Bernstein analysts downgraded shares of Southwest Airlines (NYSE:LUV) to Underperform from Market Perform, lowering the price target to $24 from $29 per share.
Analysts said the company's model is under pressure, and its cost structure is now in transition.
"We discount airline model is disadvantaged in the new world of airline marketing, and the company faces both secular and idiosyncratic cost pressures that will keep earnings power well below pre-pandemic levels near term," analysts wrote.
Analysts argue that 2023 "was a mess" for the airline, while 2024 is set up to be a transitional year.
"The street was expecting $3+ in EPS last year, and the company will likely end up halfway there," they explained. "We anticipate the 2024 outlook to be worse than expected as the company is struggling due to: a new pilot contract and secular cost headwinds; fleet constraints that are adding to network costs; and shifts in demand that are stressing the companies traditional point-to-point network model."
Meanwhile, Bernstein feels LUV's stock performance "doesn't fully reflect worse outlook vs. network carriers." Analysts stated: "Recent stock performance has been in line with network carriers, and the multiple has expanded as the market is expecting an earnings inflection. We argue valuation should come down from pre-pandemic levels as EBITDA margins lag pre-pandemic levels and negative cash flow limits valuation support."