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Southwest (LUV) Q3 Cash Burn View Improves on Rise in Demand

Southwest Airlines Co LUV provided an update on its financial and operational trends. While coronavirus continues to weigh significantly on passenger demand, the airline has been seeing modest improvement in close-in leisure-passenger demand on a month-over-month basis.

Although the improvement in demand experienced in May and June stalled in July following a spike in coronavirus cases in the United States, demand picked up again in August and the uptrend has continued thus far in September.

In August, Southwest’s operating revenues declined 70% year over year, while load factor (percentage of seats filled by passengers) was 42%. Meanwhile, capacity or available seat miles (ASMs) fell 27% year over year last month.

Southwest Airlines Co. Price

Southwest Airlines Co. Price

Southwest Airlines Co. price | Southwest Airlines Co. Quote

For September, operating revenues are anticipated to plunge between 65% and 70%, compared with the previous estimation of a decline in the range of 65-75%. Load factor in the period is estimated in the band of 45-50% (previous expectation: 40-50%). Additionally, ASMs are still predicted to decline 40% year over year.

For October, operating revenues are forecast to drop 65-75% year over year, while load factor is estimated in the band of 45-55%. Additionally, ASMs are expected to decline 40-45% year over year (previous view: down 40-50%).
 
Southwest stated, “Passenger demand and booking trends remain primarily leisure-oriented and inconsistent by region.” To ensure passenger safety, the carrier plans to keep middle seats open through Nov 30, 2020.

The airline maintains its projection for third-quarter capacity at a decline of 30-35% year over year. Meanwhile, economic fuel costs are estimated in the range of $1.20-$1.25 per gallon for the third quarter. Previously, the company expected economic fuel costs between $1.20 and $1.30 in the current quarter. Third-quarter operating expenses, excluding fuel and oil expenses, special items, and profit-sharing expenses, are still anticipated to decline 10-20% year over year.

Southwest’s improving average daily core-cash burn is also encouraging. In August, the airline’s average daily core-cash burn was approximately $19 million. For the third quarter, the metric is expected to be approximately $17 million. The projection has been improved from approximately $20 million expected previously, owing to “continued improvements in close-in leisure demand and booking trends.”

To preserve liquidity, Southwest raised approximately $18.7 billion through various means since the beginning of 2020. As of Sep 15, 2020, the company had cash and short-term investments of approximately $14.8 billion. It also has unencumbered assets worth approximately $12 billion.

Temporary Grounding of 130 Boeing 737-800 Airplanes

Already grappling with coronavirus-led woes, Southwest got into another trouble recently. According to a Reuters report, the airline has temporarily grounded 130 Boeing 737-800 aircraft due to discrepancies in aircraft-weight data.

In a statement, Southwest said, "out of an abundance of caution, we have temporarily ceased flying the respective aircraft to enter the correct weights of the aircraft in question into the system and reset the program."

Although the airline anticipates the temporary grounding of flights to "cause some delays and/or cancellations,” it does not expect much impact on its operations.

Zacks Rank & Key Picks

Southwest carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Transportation sector are Canadian Pacific Railway Limited CP, Landstar System Inc LSTR and Knight-Swift Transportation Holdings Inc KNX. While Canadian Pacific carries a Zacks Rank #2 (Buy), Landstar and Knight-Swift sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Canadian Pacific, Landstar and Knight-Swift have rallied more than 19%, 13% and 17%, respectively, so far this year.

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