What happened
A Wall Street analyst is warning that higher fuel and labor costs are likely to eat into first-quarter earnings at Southwest Airlines (LUV -0.84%), and the stock is moving lower as a result. Shares of the discount airline traded down about 5% on Thursday morning as investors brace for the worse this earnings season.
So what
The airline industry, after a difficult few years due to the pandemic, had hoped to use 2022 to regain altitude. But although demand continues to climb, there are macro issues that are getting in the way of the recovery.
Image source: Southwest Airlines.
A shortage of pilots, among other labor issues, has crimped expansion plans and left airlines at times unable to fly their full schedules. Russia's invasion of Ukraine further complicated plans by causing oil prices to spike higher. Fuel accounts for as much as 30% of an airline's operating expenses.
On Thursday, Barclays analyst Brandon Oglenski lowered his price target on Southwest to $55 from $59 as a result of these higher expenses. Oglenski kept his overweight rating on the shares, and said he expects capacity reductions and a solid pricing environment to partly offset higher prices, but in the near term there is a lot of uncertainty hanging over the sector.
Now what
Oglenski wrote that even with the pandemic and a war in Europe, demand appears to be recovering nicely. The summer tourism season is setting up well for airlines, and given that labor and fuel costs are shared by everyone in the industry, there might be a willingness to raise prices instead of just trying to fill seats.
For a long-term investor, all evidence indicates that the airlines will be able to rebuild their balance sheets and get back to pre-pandemic operations in the years to come. The issue is timing, and as the events of the first quarter showed, there are a lot of issues plaguing the industry that even well-run companies like Southwest can do little to control.
