Skip to Content
Stock Analyst Update

Southwest Hits an Air Pocket

The low-cost carrier cut its first-quarter revenue forecast.


 Southwest (LUV) shares hit an air pocket, sinking over 5% after the carrier updated investors on its first-quarter revenue guidance. In the Feb. 20 release, Southwest lowered its guidance for revenue per available seat mile to 3%-4% from 4%-5%, revealing a greater impact from January’s government shutdown than management previously expected. During its fourth-quarter earnings call, management said it expected a $10 million-$15 million top-line impact, but the updated figure is about $60 million. Management pinned the percentage point loss in unit revenue growth on continued weakness in passenger demand and bookings stemming from the shutdown. While the news is worrying, we think the market’s reaction was well overdone. We’re maintaining our $59 fair value estimate, but shares remain fairly valued.

While airlines expressed confidence around early first-quarter booking curves and close-in yields, Southwest’s guidance revision adds concerns that travel markets were more susceptible to the shutdown's impact than initially expected. That said, we are leaving our full-year RASM forecast for 2019 in place at 2% after management’s update, as we already expected top-line softness from the government shutdown and falling oil prices concurrently pulling down passenger yields. Nonetheless, we still anticipate short-term upside from Southwest’s expansion into Hawaiian markets, which usually register RASM above similar domestic stage lengths (flight distance), revenue management system implementation, and schedule optimization amid older Boeing 737 retirements.

Our long-term thesis (flat to declining passenger yields through our 2023 midcycle estimate) also remains unchanged after the guidance update, considering we believe slowing travel demand and oil-price softness will eventually lead to declining fares. 

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Danny Goode does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.