Bernstein maintains Southwest stock at Market Perform, target $33

On Monday, Bernstein’s SocGen Group maintained its Market Perform rating on Southwest Airlines (NYSE:LUV) with a steady price target of $33.00, falling within the broader analyst range of $24 to $42. Trading at $31.73 with a P/E ratio of 40.6, InvestingPro analysis suggests the stock is fairly valued. The airline introduced significant operational changes, including the addition of baggage fees and basic economy fares while discontinuing its fuel hedging strategy. Southwest’s management anticipates these updates will drive an EBIT of $1.7 billion for the fiscal year 2025, surpassing the approximate $1 billion forecast by analysts prior to the announcement made earlier this week.

Southwest believes that the new strategies, which have proven successful for other carriers, will be effective despite the company’s distinct starting point and customer demographic. With an overall Financial Health score of "FAIR" according to InvestingPro analysis and profitable operations over the last twelve months, the company shows potential. However, the analyst at Bernstein has adopted a cautious stance, suggesting that the success of these initiatives remains to be proven, with investor sentiment currently outpacing analyst expectations as indicated by the price-to-earnings multiple.

The management team at Southwest addressed the shift in policy regarding baggage fees, which was a departure from their stance at last fall’s Investor Day. They acknowledged that customer booking behavior through new channels, such as metasearch, did not align with their previous assumptions about the benefits of their bundled offerings that included free bags. This insight, coupled with the expertise of new leadership with experience in implementing baggage fees at other airlines, has led to revised projections.

Southwest’s decision to revise its business model is a notable strategic pivot aimed at enhancing profitability. With annual revenue of $27.48 billion and a market capitalization of $18.81 billion, the airline’s leadership is banking on the expertise of industry veterans to validate these changes and align their operations with successful practices from other airlines. As the company embarks on this transition, it will be closely monitored by both the buy-side and sell-side to assess the impact of these changes on its financial performance and market position. For deeper insights into Southwest’s financial health and growth prospects, including 8 additional ProTips and comprehensive valuation metrics, explore the full analysis available on InvestingPro.

In other recent news, Southwest Airlines Co. has made several notable announcements. The airline has adjusted its financial outlook, lowering its unit revenue guidance for the first quarter due to factors like a higher-than-expected completion factor and reduced government travel. Additionally, Southwest Airlines will start charging passengers for certain checked luggage, ending a longstanding free-bag policy. In another development, the airline is implementing changes to its customer loyalty program and fee structure, effective May 28, 2025, aiming to boost revenue and cater to diverse traveler needs. Southwest has also expanded its partnership with investment firm Elliott Management, allowing Elliott to increase its economic exposure in the airline. Meanwhile, the company plans to cut approximately 1,750 jobs in its leadership ranks as a cost-cutting measure. A recent incident involving a Southwest plane narrowly avoiding a collision at Chicago Midway International Airport has also been confirmed by the FAA, with an investigation underway. Lastly, Ryan Green, Executive Vice President & Chief Transformation Officer, is set to step down from his role on April 1, 2025.

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