Listen, my children, and you shall hear, about Winter Storm Elliott from yesteryear.
It was back in December 2022 when a misbegotten meteorological mix of blizzards, high winds and record cold temperatures barreled through most of America and wreaked havoc on life as we know it.
The storm and its related cold wave reportedly killed 100 people and caused the cancellation of 18,200 flights in the U.S. between Dec. 22 and Dec. 28, while hundreds more were canceled in Canada.
The people at Southwest Airlines (LUV) all know about Winter Storm Elliott.
Oh, boy, do they know.
During Christmas week, the airline canceled thousands of flights and stranded tens of thousands of passengers when the foul weather and flight changes overwhelmed its system.
The event was described as the "Holiday Meltdown" by the Southwest Airlines pilots union, and it's pretty hard to argue with that description.
On Dec. 18, 2023, the U.S. Department of Transportation fined Southwest $140 million, which was 30 times larger than any previous penalty for consumer-protection violations.
The airline also doled out over $600 million in refunds and reimbursements to customers and gave 25,000 Southwest points to passengers affected by the cancellations.
It was a dark period that exposed the airline's technology flaws, which led it to invest hundreds of millions of dollars in technology, deicing equipment, and personnel.
Image source: Paul Hennessy/SOPA Images/LightRocket via Getty Images
Southwest Airlines tests weather action plan
So, it's two years later and what has Southwest learned from this experience?
"At this time last year, we were getting back on our feet from the disruption following Winter Storm Elliott," Bob Jordan, Southwest’s president and CEO, told analysts on Jan. 25, during the company's fourth-quarter conference call.
Related: Southwest Airlines brings back a way to get free flights
"We quickly mobilized to put immediate mitigation efforts in place while simultaneously building a robust plan to prepare us for future extreme winter weather disruptions," Jordan said, according to a transcript of the call.
Southwest posted fourth-quarter earnings of 37 cents a share, swinging from a loss of 38 cents a share a year earlier and coming in at more than triple the FactSet consensus estimate of profit of 12 cents a share.
Revenue totaled $6.82 billion, up 11% from $6.17 billion a year earlier and beating FactSet’s call for $6.74 billion.
Jordan told analysts that the company’s comprehensive winter weather action plan has already been successfully tested in several extreme cases, including hurricanes, severe fog in Chicago, and the Maui fires last August.
"Through all of those events, our aircraft and crew networks remained stable," Jordan said. "We recovered quickly, and we were able to minimize the impact on our customers. We also got fully staffed, restored our network, and reached full utilization of our fleet."
Southwest’s completion factor — the percentage of scheduled flights that are completed — "was fantastic at 99% for the full year,” Jordan said, while the fourth quarter was the company’s best quarterly performance in more than a decade at 99.6%.
Chief Commercial Officer Ryan Green said the airline saw "no bookings impact from last year's operational disruption during this past holiday season, which speaks to the operational improvements we have made over the last year, as well as the enduring loyalty from our customers."
Analysts split on Southwest Air outlook
A number of analysts were impressed with Southwest's results in late January. After the earnings report, Bank of America, JPMorgan and Barclays all raised their price targets for the airline's shares.
And then on Feb. 20, two other firms upgraded the Dallas carrier and boosted their price targets for the shares.
More Wall Street Analysts:
- Analyst who correctly warned Tesla stock could fall unveils new target
- Fund manager of $2 billion portfolio unveils 9 favorite stocks
- Analysts unveil new stock price target for Nvidia ahead of earnings
Deutsche Bank analyst Michael Lindenberg raised Southwest to buy from hold with a price target of $42 a share, 50% up from from $28.
The outlook for domestic capacity in 2024 has "dramatically changed" over the past four years as most airlines have moderated their growth plans. The move followed a second half of 2023 that was beset by oversupplied domestic markets, the analyst said in a research note.
The analyst said he believed 2024 would be the year in which Southwest's network optimization initiatives start to kick in and "provide a meaningful boost to top-line and bottom-line results."
"We think that a more optimized Southwest network could result in a more balanced pricing backdrop," he wrote, saying this "could translate into strong unit revenue performance, especially during the back half of 2024."
Deutsche also upgraded Alaska Air (ALK) and JetBlue (JBLU) to buy from hold.
Bernstein analyst David Vernon upgraded Southwest to market perform from underperform with a price target of $32, up from $26.
"We are upgrading Southwest to market perform as conditions in the domestic market have improved and we no longer see sufficient downside to justify an underperform rating," Vernon wrote.
However, he added that "while we are removing the active rating, we continue to see more down than upside in the stock and believe the elevated valuation makes it vulnerable to any shift in sentiment on the domestic pricing environment."
Related: Veteran fund manager picks favorite stocks for 2024
