Why Southwest Airlines Stock Dived Today

An assertive set of recommendation downgrades of airline stocks by a researcher was a major factor in the decline of Southwest Airlines (NYSE: LUV) stock on Tuesday. Of the four carriers that received a chop, Southwest was one of only two that was demoted to underperform, or sell. With that, the stock's price eroded by 6%, on a day when the S&P 500 index closed up by 0.4%.

Reducing altitude

Jefferies marked the beginning of April with the suite of downgrades, which were detailed in a research note published by the company.

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The note covered the stocks of five airlines, four of which received recommendation downgrades. Southwest and Air Canada were knocked down to underperform, while American Airlines and Delta Airlines were each cut to hold. Only United Airlines was left unchanged, at buy.

According to reports, the researcher expressed concern with weakening domestic travel demand, on the back of declining consumer sentiment and wobbly business confidence. It cited data from the International Air Transport Association indicating that revenue passenger kilometers, a key industry metric, were down by over 4% in February.

Jefferies wrote that it expects Southwest, Air Canada, and American to reduce their earnings guidance, a move that typically results in some degree of sell-off for a stock.

Market correction

Those trends certainly are worrying, but I wouldn't say they're surprising. The travel industry in general has been on the upswing since the fading of the coronavirus pandemic, and inevitably there was going to be a pullback. It's just a question now of how severe and long-lasting this retreat will be, but for the time being maybe it's best to be ultra-cautious about airline stocks.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.