MW Southwest's stock is on a roll. This analyst explains why he's no longer bearish.

By James Rogers

Melius Research no longer recommends that investors sell Southwest's stock, saying the air carrier has done enough - including adding bag fees and cutting jobs - to turn a corner

Shares of Southwest Airlines Co. were headed for their best stretch in nearly a year, and the discount air carrier has finally done enough to convince Melius Research's Conor Cunningham to abandon his bearish stance.

Cunningham recommended in 2023 that investors sell Southwest's stock, saying the company was overstaffed, didn't have a plan to cut costs and consistently underperformed its peers, with a flight network that had "gotten out of whack."

He was basically right, he says now, pointing to how the stock has underperformed its peers for three consecutive years.

But this year, he said, Southwest appears to be at a "turning point." Cunningham upgraded Southwest's stock to hold from sell and raised his price target to $34 from $28.

"Southwest now has made significant strides towards addressing many of those deficiencies and now has a path to industry-plus unit revenue performance and potentially better costs as well in [the second half of the year] and beyond," Cunningham wrote in a note to clients.

He applauded the changes the company has made to focus on improving returns - changes that come with some risk of alienating its customer base.

Cunningham pointed to Southwest ending its 50-year practice of not charging for checked bags, as well as scrapping its open-seating and no-cancellation-fee policies. The analyst also highlighted Southwest's $(LUV)$ revised credit-card deal with Chase and its recent staff reductions. The cutting of 1,750 corporate jobs, announced in February, marked the first nonvoluntary layoffs in the company's 53-year history.

Cunningham also noted that Southwest's management "has been much more aggressive" with share repurchases, pointing to the company's plan to purchase $750 million in shares in the first quarter and $1.5 billion after July.

The analyst said Southwest may have been slow to act but stepped up its transformation efforts after activist investor Elliott Investment Management called out executives for holding on to antiquated business practices.

Related: Southwest bends further to activist shareholder Elliott's demands.

The stock climbed 1.3% in afternoon trading Thursday and was on track for a sixth straight gain. That would be the longest winning streak since the six-day stretch that ended April 22, 2024.

It has tacked on 1.2% this year. Meanwhile, the U.S. Global Jets exchange-traded fund JETS has dropped 13.3% in 2025, as a number of airlines have lowered their revenue outlooks, citing softening demand, particularly for domestic leisure travel.

Related: American travelers are booking fewer domestic flights in another warning sign for the economy

"The state of the airline industry is more muted than we had hoped, and near-term juice has been suppressed by uncertainty in the economy, which has shone a light on Southwest's relative potential here," Cunningham wrote.

One reason he's not recommending investors buy the stock is that he sees "significant risk" that, even though Southwest's moves have boosted the stock over the past few months, the longer-term outlook is murkier, depending on how the changes are executed.

"That's a lot of change for Southwest loyalists and a clearly marks the end of the old Southwest. ... Will loyalty customers abandon Southwest altogether?" Cunningham wrote. "They could, and therein lies the risk."

-James Rogers

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March 20, 2025 15:08 ET (19:08 GMT)

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