3 Reasons to Fly Far Away From LUV Stock

Stocks to sell

Southwest Airlines (NYSE:LUV) COO Andrew Watterson appeared before a Senate panel on Feb. 9 investigating what happened in December that forced the airline to cancel thousands of flights, stranding passengers trying to get places over the holidays. Because of the debacle, between Dec. 1 and Dec. 28, LUV stock lost 20% of its value. 

Fortunately for its shareholders, LUV stock has bounced back a little. 

It’s up nearly 9% through the first seven weeks of 2023. Despite the rebound, Southwest’s share price has been on a downward slide for the past five years. A $10,000 investment in LUV in February 2018 is worth $6,100 today. The same $10,000 invested in the S&P 500 is worth $14,800. 

That’s a slight difference. 

Years ago, I read Nuts! Southwest Airlines’ Crazy Recipe for Business and Personal Success, the book about founder Herb Kelleher and the airline’s launch. Written by Kevin Freiberg and Jackie Freiberg, it was first published in January 1995

At the time, I thought Southwest was the most innovative airline anywhere, only to find out in December that the airline’s scheduling system had been held together by duct tape all these years. It finally gave way. 

Here are three reasons to fly far away from LUV stock.

The CEO Had a Dentist Appointment

I couldn’t help but notice that CEO Bob Jordan wasn’t in the hot seat on Feb. 9, despite a Senate committee requesting his presence at a hearing held that day. The weird thing is that Jordan was in Baltimore the day before at a rally for the airline’s employees. He flew back to Dallas that same day (on another airline), opting not to drive the 35 miles to D.C. and do the right thing by testifying before the Senate. 

The Dallas Morning News reported that the panel was more than happy to hear from an operations person like its COO, so it wasn’t a big deal that the CEO skipped the hearing. 

A Feb. 15 op-ed from Airwaysmag.com contributor Joshua Kupietzky believes Bob Jordan should be given a second chance. When I first read the headline, I was sure that it defended the CEO’s decision to skip the Feb. 9 hearing.

Nope. 

Instead, Kupietzky argued that Jordan — who replaced long-time chief executive Gary Kelly after Kelly had spent 17 years in the top job — had handled the December meltdown as professionally as anyone could, given the poor state of Southwest’s technology. 

“The Christmas meltdown was years in the making, and it is unfair to point the blame at Mr. Jordan, who ..took over the position of CEO only a year ago,” Kupietzky wrote. 

So, by Kupietzky’s logic, if a 40-year-old bridge collapses in Dallas, the current municipal government shouldn’t take any of the blame for the incident. But I guess the buck doesn’t stop with the CEO.

The bottom line is that Jordan should have been the one in the hot seat in front of the Senate committee.

Climate Change and a Point-to-Point Route System

When the weather is perfectly fine, Southwest’s point-to-point route system works like a charm, allowing the airline to fly more routes in 24 hours than airlines using the hub-and-spoke route system. 

In a December article, The Dallas Morning News contributor Alexandra Skores discussed the airline’s use of a point-to-point route system. She pointed out that up until deregulation in 1978, most airlines used the point-to-point route system,. So clearly, it has advantages.

However, December’s debacle demonstrates that even an absolutely marvelous scheduling system probably couldn’t have saved the airline from thousands of cancellations. That’s because the point-to-point model can put pilots and crews out of position during bad weather or busy periods. 

Southwest has said it will spend $1 billion to fix its back-end technology. However, CNBC  suggests that it will take the airline a year and a half to implement the new technology. Meanwhile, before then another storm could cause a debacle like the one this past December. 

 A second debacle could be fatal for LUV.

The other airlines, which mainly use hub-and-spoke systems, didn’t have nearly as many cancellations in December. For example, on Dec. 28, 90% of the flights canceled were Southwest flights. 

The point-to-point route system bears significant responsibility for the holiday meltdown. Sure, Southwest underinvested in technology, and that’s a shame, but December highlighted the weak link of the point-to-point system. 

With climate change producing bigger winter storms, investors should question why Southwest stuck with a point-to-point approach.

You’ve Got Options Other Than LUV

 There are 65 airline stocks on U.S. stock exchanges, including 35 with market capitalizations of $1 billion or higher. 

One name sticks out for me, and that’s Copa Holdings (NYSE:CPA), the Panamanian holding company that operates both Copa Airlines -and Copa Colombia. Copa is based n Panama, ideally situated between North and South America, while Copa Columbia gets passengers from Columbia to Panama City, Copa Airlines’ hub. Copa also operates Wingo, a low-cost carrier, from its Panama City hub. 

In January, given Southwest’s troubles, I suggested three names that were better bets than LUV. Copa was one of my picks. 

Flying 97 Boeing 737s with 34 of Boeing’s (NYSE:BA) 737 Max planes on order, Copa’s potential gains are much greater than those of Southwest over the next two to three years. In my opinion, Copa is the best Latin American airline stock for investors who are able to handle above-average risk.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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