Last Tuesday, Dallas, TX-based airline heavyweight Southwest Airlines Co. (LUV) unveiled its strategic growth plans and financial targets along with the share buyback announcement. On the flip side, LUV reported to have witnessed a weaker demand scenario in the first quarter of 2025.

The mixed results naturally raise the question: Should investors buy, hold, or sell LUV stock now? A more in-depth analysis is needed to make that determination. Before diving into LUV’s investment prospects, let’s take a glance at its quarterly numbers.

LUV’s Q1 Outlook

First-quarter capacity or available seat miles (ASMs) is now estimated to decline 2% from the year-ago reported figure. The prior guidance implied a year-over-year decline of 2-3%.

For the second quarter of 2025, LUV continues to expect capacity to increase in the range of 1-2% on a year-over-year basis.

LUV now anticipates its first-quarter 2025 revenue per available seat mile (RASM or unit revenues) to increase 2% to 4% on a year-over-year basis. This marks a downside from the previous forecast of 5-7%. The downside in revenue performance was due to the softness in bookings and demand trends resulting from increased macro uncertainty, a higher-than-expected completion factor, reduced government travel, and a higher-than-expected impact from the California wildfires.

ASMs per gallon for the first quarter are now expected to be between 82 and 83 (prior view: 81-83).

Economic fuel cost per gallon for the first quarter is now expected to be in the range of $2.35 to $2.45 (prior view: $2.50 to $2.60). Lower fuel costs should boost the company’s bottom line, as fuel expenses represent a key input cost for any transportation player.

Apart from LUV, Delta Air Lines, Inc. (DAL), American Airlines (AAL) and JetBlue Airways Corporation JBLU have also provided updated first-quarter 2025 guidance, citing economic uncertainties and the resultant reduction in travel demand.

DAL lowers its first-quarter 2025 adjusted earnings per share guidance to the range of 30-50 cents from the previously guided range of 70 cents-$1 per share. The adjusted operating margin in the March quarter is now expected to be in the range of 4-5%, which is lower than the prior guided range of 6-8%. Management has also reduced first-quarter 2025 total revenues (adjusted) to increase in the 3-4% band from first-quarter 2024 actuals (prior view: up 7-9%).

AAL now expects a loss per share of 60-80 cents in the first quarter of 2025 compared with the prior expected loss of 20-40 cents. First-quarter total revenue is now anticipated to be approximately flat on a year-over-year basis. This marks a downfall from the prior expectation of 3-5% year-over-year growth

For first-quarter 2025, JBLU expects capacity to decline in the 4-5% band (prior view: down 2-5% band). The average fuel cost per gallon is now estimated to be between $2.55 and $2.65, down from the prior guided range of $2.65-$2.80. Capital expenditures are now expected to be roughly $215 million (prior view: $270 million). 

Strategic Growth Plans of LUV

Apart from issuing guidance, LUV also laid out an impressive roadmap for its growth and updated its share buyback plans.

LUV continues to work on its revenue management actions, which include network optimization, capacity moderation and marketing and distribution evolution. To this end, the company’s progress so far includes offering assigned seating and extra legroom options, a co-brand agreement with Chase (which offers enhanced Cardmember benefits and aid multi-year financial targets), an airline partnership with Icelandair (which began on Feb. 13, 2025) and the completion of short-term sale-leaseback transaction for 36 737-800 aircraft.

The new revenue initiatives taken up by LUV include an updated policy on bag fees effective on or after May 28, 2025, wherein LUV will continue to offer two free checked bags to Rapid Rewards A-List preferred members and customers traveling on business select fares and one free checked bag to A-List members and other select customers. LUV will sponsor one checked bag for Rapid Rewards Credit Cardmembers. Customers not entitled to these free bag options will be required to pay for their first and second checked bags, subject to the weight and size conditions. This was followed by the optimization of loyalty programs on both high-demand and low-demand flights, as well as the expansion of distribution channels through online travel agencies such as Expedia.

Some Other Tailwinds Working in Favor of LUV Stock

Southwest Airlines' liquidity position is encouraging. The airline ended fourth-quarter 2024 with cash and cash equivalents of $7.50 billion, much higher than the current debt level of $1.63 billion. This implies that the company has sufficient cash to meet its current debt obligations.

Long-Term Debt to Capitalization

Image Source: Zacks Investment Research

A strong balance sheet enables the company to reward shareholders with dividends and share repurchases. LUV has already completed a share repurchase worth $1 billion from its previously authorized $2.5 billion share repurchase program. The company anticipates completing the remaining $1.5 billion share buyback in July 2025 and plans to accelerate its $2.5 billion share repurchase program.

LUV’s Price Performance

LUV has an impressive track record of earnings surprises. The company's earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters, missing the mark in the remaining quarter, delivering an average surprise of 58.64%. Driven by this upbeat earnings performance and the positives mentioned above, LUV shares have gained 11% in the past six months, outperforming the Zacks Airline industryas well as the S&P 500, of which the company is a key member.

LUV Stock Six-Month Price Comparison

Image Source: Zacks Investment Research

Impressive Valuation Picture of LUV Stock

From a valuation perspective, LUV has been trading at a discount compared with the industry. Southwest Airlines’ forward 12-month price-to-sales, a commonly used multiple for valuing airline stocks, reading is also below its median over the past five years. The company has a Value Score of B.

Image Source: Zacks Investment Research

Rising Expenses Weigh on Southwest Airlines Stock

The rise in labor and airport costs is likely to continue denting bottom-line performance. Evidently, operating expenses were up 5% during 2024, with expenses on salaries, wages and benefits increasing 9.8%. Consolidated operating costs per available seat mile (excluding fuel, oil and profit-sharing expenses, and special items) rose 7.8% year over year in 2024.

For first-quarter 2025, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 6% from the comparable period in 2024.

How Should Investors Approach LUV Stock?

LUV is highly optimistic about the aforementioned plans to boost revenue growth and expand the customer base by retaining existing customers and attracting new ones. These are expected to increase LUV’s EBIT contribution in 2025 and 2026. LUV also announced that it is doubling its 2027 cost reduction target to exceed $1 billion and will end its fuel hedging program. A solid balance sheet allows LUV to reward its shareholders through share buybacks and dividend payments. The company’s attractive valuation is added positive.

Despite these positives, we advise investors not to buy LUV stock now due to the current macroeconomic uncertainties and the resultant reduction in travel demand. Escalated labor and airport costs also act as headwinds for LUV's bottom-line growth.Considering all these factors, investors are advised to wait for a better entry point. For those who already own the stock, it will be prudent to stay invested. The company’s Zacks Rank #3 (Hold) further supports our thesis.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report

Southwest Airlines Co. (LUV) : Free Stock Analysis Report

JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report

American Airlines Group Inc. (AAL) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research