Karishma Vanjani

Southwest Airlines stock moved lower after the government sued the carrier over late flights and a Wall Street analyst downgraded the shares, citing concerns about valuation.

An investigation by the Transportation Department found that Southwest flights operating on two routes -- Chicago and Oakland, Calif., and between Baltimore and Cleveland -- resulted in 180 flight disruptions between April and August 2022. Each flight was chronically delayed for five straight months.

A flight is considered chronically delayed if it is flown at least 10 times a month and arrives more than 30 minutes late more than half of the time, the department said in a lawsuit filed on Wednesday said.

The agency said it "seeks maximum civil penalties."

Southwest told Barron's that it was disappointed that the department filed a lawsuit over flights that had occurred more than two years ago. "Any claim that these two flights represent an unrealistic schedule is simply not credible when compared with our performance over the past 15 years," it said.

The agency has ramped up enforcement on aviation. It also fined Frontier Group Holdings' Frontier Airlines unit $650,000 for operating multiple chronically delayed flights. Frontier declined to comment.

Earlier this month, JetBlue Airways was fined $2 million for chronic flight delays and unrealistic scheduling.

Southwest stock was down 3.5% to $31.65 on Thursday.

Also weighing on Southwest shares is a research note from Citi Research analyst Stephen Trent changing his rating to Sell from Neutral. Trent's target for the stock price is $29.50, implying a decline of 10% from Wednesday's closing level.

Trent's rationale is that Southwest's stock is trading at a higher valuation than rival carriers such as Delta Air Lines and United Airlines, even though the company isn't offering the same earnings growth.

Southwest's shares sell for a little over 19 times the earnings per share expected over the next twelve months, while Delta and United trade at 8.6 times and 8.1 times, respectively. United is expected to achieve 3.4% earnings growth in 2024 while Delta's profit, disclosed early this month, declined 1.4%. Southwest is expected to report a 47% decline in earnings.

"Over time, we see Southwest's valuation correcting to more normalized levels, as the network carriers' premium travel gains, limit Southwest's efforts to penetrate that category," Citi wrote on Wednesday

On Tuesday, Southwest said it is halting most hiring of interns and noncontractual hiring, as well as its Rallies -- gatherings with food, concerts, photo opportunities, and DJs -- where employees discuss business plans.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 16, 2025 13:00 ET (18:00 GMT)

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