“We are moving the rating of LUV to Buy from Neutral as we see a clearer path for domestic travel recovery (weekly domestic traffic down 83% from 94% 3 weeks ago) and have started to see enough evidence of LUV’s cash burn reduction that some of the tail risk is removed and 2Q exit load factors of 40% would be part encouraging,” UBS stated in a note.
“Moreover, unlike many other airlines, the balance sheet position of LUV is remarkably clean, which provides protection from any step backward in demand under another wave of COVID-19.”
Let’s have a look.
Southwest’s Balance Sheet and Cash Burn
According to the company’s May 19 8-k, it expects a second-quarter cash burn of $32.5 million per day at the midpoint. When you add in net revenue, the number drops to $25 million. In June, it sees the cash burn dropping to the low $20s.
As its 8-k states, “ [these] estimates exclude proceeds from financing transactions and the Payroll Support Program (PSP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).”
If you include $205 million in proceeds remaining on its sale-leaseback and $1.6 billion from the PSP, Southwest has approximately $14.8 billion in cash and short-term investments on the asset side of its balance sheet, good for 20 months liquidity.
As UBS said, that’s pretty darn good.
What About the Rest?
I’ll quickly run through the other three airlines in order of their market capitalization.
Delta: In April, Delta said its cash burn was $100 million, but it’s expected to drop to $50 million by the end of June, and hopefully to zero by the end of the year.
According to Morningstar, Delta finished the first quarter with $22.97 billion in total debt and $5.97 billion in cash for net debt of $17.0 billion. Delta said April 22 that it expected to end the second quarter with $10 billion in total liquidity, which includes $1.5 billion in senior secured notes it intends to issue and $1.5 billion from a term loan due in 2023.
At a cash burn of $50 million a day, it’s got about seven months liquidity. However, Delta expects to lower that in the second half of the year.
United: InvestorPlace’s Muslim Farooque recently discussed United’s liquidity position, stating that it had $9.6 billion in cash and undrawn credit facilities available to it. It expects to burn $42.5 million per day in the months of April through June. If it continues on this path, it looks like it has close to eight months of liquidity.
According to Morningstar, United had $23.4 billion in total debt at the end of the first quarter, with $5.2 billion in cash. Using the $9.6-billion figure, it has net debt of $13.8 billion.
American: In the first quarter, American was able to reduce its daily cash burn from $70 million to $50 million per day. Add in the federal assistance, and that number drops to $27.5 million without taking into account any uptick in the number of passengers.
On May 28, American announced that it would cut 30% of its management and support staff, which amounts to 5,100 job cuts. In addition, it is encouraging staff approaching retirement to consider leaving early as it restructures its overhead for the new normal.
At the end of the first quarter, American had $6.8 billion in liquidity. The $10.6 billion in federal aid will certainly help. However, if you add $6.5 billion in debt it got from the government to the $34.1 billion in total debt at the end of the first quarter, you’re looking at a net debt of $19.9 billion based on $14.2 billion in cash [$10.6 billion from the federal government and $3.6 billion on the balance sheet at the end of the quarter].
The Bottom Line on LUV Stock
Looking at the financial situations of all four airlines, I would have to agree with UBS. Southwest’s financial picture does appear to be the strongest.
And let’s not forget something else. Unless people’s attitudes change drastically over the next few months, Southwest has the least to lose from the cancellation of long, overseas trips due to not wanting to wear a mask for six to 10 hours.
I’m still leery about airline investments, but Southwest’s appears to make the greatest sense.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.