have dropped markedly in recent years, with a 50% drop in stock price over the past 3 years leaving activists circling.

In a decisive strategic move, Elliott Investment Management has secured an almost $2 billion stake in the airline, signalling a potentially transformative period. This investment places Elliott as one of the largest investors in Southwest and heralds a push for operational reforms in an attempt to rejuvenate the underperforming carrier.

Southwest Airlines, which has recently reported subpar first-quarter financial results amid strong travel demand, finds itself at a critical juncture. An 11.7% decline in the airline’s stock over the past year underscores the broader challenges it faces, with the share price continuing to encounter turbulence in the red YTD (-2.5%). Elliott's expanding investment comes the expectation of proactive engagement with Southwest's management to initiate improvement measures, pivoting towards a more productive trajectory.

The first quarter for Southwest proved disappointing as the carrier's adjusted loss per share expanded from $0.27 in the previous year to $0.36. Despite witnessing a 11% uptick in operating revenue, hitting $6.3 billion, the company fell short of analyst estimates. The financial strain is further exacerbated by a spike in labor costs and ongoing delays in the delivery of Boeing aircraft.

Southwest's operational capabilities continue to be strained with the expectation to receive only 20 Boeing 737 Max 8 aircraft this year, a stark reduction from the initially anticipated 46 planes. This diminished fleet expansion has raised performance concerns for Southwest, not just for the current year but also casting a shadow over 2024 and 2025.

Analyst Sentiment and Prognosis

Market analysts have responded to the developments with measured caution. Southwest has been relegated to a Hold rating from Buy by Argus analyst John Staszak, attributing the downgrade to the aforementioned aircraft delivery delays and a ballooning of employment-related expenses.

Furthermore, the wake of this news has left the Hold consensus rating for LUV stock largely unshaken, with projected price targets suggesting a marginal 3.4% upside potential from the current level of $28.68.

HSBC are another to initiate coverage of NYSE:LUV and do so with a Hold rating, and a $27.80 price target. With the stock closing out at $27.75 in the most recent trading day, it is clear analysts see minimal upside movement without a shift in operations. The dependency on Boeing Max aircraft, which have sentiment issues in themselves have also been raised as a potential weight on the company over the short term.

The acquisition of stock by Elliott Management marks a significant inflection point for Southwest Airlines. With one of the industry's most influential activist investors at the helm, Southwest may embark on a rigorous path toward operational and financial revitalization.