Southwest stock trails top peers as a key strategic change backfires

Southwest Airlines stock price has plunged harder than its American peers during the ongoing Iran war as a key strategy decision made last year backfired.

LUV has dropped by 25.3% in the last 30 days, while Delta, United Airlines, and American Airlines have slumped by 2%, 17%, and 21%, respectively.

LUV stock vs United Airlines, Delta, and American Airlines

Southwest stock price crashes as hedging strategy backfires

The LUV stock price has been pummeled harder than other airlines this year because of a decision the management made mid last year as it executed its turnaround strategy.

The management decided to give up its fuel hedging strategy, citing its high costs and the fact that it was not beneficial for years. 

Hedging acts as an insurance policy against unexpected spikes in fuel prices.

In most cases, this hedging sets a ceiling on their fuel, a move that often insulates them from market volatility.

The company spent over $174 million in the previous financial year, up by 30% from a year earlier. At the time, the management said that:

“The discontinuation of our fuel hedging program is another step along our path to transforming our business. This change will result in significant savings in hedge premiums as we move forward.”

Therefore, the company is facing many challenges compared to other American airline companies, which ended their hedging strategies over a decade ago. 

Data shows that jet fuel prices have surged during the ongoing Iran war.

According to IATA, the average jet fuel price has jumped by 105% in the last 30 days.

In North America, where Southwest does most of its business, it has jumped by 81% in the same period.

As a result, the company has been forced to hike prices and, in some instances, issue fuel surcharges to address the soaring fuel prices.

On the positive side, the ongoing oil shock may push more American customers to move to Southwest, a company whose fares are often cheaper than those of its rivals like Delta, United, and American.

The most recent results showed that Southwest brought in over $7.4 billion in fourth-quarter revenue, which brought its full-year figure to over $28.1 billion.

Its net income rose to $323 million and $441 million, respectively.

The company also continued to return cash to its investors. It returned $2.9 billion to shareholders through buybacks and dividends.

Before the ongoing war, analysts were expecting that the company’s revenue and earnings would continue growing in the coming weeks.

The average estimate is that its revenue will rise by 12% this quarter to over $7.21 billion, while its annual figure will be $31.6 billion, up by 13% YoY.

LUV stock price technical analysis 

Southwest stock chart | Source: TradingView 

The weekly timeframe chart shows that the LUV stock price bottomed at $20.7 on October 30th 2023 and then rebounded to a high of $54 earlier this year.

It has suffered a harsh reversal, falling in the last seven consecutive weeks as investors focus on the soaring jet fuel prices.

It has dropped below the 50% Fibonacci Retracement level at $37.8.

The stock has dropped below all moving averages and the Major S&R pivot point of the Murrey Math Lines tool.

It has also slumped below the 50-week Exponential Moving Average (EMA).

Therefore, the stock will likely continue falling in the near term, possibly to the 61.8% retracement level at $33.87. 

It will then bounce back faster than its peers when the war ends, a move that will lead to lower prices.