Keep Southwest Airlines Grounded for Now

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Southwest Airlines (NYSE:LUV), along with virtually all other airlines, has seen its bookings fall out of bed. But it’s all about what happens in the second half for LUV stock. Without a pickup in travel, the company and the stock won’t rebound.

LUV stock: Keep Southwest Airlines Grounded for Now

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After all, Southwest Airlines extended its flight capacity adjustments past June 5 to June 27. Southwest is cutting nearly 50% of flights — roughly 2,000 a day — from its network in June.

The Coronavirus Impact on Revenue, Profits and LUV Stock

These cuts can’t be good for revenue. So far we don’t know exactly how bad the airline has been hit. This 50% reduction for both the first and second quarters is likely to be devastating to its earnings.

The company comes out with its first-quarter earnings on April 23. LUV has had 47 years of never-ending profits. Depending on how well the second half goes, this might end up being the first year it books a loss.

There is ample evidence that might be the case. So, Southwest has drawn down $3.33 billion in credit lines. It has applied for its portion of the $25 billion in industry grants for payroll that the Treasury is handing out.

Assuming revenue is down 50% in the first half, we can estimate that revenue will be just $6.5 billion. Fuel costs last year were 20.7%. But the problem is that its salaries and wages were $8.293 billion in 2019. Half of that is $4.15 billion. This represents 64% of its expected revenue.

So you can see, this leaves very little room for profits. If you add in landing fees, depreciation and other expenses, there is likely very little possibility of LUV stock making profits. That is unless it dramatically cuts its payroll costs.

Problems With the Stimulus Assistance

But that does not seem likely. Especially now that it expects to receive grants to keep its payroll even. But that is the rub. The airlines don’t like strings that prevent them from cutting costs.

On April 12, 2020, the Wall Street Journal reported that Treasury Secretary Steven Mnuchin told chief executives of the largest airlines Friday that 30% of that money is to be repaid. He also said they will need to offer stock warrants on about 10% of the loan amount. The government could convert to shares later.

The WSJ also reported that unions were worried that requiring some of the funds to be repaid could lead to layoffs. Loans would burden airlines with more debt, making their path to recovery more uncertain.

This is exactly the point that I made above about the necessity for layoffs in order to stay profitable. If the loans convert 100% into grants, the airlines can afford to keep their payrolls. This assumes that business picks up dramatically in the second half.

But if not, when the prohibition on firing is up in October or thereafter, you can be sure there will be cuts across all the airlines, including Southwest Airlines.

What Will Happen With Airline Travel?

One piece of good news is that Southwest has decided to offer cargo-only flights. This is the first time in its 48 year history that it has done this.

Bloomberg reported that, unlike other larger carriers, Southwest will confine freight to the bellies of its Boeing Co. 737 aircraft instead of converting planes for cargo.

That will help with revenue a bit. But there could be more fundamental problems in the second half of 2020 and in 2021.

For example, what if people are still scared to travel on airplanes in the second half? That will not bode well for LUV stock. Earnings will be barely profitable in that case, if at all.

The problem is there is no way to tell what will happen. I suspect that it will take a number of quarters for the general public to return to their normal traveling habits.

But there are two sides to this question. As The Guardian newspaper recently pointed out, there could be a huge increase in travel from pent-up demand. On the other hand, people might begin to question the need to travel. Society and businesses may begin to re-evaluate whether the travel habit is worth it.

What to Do With Southwest?

Investors should probably wait to see on April 23 how bad the first-quarter earnings will be. In addition, the company is likely to have a better handle on its second-half 2020 outlook.

Moreover, the issues with the bail-out package from the U.S. Treasury may have been cleared up by then. Investors should consider these points before investing in LUV stock.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/luv-stock-depends-second-half-bookings/.

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