The COVID-19 pandemic dealt a severe blow to the demand for air travel and the industry faced an uncertain future. The impact was so intense that many airlines had to lay off staff to reduce costs. Although the economy is recovering gradually, the demand for air travel could remain low as the work-from-home trend continues and people continue doing business from their homes and avoiding business travel.

With the reports of the new coronavirus variant, omicron, surfacing recently, the airline industry is again expected to suffer as nations revise travel entry rules and implement border restrictions. According to a Kyodo news report, the global airline industry is expected to remain unprofitable in 2022 with a combined net loss of $12 billion, because travel demand will remain subdued at below pre-pandemic levels.

Against this backdrop, we think it could be wise to avoid airline stocks Southwest Airlines Co. (LUV) and Mesa Air Group, Inc. (MESA) because they have poor growth prospects and their valuations look stretched at their current price levels. Furthermore, they have been downgraded recently by analysts.

Southwest Airlines Co. (LUV)

Dallas, Tex.-based LUV is a passenger airline that provides scheduled air transportation in the U.S. and internationally. The company provides in-flight entertainment and connectivity services on Wi-Fi-enabled aircraft. In addition, it provides a suite of digital platforms, such as its website called Southwest.com, mobile apps, and SWABIZ. The Goldman Sachs Group, Inc. (GS) recently downgraded the stock’s rating from ‘Neutral’ to ‘Sell.’

On December 8, 2021, LUV’s management said that its rising costs were a cause for  concern because they may hamper its margin targets. The adjusted nonfuel unit costs for 2022 are expected to increase 8% – 12% beyond its 2019 costs.

LUV’s operating revenue for the fiscal third quarter, ended September 30, 2021, came in at $4.67 billion compared to $5.63 billion in the third quarter of fiscal 2019. The company’s operating expenses increased 23.1% year-over-year to $3.94 billion. Also, its non-GAAP fuel and oil expense, excluding special items (economic), increased 154% year-over-year to $1 billion.

In terms of forward P/E, LUX’s 29.38x is higher than the 22.81x industry average. Over the past nine months, the stock has declined  28.2% in price to close Friday’s trading session at $41.97.

LUV’s weak fundamentals are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

LUV has a D grade for Momentum, Stability, and Sentiment. It is ranked #5 out of the 31 stocks in the F-rated Airlines industry. To see the other ratings of LUV (Growth, Value, and Quality), click here.

Mesa Air Group, Inc. (MESA)

MESA is the holding company for Mesa Airlines, Inc., which provides regional air carrier services under capacity agreements with American Airlines and United Airlines. It also undertakes the leasing of aircraft to third parties. The Phoenix, Ariz.-based company had a fleet of 167 aircraft as of September 30, 2021. Deutsche Bank AG (DB) recently downgraded the stock’s rating to ‘Hold’ from ‘Buy.’

For its fiscal fourth quarter, ended September 30, 2021, MESA’s adjusted net loss came in at $2.14 million compared to $11.37 million in  net income in the year-ago period. The company’s adjusted EBITDA has decreased 42.1% year-over-year to $25.84 million. And its  EPS came in at $0.21 compared to $0.32 in the year-ago period.

In terms of forward non-GAAP P/E, MESA’s 24.81x is higher than the 20.79x industry average. Analysts expect MESA’s EPS for the quarter ending December 31, 2021, to decrease 41.7% year-over-year to $0.21. The stock has declined 65.5% in price  over the past nine months to close Friday’s trading session at $5.72.

MESA’s POWR Ratings reflect these bleak prospects. It has a D grade for Momentum, Stability, and Sentiment. It is ranked #3 in the F-rated Airlines industry. Click here to see the other ratings of MESA for Value, Growth, and Quality.

LUV shares were trading at $40.68 per share on Monday morning, down $1.29 (-3.07%). Year-to-date, LUV has declined -12.72%, versus a 26.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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