A month has gone by since the last earnings report for Southwest Airlines (LUV). Shares have added about 5.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Southwest due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Wider Than Expected Loss in Q2
Southwest Airlines incurred loss of $2.67 per share (excluding $1.04 from non-recurring items) in the second quarter of 2020, wider than the Zacks Consensus Estimate of a loss of $2.53. In the year-ago period, the company had reported earnings of $1.37 per share. Similar to the first quarter, second-quarter results reflect the coronavirus-induced drop in passenger demand.
Meanwhile, operating revenues of $1,008 million beat the Zacks Consensus Estimate of $868.9 million. The top line declined 82.9% year over year, with passenger revenues accounting for bulk (69.8%) of the top line, sliding 87.2%.
Airline traffic, measured in revenue passenger miles, declined 83.7% year over year to 5.61 billion in the quarter under review. With reduced passenger demand as a result of the coronavirus pandemic, capacity or available seat miles (“ASMs”) fell 55.3% to 17.89 billion. Load factor (percentage of seats filled by passengers) came in at 31.4%, down 5500 basis points on a year-over-year basis as the decline in traffic was wider than the capacity contraction.
Passenger revenue per available seat mile (“PRASM”: a key measure of unit revenues) dropped 71.3% to 3.94 cents. Moreover, revenue per available seat mile (“RASM”) declined 61.9% year over year to 5.63 cents, owing to decline in load factor and passenger revenue yield.
Operating Expenses & Income
In the second quarter, operating loss totaled $1,127 million against operating income of $968 million in the year-ago quarter. Total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expense) dropped 20.7%, thanks to the company’s cost-cutting measures and reduction in salaries, wages and benefits among other expenses.
Fuel costs per gallon (inclusive of fuel tax: economic) was down 37.6% to $1.33. However, consolidated unit cost or cost per available seat mile (“CASM”) excluding fuel, oil and profit-sharing expenses, and special items, increased 77.3% year over year to 16.12 cents due to significant reduction in capacity.
The company had cash and cash equivalents of $12,351 million at the end of the second quarter, compared with $2,548 million at the end of 2019. As of Jun 30, 2020, the company had long-term debt (less current maturities) of $8,905 million compared with $1,846 million at 2019-end.
Spike in COVID-19 cases in some parts of the United States has dampened the modest improvement in demand which Southwest witnessed in May and June. With bookings having decreased and trip cancellations slightly increased, Southwest anticipates operating revenues to plunge 70-75% year over year in July. In the same period, capacity is estimated to decline approximately 30% year over year, while load factor is expected in the band of 40-45%. For August, operating revenues are anticipated to decrease 70-80% year over year. The company predicts capacity to decline approximately 20% year over year next month, while load factor is estimated in the range of 30-40%.
For the third quarter, Southwest anticipates economic fuel costs between $1.2 and $1.3 per gallon. This compares with fuel costs of $2.07 per gallon in the third quarter of 2019. The company expects to record a charge of $540 million in the third quarter related to voluntary-separation charges for employees. An additional charge of more than $800 million is also estimated regarding a similar voluntary program for employees.
During the third quarter, operating expenses, excluding fuel and oil expense, special items, and profit-sharing expense, are estimated to decrease 10-20% year over year. Capacity is estimated to decrease 20-30% year over year in the third quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -96% due to these changes.
At this time, Southwest has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Southwest has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.