Question

Please read the following article, then answer the question below.

Airline Stocks Are Slipping Because 'Storm Clouds Are Starting'
by Teresa Rivas

American Airlines Group, Alaska Air Group, Hawaiian Holdings, and Spirit Airlines stock are all lower in Monday morning trading, following downgrades from Macquarie, which warns that a market share push by Southwest Airlines could spell trouble for rivals.

The back story. Airline earnings have been a bit of a mixed bag this season, with aircraft groundings adding extra complexity to the companies’ outlooks. Yet most of the stocks in the group haven’t been able to quite keep up with the S&P 500’s 2019 rally, which stood at almost 20% as of Friday’s close.

What’s new. On Monday, Macquarie analyst Susan Donofrio took a look at the airline industry following the second-quarter earnings season (only Hawaiian (ticker: HA), due to report Tuesday, has yet to release results), and warns that she sees the competitive environment getting choppier, offsetting some of the benefits of ongoing strong demand.

“We believe storm clouds are starting to form over the group as Southwest, unhappy with what management sees as lost market share in parts of their system, has recently made it clear that they plan on focusing and re-capturing what they lost,” she writes. “As a result, we see a sloppier fall and early 2020 than previously expected as for the pricing environment for the group and are cooling on most airline stocks.”

Looking ahead. Donofrio’s rationale isn’t surprising: Last week Southwest shares flip-flopped following earnings, as investors digested the implications of prolonged delays related to the grounded Boeing (BA) and the company’s decision to pull out of Newark Liberty International airport. Southwest (LUV) is known for its savvy and driven management team, and while the Boeing situation is out of its control, it’s quite feasible that the company would be aggressively looking to make up the difference elsewhere, and new routes like Hawaii have long been speculated about in terms of price cuts.

Given that she believes Southwest’s push will dampen pricing power in the domestic market where it’s most powerful, she downgraded American (AAL), Alaska (ALK), Hawaiian, and Spirit (SAVE) to Neutral from Outperform, with price targets of $34, $63, $29, and $47, respectively.

That said, she still has three Outperform ratings in the sector: Allegiant (ALGT),Delta Air Lines (DAL), and United Airlines Holdings (UAL). These “form the trifecta of being quality companies where we think that ongoing revenue initiatives (in the case of United and Delta) or minimal competitive route overlap (roughly 75% of Allegiant’s routes face no competition) are likely to lead to stock price outperformance.”

Airline Stocks Are Slipping Because 'Storm Clouds Are Starting'Teresa RivasBarron'sJuly 29,2019© 2019 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License number: 4819070975338

Part 1 (1 point) 

According to the article, what is the most likely way that Southwest will "push" to increase its market share? 

Choose one: 

A. flying its routes faster even though it costs more in fuel 

B. offering more in-flight entertainment 

C. cutting prices on flights 

D. improving the friendliness of the ground and air crews 

Part 2 (1 point) 

How is Hawaiian Airlines, a direct competitor on these routes, likely to respond to Southwest's action? 

Choose one: 

A. advertise more 

B. increase its in-flight entertainment options 

C. buy bigger planes 

D. cut its prices

Answer 1

Part 1. (C) cutting prices on flights ; "minimal competetive route overlap" ; along with "they downgraded to neutral from outperform with price targets" proves that pushing down the prices or cutting them will help Southwest to gain market share

Part 2. (D) cut it's prices ; "Hawaii has long been speculated about in terms of price cut" on these routes Hawaii is also planning on the price cut strategy as opted by Southwest making it a direct competitor.

Sir/Mam kindly please rate the answer and do feel free to ask in case of any doubt