Though Southwest Airlines (NYSE: LUV) and other airline and travel shares were hit hard today in the wake of the Paris terrorist attacks, the slump is temporary and to be expected.
In other words, don’t rush to dump LUV or any of the other travel companies affected by the deadly attacks.
Travel stocks worldwide are under pressure from the trickle-down effects of the terrorist attacks that killed at least 132 in Paris. Air France (EPA:AF), Delta Airlines (NYSE:DAL) and Carnival Corp. (NYSE:CCL) are just a few companies feeling the sting.
At times like these, travelers are worried about possible attacks in other countries, and the travel sector will feel this.
There will definitely be a negative psychological impact in the short term in tourism-related sectors. Airlines are particularly affected,” said Haitong Securities analyst Zhang Qi, according to Bloomberg.
Once this slump passes, Southwest Airlines could keep climbing.
Many investors watched the news over the summer about Southwest Airlines and stayed away from its stock.
First, it was about its new agreement with the flight attendants’ union. That agreement brought the stock down from a 12-month high of almost $47 to just $32.
Then, some worried it would have a similar fight with its pilots.
Now—temporary, terror-induced dive aside—things are looking up.
Thanks to careful planning, lower fuel prices, and that little AirTran merger, the stock is looking like one to pick up now.
Since the labor agreement kerfuffle, the stock has been flying high.
In fact, those kinds of agreements, help with certainty.
Now, with a solid base, the airline was able to budget well going forward, which makes a difference for this airline, as staffing is its greatest expense.
The other great expense? Fuel.
This year, though, fuel is so cheap some are expecting to see a 16 percent drop in the cost of airline tickets. That means more people will fly, and that means more full 737s for Southwest.
And, in case you forget, it costs almost as much to fly an empty seat as it does one with a paying passenger, so revenues are likely to go up in the fourth quarter, as well.
Two other factors are also set to improve the company’s fortunes.
Southwest won big when it fought the Wright Amendment. That amendment, a federal law, was designed to protect the airport in Dallas that Southwest didn’t fly to. It also forced Southwest to make extra stops in several low-volume cities.
Now that amendment is dead, and for the last year, Southwest has been able to reap huge cost benefits from the expiration.
It’s no longer constrained at Love Field, and it’s not forced to stop in low-margin cities. It’s also adding flights to major destinations—three times as many—from Dallas.
The other major factor is its AirTran Airways merger. Though it took a long time, and many dumped the stock waiting for Southwest to fully integrate the AirTran planes and personnel, its economies of scale are now showing from that merger.
Also, the merger allowed Southwest to enter smaller markets it hadn’t been serving, with a fleet of planes that was specifically designed for that.
The world will grow stronger following the Paris tragedy. Global citizens won’t take kindly to limited travel access for long. Change is coming.
The travel sector will recover, and with it Southwest Airlines—and likely in a big way.
Indeed, in 2016, it seems the only thing missing from a stock certificate marked LUV is a bag of peanuts.