Bank Of America Downgrades Southwest Airlines Amid Boeing Concerns

Bank of America analysts turned bullish on Southwest Airlines Co LUV last September, but this call has proven to be too early.

The Analyst

Andrew Didora downgraded Southwest from Buy to Neutral with a price target lowered from $65 to $60.

The Thesis

The case for turning bullish on Southwest's stock a few months ago was based on expectations for the grounded 737 MAX plane to report to the skies in the near-term, Didora wrote in the note. Had this scenario played out, Southwest would have had a "more normalized" earnings power growth and "strong" margin growth in 2020.

However, BofA's Boeing Co BA analyst is estimating the 737 MAX will return to service in April which is one month later than previously expected. As such, Southwest's "737 MAX headaches" will continue for now.

In fact, Southwest removed the 737 MAX from its schedule through April 1, which implies its scheduled capacity is now down by 3.8% in the first quarter of 2020. The analyst said this could prove to be a net benefit to unit revenue as first quarter revenue per available seat mile could rise by 2.5% in the quarter. At the same time, first quarter unit costs are projected to rise by 6.5% from training pilots on a 737 MAX simulator, which can take at least a full year to complete.

Price Action

Shares of Southwest Airlines trade around $54.40.

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