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Southwest Airlines’ Q1 Losses Were Lower than Expected, Stock Rose 2%

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Southwest Airlines (NYSE:LUV) reported its results for the first quarter of fiscal 2020 on April 28. As expected, the airline reported a loss in the quarter. However, the loss was lower than analysts’ expectations. The revenue decline wasn’t a surprise. The airline sector has seen a major decline in air travel demand due to the COVID-19 pandemic. Southwest Airlines stock closed 2% higher on Tuesday. We’ll discuss what happened in the first quarter and the outlook for 2020.

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Southwest Airlines’ revenue took a hit

Southwest Airlines reported revenue of $4.2 billion—a decline of 17.7% YoY (year-over-year). The revenue was lower than analysts’ estimate of $4.4 billion. The airlines stated that a sharp decline in bookings and cancellations since February impacted the revenue. The net loss for the first quarter was $77 million or $0.15 per share. The losses were lower than analysts’ estimates of $0.41 per share.

As noted in the press release, Southwest’s operating revenue per available seat mile declined 11.8% to $0.11 in the first quarter due to a decrease in the load factor. The company saw the load factor fall to 46.6% in March 2020 compared to 85.7% in March 2019.

The load factor measures the available seating capacity in an airplane that’s filled with passengers. A higher load factor reveals full capacity and higher profitability. A declining load factor doesn’t paint a pretty picture. However, the lower load factor is obvious given the current scenario.

The company saw a 6.5% decline in its operating expenses YoY to $4.3 billion. The recent market decline in fuel prices helped Southwest lower its first-quarter 2020 fuel and oil expense by $80 million. Delta Air Lines also reported lower revenues and higher losses in the first quarter.

Southwest returned $639 million to shareholders as dividends and share repurchases in the quarter. However, the company suspended any dividends and share repurchases in the near future until it has a better picture of where it stands.

Short-term outlook

Southwest Airlines expects its revenue to be lower until May 2020. The company expects the load factor to decline to 6% in April. Meanwhile, the load factor could be 5%–10% in May.

In April, airlines expect the operating revenues to be lower by 90%–95% YoY. In May, the revenue could decline approximately in the same range. Beyond May, airlines said that it’s hard to predict how things will turn out. The sector expects the turbulence to continue in the second quarter of fiscal 2020. Southwest clearly stated that the financial impact in the second quarter could be higher than in the first quarter. Due to uncertainty amid the pandemic, airlines weren’t able to provide any guidance for fiscal 2020.

Southwest also announced that capacity reductions and the MAX grounding could increase its cost pressure in the second quarter. The company continues to work with Boeing to safely reintroduce the 34 MAX 8 aircraft that it has in its fleet. However, the timing will vary.

As of April 24, Southwest has $6.8 billion as cash-on-hand. As I discussed earlier, airlines expect to receive more than $3.3 billion in financial aid under the CARES Act as part of the agreement with the US Treasury.

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Analysts’ view

Currently, 17 analysts cover Southwest Airlines stock—lower than 18 analysts before the earnings. Among the analysts, ten recommend a “hold,” two recommend a “strong-buy,” four recommend a “buy,” and one recommends a “sell.” Surprisingly, analysts increased the average target price for the stock to $43.13 from $43.06 before the earnings. The target price depicts an upside potential of 45% for the stock as of the closing price on April 28. The stock closed 1.9% higher at $29.69 on Tuesday. After the earnings, J.P. Morgan cut the target price for the stock to $34 from $36.

Despite the losses, Southwest stock gained 2% on Tuesday. Surprisingly, most of the airline stocks gained yesterday. The slightest hope that the airline industry’s situation isn’t as bad as expected uplifted the stocks. Most of the airline companies have received financial aid under the Payroll Support program of the CARES Act. The sector should survive the COVID-19 storm despite ongoing losses.

On Tuesday, United Airlines (NYSE:UAL) gained 11.3%, JetBlue Airways (NASDAQ:JBLU) gained 11.0%, and Delta Air Lines (NYSE:DAL) gained 9.8%. American Airlines (NASDAQ:AAL) is also trading 12.3% higher before its earnings release. The company will likely release its first-quarter results on Thursday.

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