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Southwest Airlines’ Latest Gambit: Unloading Its Employees. Why Wall Street Is Bullish.

Southwest Airlines is offering what it calls “the most generous” buyout packages in its history to ensure the company’s survival, according to a memo sent to employees. Investors are bidding up the stock, along with shares of other airlines, as carriers continue to see a slow recovery in travel and cut costs to regain profitability.

Southwest (ticker: LUV) is offering employees with more than 10 years of service one year of pay and flight privileges if they take an early retirement package. Pilots would get a separate buyout package. The airline has now received $2.3 billion in payroll support under the federal Cares Act program, covering 70% of its payroll costs through Sept. 30, when the program expires.

Shares of Southwest were up about 3% in trading Tuesday, amid a broader rally in airline stocks. The NYSE Arca Airline Index was ahead 2.2%.

Analysts appear increasingly confident that air traffic has bottomed and is on a path to recovery—albeit one without precedent. Most airlines have slashed flight capacity by at least 75%, aiming to reduce their daily cash-burn rates. Airlines have parked roughly two thirds of their fleets, and they have permanently retired some of the biggest planes. Delta Air Lines (DAL) said recently that it was retiring its entire fleet of Boeing 777 jumbo jets, for instance.

”We have moved well past the point of no return with respect to Covid-19 and its potential to have an enduring, multiyear impact on the commercial aviation industry,” Credit Suisse analysts wrote in a report out Tuesday.

Airlines are now cutting labor costs to restore profitability at far lower revenue levels. Last week, American Airlines Group (AAL) said it would cut management and support staff by 30%. Delta also offered more buyout packages.

The good news is that passenger traffic appears to be inching back. Cowen analyst Helane Becker notes that U.S. passenger traffic has picked up about 10 percentage points off its lows on April 16. The seven-day moving average is now down 87% from a year ago, an improvement from declines of more than 93%, and traffic trends continue to show modest improvements, she wrote in a note published Tuesday.

“We expect trends to continue to improve as states ease stay at home restrictions and leisure activities resume,” Becker writes. Her top picks are Southwest, Spirit Airlines (SAVE), and Delta. Barron’s has written favorably about all three stocks.

UBS analyst Myles Walton also sees traffic improving, particularly for domestic travel. “Overall, the data reinforces confidence in the U.S. domestic led travel recovery,” he wrote in a note out Tuesday.

Citigroup analyst Stephen Trent writes that investors are shifting from concerns about liquidity and solvency to the shape of a recovery. July passenger revenue will still be down 65% to 70% year-over-year for each carrier, he wrote in a note published Monday, but “the improving trend is consistent with Citi’s thesis that the ferocity of the declines should start moderating in 3Q.”

Trent notes that Southwest has some of the strongest price momentum, a technical factor that can indicate more gains in the stock. But the stock is looking more crowded as investors pile in, and stocks with less crowding may have more upside.

Delta and Spirit “have only begun to look marginally more crowded, relative to Buy-rated United [UAL] and Sell-rated American—but shares of all four carriers lacked momentum,” Trent writes. “As the sector potentially rallies in anticipation of a 2H demand recovery, it is conceivable that shares that are more under-owned could see the greatest potential rally.”

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