The chart of Southwest Air (NYSE:LUV) looks like a disaster until you compare it with those of other airlines. Since the start of the year LUV stock is down by 35%. It opens for trade March 20 at a little more than $30. One month ago, it cost $57.
The other airlines have fared much, much worse. Delta Airlines (NYSE:DAL) and American Airlines (NYSE:AAL) are both down 60%. United Air Holdings (NYSE:UAL) has lost 75% of its value.
The difference is cash. At the end of 2019 Southwest had $4 billion in cash and short-term notes on its books. Its long-term debt was just $1.8 billion. With most flights grounded due to Coronavirus and employees who need to be paid, that’s a huge advantage.
Conservative in the Best Possible Way
While known for innovative uniforms and flight maps, Southwest is also conservative in the best possible way.
A Trefis dashboard on the industry shows Southwest needing to retire just $654 million in debt this year, and none in 2021. Delta will owe $3.2 billion over that time, United $2.8 billion, and American ng $6.3 billion. Southwest’s operating lease payments are also much lower than those of its main competitors.
Even if the U.S. airline industry must close for a month, Southwest will survive it. So will its employees. They got the equivalent of six weeks’ pay even after 2019 profits fell.
On March 16 Southwest was already planning on reducing schedules 20%, with load factors already as low as 50%. CEO Gary Kelly is taking a pay cut. He admits this is the biggest challenge the industry has faced since the 9/11 attacks, and that it “might get worse.”
Meanwhile, as customers rush home to self-quarantine, Southwest continues to offer bargain fares as low as $49. Prices haven’t been this low since the aircrew wore hot pants. This could increase the airlines’ goodwill, the kind it gets from re-creating marriage proposals or replacing lost teddy bears.
The Bad News
Not all the news from Southwest is good or even relatively good. Flight attendants are reporting skin rashes and other conditions from their new uniforms. Most of these reports are going to the airline’s union rather than directly to the company. Some customers are complaining publicly about the airline’s cancellation policies.
The airline is still tied to the Boeing (NYSE:BA) 737. It flies no other jet. Customers have been taking advantage of this when flights are rearranged.
A bad report on safety from the Federal Aviation Administration (FAA) is being supported by the company’s mechanics, who say it’s protecting Boeing. The result was that planes flew that hadn’t been proven safe.
The Bottom Line on LUV Stock
While Southwest stock has entered oversold territory it may go lower.
That’s because we’re now in the panic section of the downturn, with traders dumping shares they don’t have to, confident they’ll be able to buy them for less down the road.
This follows last week’s forced selling of leveraged positions and the previous week’s advice to “buy the dip,” which now sounds ridiculous. The capitulation is leaving enormous amounts of cash on the sidelines of the market, waiting for an all-clear signal that has not yet come.
When the all-clear approaches, Southwest will be one of the stocks you’ll want. When Boeing’s problems are solved and the Coronavirus panic has eased, Southwest will be able to take advantage. That’s what it did in previous industry downturns. That’s what it will do this time.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
