By Jacob Sonenshine

Southwest Airlines stock hasn't arrived at the same destination its peers have. Management is taking steps that should enable shares to make the journey.

Forget turbulence. Airline stocks have been among the market's top performers over the past 12 months. The U.S. Global Jets exchange-traded fund has gained 30% in the past year, led by gains in United Airlines, Delta Air Lines, and Alaska Air Group. The industry has benefited from better-than-expected earnings, as travel demand continues to grow long after the pandemic.

Southwest stock, however, has taken a very different journey. The company has missed analyst's earnings forecasts four times in the past 10 quarters and missed sales expectations half the time. As a result, profit projections keep dropping, pulling shares down with them. The stock has dropped about 13% in the past year, to a recent $29.93.

The good news is that Southwest is taking steps to execute more consistently and efficiently. It also announced this past week that Tom Doxey, who was previously an executive at United, would take over as chief financial officer, replacing Tammy Romo, who plans to retire. Argus Research analyst John Staszak has upgraded the stock to Buy from Hold, with a $35 price target, implying a 17% gain.

Why the optimism? In its fourth-quarter earnings release, Southwest guided for a 1.5% increase at the midpoint of the range this year for average seat miles -- essentially the metric for the number of available seats -- as it utilizes more of its aircraft. That won't damage pricing enough to cause a revenue decline. In fact, the company said on the earnings call that it expects some growth in revenue per available seat mile this year.

That helps Staszak model 2025 revenue of $29.3 billion, a couple hundred million above consensus estimates and representing almost 7% growth. The added available seats should capture additional fliers instead of going vacant. Southwest also has plans to save $500 million on fuel costs largely as it replaces old planes with more-efficient new ones. While that has been more difficult given delivery issues at Boeing and Airbus, Southwest said on its earnings call that it ordered 136 planes for delivery this year.

It also disclosed in its earnings release that based on recent energy prices, its fuel cost per gallon this year would come in at a number that's 6% lower than last year. That, plus the fact that it doesn't have to spend additional money to increase seat availability, would push profit margins and earnings far higher.

Lower costs and faster sales growth would boost Southwest's earnings, as would its plans to spend some of its $1 billion in free cash flow to buy back shares; the airline has more than $8 billion in cash and equivalents to cover its debts. That could help earnings per share reach Staszak's forecast of $1.70 this year, five cents above consensus, for 77% growth.

Investors might have forgotten Southwest, but get ready to watch the stock take off.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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February 14, 2025 21:30 ET (02:30 GMT)

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