We recently compiled a list of the 10 Best Airline Stocks To Buy According To Short Sellers. In this article, we are going to take a look at where Southwest Airlines Co. (NYSE:LUV) stands against the other airline stocks.
The COVID-19 pandemic’s impact on travel caused an alarming 54.1% drop in the airline industry’s revenue from $838 billion in 2019 to $384 billion in 2020, according to the International Air Transport Association (IATA). However, the industry has subsequently risen substantially, with annual revenue estimated to reach $996 billion by 2024, representing 18.8% growth from 2019 and a 159% recovery from the pandemic low.
On the other hand, the Business Research Company projects that the global airline market will grow at a compound annual growth rate of 8.2%, from $523.04 billion in 2023 to $566.06 billion in 2024. Whereas in the upcoming years, a significant expansion in the size of the airline industry is anticipated at a CAGR of 8.8% to $794.61 billion in 2028. According to the aforementioned research, the increase in the number of air passengers is fueling the growth of the airline industry. For example, in March 2023, the US government’s Bureau of Transportation Statistics reported that the number of passengers carried by US airlines rose by 30% from 658 million in 2021 to 853 million in 2022. Regionally, Asia-Pacific was the world’s largest airline market in 2023, and it is also projected to be the fastest-growing region in the airline market study throughout the forecast year.
Furthermore, the booming airline market is also being driven by the growing tourism market. For instance, in December 2022, the New Zealand government ministry, the Ministry of Business, Innovation, and Employment, reported that tourism spending in the country hit $26.5 billion, up 2.7% from $704 million a year before. Most importantly, arrivals of foreign visitors to New Zealand jumped by 335.3% to 229,370.
Consumer confidence in leisure travel is still high. Jamie Baker, analyst for aircraft leasing and U.S. airlines states: “Our prevailing thesis is that premium and international demand for air travel remains in the lead.” Nonetheless, limited capacity and lower costs are two challenges that airlines around the globe are dealing with. On the other hand, in China, the rate of domestic passenger yield is anticipated to stay high, while the rate of outbound tourism is projected to increase in the upcoming months. The IATA has raised the industry’s projected profit for 2024 in Asia Pacific by almost 18%. According to its longer-term projections, Asia Pacific will have the fastest global growth in air travel demand, with a passenger CAGR of 5.3% over the next 20 years.
Meanwhile, the US airlines have emphasized debt reduction, which should assist in strengthening their balance sheets and credit ratings over time. The domestic industry reported a total debt of $143 billion at the end of 2023, a decline of around 15% from 2021 levels. Investors who keep a long-term perspective and diversify their portfolios may gain from the industry’s revival and expansion in the future years.
Methodology:
We sifted through holdings of airline ETFs and online rankings to form an initial list of 20 airline stocks. Then we selected the 10 stocks that had the lowest percentage of their shares shorted. The stocks are ranked in ascending order of the lowest percentage of their shares shorted. We’ve also mentioned the number of hedge funds that have long positions in these stocks as of Q2, 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A commercial Boeing 737 aircraft flying in the sky with the well-known SWABIZ logo on it.
Southwest Airlines Co. (NYSE:LUV)
% of shares shorted: 7.33%
Number of Hedge Fund Holders: 23
Southwest Airlines is the largest domestic airline company in the United States in terms of passenger volume, renowned for its low-cost air travel. The airline company has nearly 800 aircraft in its all-Boeing 737 fleet. Despite offering some longer routes and a few advantages for business travelers, the airline primarily specializes in short-haul, leisure flights operated in a single, open-seating cabin format on a point-to-point basis.
The company, under pressure from investors and difficult business circumstances, is going through major adjustments. The airline, which has been well-known for its open seating policy since the 1970s, stated that it will be discontinuing this distinctive characteristic as part of a larger campaign to rebrand. Boeing’s delivery delays have increased sales and expense constraints, which has further stressed Southwest’s profits.
Due to industry-wide overcapacity in the domestic market, LUV is also facing pricing pressure, which has caused its stock value to drop by 30% over the last two years, while the S&P 500 increased by 37% during that time. As a result, the stock fell 67% off the market.
Elliott Investment Management, an activist investment firm, is advocating for leadership transitions at Southwest, claiming that new ideas are necessary for the company to stay competitive. In response, CEO Bob Jordan stressed the company’s dedication to change, citing the implementation of assigned seating and premium, longer-legroom seats, claiming that these features are desired by 86% of prospective passengers.
In spite of these difficulties, Southwest’s shares increased by 6% after their Q2 2024 results release. In addition, the airline declared that, subject to FAA permission, it will begin operating overnight flights in February 2025 and take reservations for new cabin layouts. The Dallas-based airline operator announced record sales of $7.35 billion for the second quarter of 2024, up 4.5% from the previous year. However, profitability fell by more than 46% to $367 million. A crucial pricing indicator for the airline, revenue per available seat mile, decreased by 3.8%.
Analysts are still skeptical; Thomas Fitzgerald of TD Cowen is predicting significant losses in the most recent quarter and breakeven results for Q4 2024.
However, it has only 7.33% of its shares shorted. Moreover, Insider Monkey monitored that 23 hedge funds out of the 912 hedge funds held a position in Southwest Airlines Co. (NYSE:LUV) as of the end of the second quarter of 2024. Paul Singer’s Elliott Management is the largest stakeholder in the company, with 6,000,000 shares worth $171.66 million.
Overall LUV ranks 10th on our list of the best airline stocks to buy according to short sellers. While we acknowledge the potential of LUV as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LUV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.