Cost Concerns In Southwest Air 'Overblown,' Imperial Says

Imperial Capital believes cost concerns for Southwest Airlines Co LUV have been magnified. Analysts initiated coverage with an Outperform rating and a price objective of $46.

In contrast to the Big three airliners, Southwest adopts a customer-friendly and low cost business model thus differentiating itself from others for value offer. The analyst comments come on the heels of the company reporting an 0.8 point drop in August load factor while witnessing RPM and ASM growth of 3.6 percent and 4.6 percent, respectively.

The brokerage pointed out that the low-cost air carrier has recorded profit for 43 straight years, which isn't an easy task to achieve for a cyclical airline. The primary factor behind the success is its continued concentration on productivity and control over costs. As a result, the company was able to offer freebies like bags fly free, no change fees and low fares.

In a note, the analysts said, "Recently, the sustainability of LUV's business model has been questioned by investors following a tentative pilots' agreement, which reportedly boosts pilots' pay by 29% over seven years. With flight attendant and mechanics' contracts in negotiations, we have observed that investors are asking whether labor is about to "kill the goose that laid the golden eggs."

The brokerage thinks there is no reason to suggest that Southwest won't be able to maintain its competitive cost advantage pointing out the frequency and optimization in productivity of assets.