Southwest Airlines (NYSE:LUV) has by far the strongest balance sheet in the U.S. airline industry. That has proved to be a huge strategic advantage this year, allowing Southwest to navigate the COVID-19 pandemic with relative ease. This made the company a good choice for investors looking to profit from an eventual airline industry recovery.

Sure enough, Southwest Airlines stock has more than doubled since bottoming out in May. However, investors now may be counting on a stronger earnings recovery than they can reasonably expect. Other airline stocks -- such as Alaska Air (NYSE:ALK) -- look more attractive by comparison. That's why I sold all of my Southwest Airlines stock last week.

A Southwest Airlines plane preparing to land, with mountains in the background

Image source: Southwest Airlines.

Earnings won't bounce back quickly

Back in October, Southwest Airlines estimated that it would burn an average of $11 million of cash per day during the fourth quarter. If anything, cash burn could end up being a bit worse than that estimate. Many other airlines have increased their cash burn forecasts recently, as rising COVID-19 case counts have again started to undercut air travel demand.

Demand is likely to remain quite weak for the first few months of 2021. Leisure travel demand could improve rapidly as the summer approaches, assuming that vaccines start to tame the pandemic by then. On the other hand, Southwest Airlines executives estimated on the Q3 earnings call that business travel demand could remain 50% or more below pre-pandemic levels in late 2021. Furthermore, they acknowledged that business demand may never recover to 2019 levels.

Southwest hasn't announced any major new restructuring programs to cut costs this year, either. It will benefit from putting the 737 MAX back in service and replacing some of its older planes with 737 MAX 8s over the next few years, but the potential savings are fairly modest in the grand scheme of things.

As a result, most analysts think Southwest Airlines will barely turn a profit next year. As far out as 2023, the analyst consensus calls for earnings per share somewhat lower than the company's 2019 adjusted EPS of $4.27.

Southwest Airlines stock has already recovered

While a full earnings recovery is likely years away, Southwest Airlines stock ended the day on Monday down just 11% in 2020. Furthermore, the company issued 80.5 million shares earlier this year in an effort to maintain a strong balance sheet. The increase in its share count means that Southwest's market cap is now 1% higher than it was at the beginning of the year.

LUV Chart

Southwest Airlines year-to-date stock performance. Data by YCharts.

If anything, this understates the increase in Southwest's market cap. In conjunction with its stock offering, the company also issued $2.3 billion of convertible debt on May 1. Southwest Airlines stock already trades well above the conversion price of approximately $38.48 per share. Unless the company settles the convertible debt in cash at a premium, it could eventually wind up issuing nearly 60 million additional shares. At the current stock price, that would add nearly $3 billion to Southwest's market cap.

In short, Southwest Airlines stock is trading at a level that implies investors think the company is worth more than it was at the beginning of 2020. That seems overly optimistic. After falling too far earlier this year, the stock now appears to be overheated.

Better options elsewhere

As air travel demand recovers in the years ahead, Southwest Airlines could eventually grow its earnings to record levels, boosting its stock price. Southwest Airlines stock certainly isn't a terrible choice for long-term investors. However, there are better options in the U.S. airline industry right now, such as Alaska Air stock.

Alaska Air shares have fallen about 25% year to date. Importantly, the company hasn't issued any stock this year, so its market cap has declined by a similar amount. Alaska also has a solid balance sheet, although it isn't quite as good as that of Southwest. Moreover, it has cut hundreds of management positions, reduced nonwage overhead costs by tens of millions of dollars, and appears to be laying the groundwork for returning to an all-Boeing mainline fleet, which would simplify its operations and reduce its costs.

If anything, Alaska Air could achieve a faster earnings recovery than Southwest thanks to these cost-cutting moves. Investors who had bought Southwest Airlines stock to profit from the airline industry's post-pandemic recovery should consider betting on Alaska Air instead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.