Southwest Airlines, Investors Duped

Southwest Airlines Co. investors were duped for a second straight quarter, as the air carrier’s stock suffered another sharp post-earnings selloff on the heels of a big pre-earnings surge.

The stock LUV, -8.46% plunged as much as 12% intraday Wednesday, before paring some losses. Volume spiked to nearly 44 million shares, which was more than five times the full-day average. Southwest reported ahead of the open third-quarter earnings that beat expectations, but provided a downbeat outlook for revenue per available seat mile, a key metric for the airline industry.

Before the reported results, the stock had shot up 14% over the past month.

Helane Becker of Cowen & Co. said she would not be surprised if some investors gave up on the stock, as she wrote in a note to clients that, “again, Southwest is the only carrier to report that it is increasing capacity” from the previous quarter.

Based on the saying that starts, “Fool me once...,” investors should feel shamed, because the same thing happened surrounding second-quarter results.

The stock had run up 14% in the three weeks before the report, then plunged 11% on July 21, the biggest percentage loss in 7 1/2 years, the day of the report following — as one may have guessed — a downbeat outlook for unit revenue.

As the chart above shows, the stock’s pre-results rally was in line with the broader airport sector, as investors were encouraged by the overall industry trend of reducing capacity to improve unit revenue. But investors don’t usually need three strikes to see that one company isn’t keeping up.

The stock has shed 16% over the past six months, while the NYSE Arca Airline Index XAL, -1.85% has climbed 5.2% and the S&P 500 index SPX, -0.17% has gained 2.1%.

“Southwest is the only airline to report that it is seeing no sequential improvement in unit revenue performance,” Becker wrote. She said Southwest’s outlook is even more concerning, considering the performance would still fall short even if the lost revenue from the technology outage in July was added back in.

And if the trouble the company has been having with its labor unions persists, Becker thinks the outlook could get even worse.