Southwest Airlines hit with its first Wall Street downgrade since Boeing's 737 Max crisis began

Southwest Airlines

The fallout from Boeing’s largest crisis in years is continuing.

As airlines gear up for what could be a turbulent earnings season, Southwest Airlines, a major US operator of the now-grounded 737 max planes, was hit with a stock downgrade by analysts at Raymond James.

The Wall Street firm slashed its rating for shares of the low cost carrier to market perform from outperform on Monday, saying that the grounding of 737 Max planes could make it harder for Southwest to retire its fleet of 737-700s as planned. It kept its price target at $US60, above the $US51.90 level where it was trading Monday.

“Southwest’s current fleet plan calls for the retirement of 20 B 737-700s, which could be delayed to make up for the shortfall and there are somewhat higher cost options such as purchasing or leasing used B 737s to help maintain schedules,” Savanthi Syth, the firm’s airlines analyst, said in a note to clients.

Luckily, despite being one of the biggest US operators of the 737 Max, the model makes up relatively few of Southwest’s revenue seat miles, a closely watched metric for airline investors, Syth says. Still, this quarter’s earnings are likely to take a hit due to the grounding, as Southwest has already warned investors.

Therefore, “we are downgrading LUV from Outperform to Market Perform due to near term earnings risk related to the grounding of the MAX fleet, which we now believe may run into the summer months.”

American, for its part, also believes the grounding may last that long, and canceled flights on the affected plane through at least June 5 on Monday.

There are longer-term issues, too

In March, Southwest made headlines as its spat with its mechanics union resulted in canceled flights across the country. The airline alleged the union was deliberately slowing down work to force the cancellations, while the union hit back accusing the carrier of scapegoating. A final vote is pending on a new agreement, which should be finalised within two months.

But despite its pre-earnings forecast revision and the union spat, Wall Street remains fairly bullish on Southwest’s outlook going forward.

Of the 23 analysts polled by Bloomberg, 12 remain buy-rated on the stock, with 10 recommending hold, and two advising clients to sell. Raymond James, whose unchanged $US60 price target is still well above the Wall Street average of $US51, is the first notable downgrade following the 737 Max’s grounding.

Shares of Southwest fell another 2.6% in trading Monday following the downgrade. As the industry prepares to kick off airline earnings on Wednesday with Delta, Raymond James suggests that American and United might be smarter plays for investors looking for less 737 Max risk.

“The grounding of the MAX fleet is likely to lower domestic capacity by ~1-1.5 ppts during the period in question, which could bode well for domestic industry fares primarily in the off-peak periods where there appears to be an oversupply,” Syth said. “Additionally, given the relatively low exposure to the MAX at American and United, we believe there is less (but not zero) downside earnings risk.”

More on Boeing’s 737 Max crisis:

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