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Why Goldman Sachs Downgraded Southwest Airlines

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Feb. 21 2019, Published 8:03 a.m. ET

Goldman Sachs downgraded Southwest Airlines

On February 20, Goldman Sachs (GS) downgraded Southwest Airlines (LUV). The company’s new Hawaii route might put pressure on its profits in the near term. Goldman Sachs analyst Catherine O’Brien cuts the rating on the stock to “sell” from “neutral.”

O’Brien cited the delayed launch of Southwest Airlines’ Hawaii flight services as the main reason behind her rating downgrade. In a note to her clients, O’Brien stated that the delay would reduce the number of days between ticket sales and the take-off of the first flight, which would force the company to sell the tickets at lower rates. She doesn’t think that the Hawaii route will generate a profit in the near term. However, O’Brien is positive about the route’s long-term outlook.

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In October 2017, Southwest Airlines announced that it would start the services by the end of 2018. However, the services didn’t start in 2018. The partial government shutdown in January delayed the company’s plan. Southwest Airlines couldn’t get regulators’ approval to start the operations. The company finally made its first trip to Hawaii earlier in February.

O’Brien thinks that the Hawaii route will increase the company’s ex-fuel cost in 2019. She expects Southwest Airlines’ 2019 pre-tax margin to decline by 60 basis points on a YoY (year-over-year) basis. O’Brien has also lowered her fiscal 2019 EPS outlook to $4.45 from $4.70.

Shutdown hurt Southwest Airlines’ revenues

The partial US government shutdown delayed the Hawaii route approval and hurt Southwest Airlines’ regular business. In a regulatory filing on February 20, the company revealed that the shutdown hurt its revenues more than it expected.

The company expects the January 1–23 shutdown to hurt its first-quarter revenues by $60 million—up from the previous projection of $10 million–$15 million. The fourth-largest US airline by passenger traffic has also lowered its unit revenue growth outlook for the quarter to 3%–4% from 4%–5%. The unit revenue measures passenger fares.

Following the guidance cut and Goldman Sachs’ rating downgrade, Southwest Airlines shares fell 5.7% on February 20. Other major US airline (IYT) stocks including Spirit Airlines (SAVE) and Hawaiian Holdings (HA) lost ~7% and 5.1% of their respective value on February 20.

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