Due to the unprecedented novel coronavirus pandemic and resultant governmental response, all industries suffered. However, few sectors absorbed the kind of damage that the air travel industry did. Even fiscally stable entities like Southwest Airlines (NYSE:LUV) were not safe from the fallout. Worse yet, what was once perceived to be a break in Covid-19 infections has turned into a nightmare, leaving LUV stock hanging in no-man’s-land.
If that wasn’t enough pressure, consider that Southwest is scheduled to release its second quarter of 2020 earnings report on Thursday, July 23, before the opening bell. On paper, covering analysts expect the company to deliver an earnings per share loss of $2.66. Individual estimates range from a loss of $3.75 to a loss of $1.30 per share.
In the year-ago quarter — and without the specter of a debilitating pandemic — Southwest delivered an EPS of $1.37 against a target of $1.34. However, the disappointment isn’t unexpected. For the period covering Q2, U.S. air passenger volume averaged only 11% from 2019 levels. Thus, you shouldn’t expect LUV stock to move much based on EPS alone.
The same goes for the revenue front. Analysts expect Southwest to ring up $930.3 million. Estimates were all over the map, ranging from $429.6 million to $1.8 billion. For context, the company generated $5.9 billion in Q2 2019. Therefore, whatever number is produced, it will look comparatively ugly.
So no, don’t expect any “paper” fireworks from LUV stock. Instead, Wall Street is seeking answers, notably solidifying expectations for the rest of the year. If management produces a credible story, shares might swing higher as a reactionary move.
But the more I dive into the details for airliners, the less optimistic I become.
Mixed Messaging May Come Back to Bite LUV Stock
On June 4, most if not all airline stocks jumped substantially higher. On that day, American Airlines (NASDAQ:AAL) announced that they intended to add back more domestic and international flights. Based on its analysis at the time, management felt confident in consumer trends.
According to Vasu Raja, American’s senior vice president of network strategy, “We’re seeing a slow but steady rise in domestic demand … After a careful review of data, we’ve built a July schedule to match.” Over the next few weeks, other airliners made similar encouraging statements, including Southwest in its “WOW Fall Fare” sale.
This collective industry message sent a clear signal that the American consumer was ready to get back in the air. As well, this implied that the economy was on the right track. So far, so good for LUV stock.
Suddenly, the narrative abruptly reversed. Last week, American warned its employees that the company may be overstaffed by more than 20,000 workers this fall. The only reason that management isn’t getting out the axe now is due to the terms of the federal payroll support it accepted. This prevents carriers from laying off workers until Oct. 1.
But it’s not just American Airlines. Southwest stated that it needed passenger volume to triple by year’s end to prevent layoffs. Between July 6 to July 16, volume is only 26% of 2019 levels.
Granted, what has led to this abrupt change of heart is the escalating Covid-19 crisis. Obviously, this is not an easy matter to predict. However, Americans are getting tired of the mixed and contradictory messaging.
First, we shouldn’t wear masks. Then, it turned out we should to flatten the curve. And when we did just that, we could go fly. Except now, we can’t.
Airliners Are a Hot Mess
If you thought the airline messaging was confusing for the passenger, imagine what it’s like trying to navigate LUV stock as a Wall Street fund manager. With the coronavirus throwing one curveball after another, it’s extremely difficult to decipher the best approach.
That said, if I’m reading correctly between the lines, the outlook for LUV stock is more negative than positive. Since the first days when the infection curve was noticeably flattening, Americans were more concerned about their health than about reopening the economy. About a month later, that sentiment hasn’t changed.
True, most folks are worried about the economy. But they believe the top priority should be controlling the virus’ spread. That was in late May/early June. Particularly, this has been the case for communities of color, which have been disproportionately impacted.
Today, everyone is watching case numbers reach astonishing daily records. Tacked onto this dumpster fire is the airline industry implicitly warning that demand is nowhere near its prior projections. Essentially, both the government and the business world badly underestimated the coronavirus. And that ultimately puts LUV stock in a bad way.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
