Southwest affected by Boeing 737 MAX problems
Boeing (BA) has had its share of problems recently, especially with the 737 MAX jet. However, new reports have emerged recently that suggest another airline may have been involved, and to a much greater degree than some believe.
This airline is Southwest (LUV), which reports having had a surprisingly strong hand in training pilots to operate the 737 MAX. This move contributed to losses for both companies in the pre-market.
I remain bearish on Boeing. Boeing has struggled so hard for so long that it’s going to take a long time to pull through. Meanwhile, I’ve been pulling neutral on Southwest, to see what kind of impact this news has on its operations for at least the next quarter.
The last 12 months for Boeing have had their ups and downs, but for the most part the company has been on a downward trend throughout. The southwest saw a similar slope, but with deeper valleys and higher peaks in between.
This is the latest news that could prove disastrous, at least for Southwest. A recent legal filing, containing internal documents from both companies, reveals that Southwest played a significant role in the formation proceedings.
In fact, according to reports, Southwest has agreed that Boeing should remove sections from the 737 MAX pilot manuals that reference automated flight control systems.
Investigators later blamed this system for two separate dives. Southwest was a “launch customer” for the aircraft, meaning it would buy – and fly – some early models. Thus, he took part in their development, which led to many problems for Boeing itself.
The Taking of Wall Street
Southwest has a moderate buy consensus rating on TipRanks. This is based on nine purchases, six reservations and one sale attributed over the past three months. Southwest’s average price target of $54.20 implies 28.6% upside potential.
Analyst price targets range from a low of $34 per share to a high of $72 per share.
Investor Sentiment Offers Hope and Trouble
Southwest has a smart score of seven out of 10, which puts it at the highest neutral tier. That suggests it’s only a little better than even the odds of it outperforming the market in the future.
Individual indicators help paint this gloomy picture. Hedge fund involvement – as indicated by the TipRanks 13-F Tracker – has been on a steady decline since March 2020. The last quarter was no exception, with hedge funds falling once again between September 2021 and December 2021.
Insider trading at Southwest, on the other hand, is heavily sales-oriented. In the past three months, all insider trades have sold out, although there has only been one sell trade recorded. The last 12 months are actually worse. While seven buy transactions have been recorded over the past 12 months, there have also been 13 sell transactions.
Retail investors holding portfolios on TipRanks are also increasingly bearish on Southwest. The number of portfolios holding Southwest has fallen 1% in the past seven days and 1.1% in the past 30 days.
Make a bad situation only get worse gradually
Southwest has built an excellent reputation over the years for being customer-centric. Prices for everything are on the rise. This will cause many potential travelers to sacrifice service for lower prices.
Southwest has long done well with customers on this front. In fact, the company recently planned to roll out an all-new fare class, dubbed “Wanna Get Away Plus” this quarter. It’s a little more expensive, but it offers additional flexibility like transferable credits and a better pay rate on airfare.
The southwest may not be in much danger here. Customers may not care that the company was involved in changing flight instructions, etc. They can simply demand the cheapest fares to get where they want or need to go.
In fact, the picture is so complex that it probably cannot be reduced to a solid counter-marketing campaign by other airlines like United (LAU) or Delta (DAL). Any attempt to do so could ultimately do more harm than good to the competing airline that tried it.
Southwest’s involvement in Boeing’s 737 MAX problems is difficult to parse and may not be so remarkable anyway. Depending on how certain legal matters play out, it can turn out to be much worse in the end.
Right now, though, Southwest was really just an early customer, pointing out some potential design points.
While this could easily escalate over the coming months, for now the impact is likely to be minimal. To be sure, the Federal Aviation Administration (FAA) may take a dim view of so-called efforts to “overstretch” FAA training requirements. It’s not clear at this point, however. Worse, Southwest and Boeing may have bigger issues to deal with right now.
I therefore remain bearish on Boeing. He has a long way to go to get out of his hole.
I’m also neutral on Southwest, which could have a lot of legal trouble ahead. Or maybe not. Soaring fuel prices and hesitant customers are more likely issues the business has to deal with in the short term.
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