Southwest Still A Buy At Deutsche Bank Despite Revenue Challenges

Southwest Airlines Co (NYSE: LUV) hosted its Investor Day on June 23. Deutsche Bank’s Michael Linenberg maintained a Buy rating for the company, with a price target of $57. The analyst mentioned that although the revenue challenges continue, technology and operational improvements could boost EBIT in the longer run.

Revenue Environment Challenging

Southwest Chairman and CEO Gary Kelly indicated that the revenue environment continued to be challenging, much on the lines of what was being said by the company’s peers. Management also said that June quarter unit revenue or RASM would have modest growth of less than 1 percent.

“We thought RASM growth over 1% was unlikely given the current environment/the company’s growth plans and are forecasting June quarter RASM +0.5%; however, given the stock’s reaction, it seems consensus expectations were higher,” analyst Michael Linenberg wrote.

Linenberg added that there could be downside to the consensus forecast for 2H16 RASM comps as well.

EBIT Boost

Management provided greater details of the company’s new domestic reservation system. The implementation is expected to commence in late 2016 and the completion is slated for 2H17. The analyst expects these improvements to add $200mm to Southwest’s EBIT.

“After R3 [phase three of the reservation system] the company will continue to innovate using its new capabilities and generate $500 mm in incremental EBIT by 2020,” Linenberg added.