Southwest Airlines Co. (NYSE: LUV), which announced plans to reduce its service between Atlanta and other cities, is the focus of attention this morning.
The airline will be able to reduce costs by cutting up to 200 flight attendants, and 140 pilots from the capital of Georgia in the next year.
LUV sent a memo to its employees today.
We can’t afford to continue losing money and must make this adjustment to restore our profitability.
Southwest Airlines shares are down about 15% from their highs for the year to date in early March.
Southwest Airlines stock: What it means
Southwest Airlines’ announcement this morning confirms its commitment to cutting cost in pursuit of boosting shareholders value amid a looming proxy battle with activist investor Elliott Investment Management.
LUV shares are not necessarily attractive as an investment.
This is because unprofitable routes and poor ground service are affecting profitability. Southwest Airlines forecasted a 2.0% decline in unit revenue for the current quarter and a 13.3% increase in non-fuel costs.
Analysts at Bernstein say that the airline also proposed cabin reconfiguration to boost premium revenue. However, “plans to increase pitch in the front without removing anything from the back look difficult to imagine, which could complicate its commercial transformation.”
The investment reiterated in its latest note its market perform rating for Southwest Airlines stock but lowered its price target to $24 which warns of a 20 percent decline from here.
Should you invest in Southwest Airlines this September?
Southwest Airlines has recently changed its board of directors due to pressure from Elliott Management, which currently holds an economic interest of 11% in the airline.
Stephen Trent says that the changes are more strategic than a re-orientation of the company.
The activist investor is expected call a special gathering as early as next week.
Citi analyst also rates the LUV as “neutral”. He sees a downside in its share prices to $28 because he expects that the airline will continue to lose money in its current quarter.
Southwest Airlines’ stock pays a current dividend yield of 2.39 %, which makes it more attractive to income investors.
As long as it does not adequately address the concerns listed above at its Investor Day scheduled for September 26, then its shares will likely remain a risky purchase.
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