Is Southwest Airlines Stock a Buy?


Nov. 4 2020, Updated 3:24 a.m. ET

Airline stocks are one of the worst-affected groups of stocks due to the ongoing COVID-19 pandemic. Will they recover anytime soon? Is Southwest Airlines a buy?

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When was Southwest Airlines founded?

Southwest Airlines is a leading low-cost U.S. airline. The company was founded in March 1967. When Southwest Airlines started operations, it had three Boeing 737 aircraft, which served Texas cities. The airline debuted on public markets in 1971 by starting trading on the NYSE under the ticker "LUV." Southwest Airlines launched its international operations in July 2014 after acquiring AirTran Airways in 2011. 

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What does Southwest Airlines offer passengers?

Southwest Airlines is the world’s largest low-cost carrier. It's a pioneer in low-cost travel. The company bought down airfares through its short route point-to-point business model, productive employees, single flight strategy, and “no-frills” service. Compared to its peers like Delta Air Lines and American Airlines, Southwest offers the lowest-prices fares. 

The company's operational efficiency and logistics were the key differentiators that helped it lower the costs. Southwest Airlines has a few aircraft types and serves smaller airports. If a customer can find a lower-priced fare for the same route and time, Southwest Airlines matches the price. 

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Southwest’s change and cancellation policies are also very generous compared to its peers. The company allows customers to cancel tickets up to 30 minutes prior to a flight’s departure. The funds from non-refundable fares are available as travel funds, which can be used for a future trip. These flexible policies have earned the company a loyal customer base. Also, Southwest Airlines was among the first airlines to offer its customers a website, online booking, and direct discounts and coupons. 

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Southwest offers the Rapid Rewards frequent flyer program, which is also one of the better rewards programs in the industry. The points get accrued by flying, dining with its partners, shopping, and with Southwest Rapid Rewards credit card. Customers can use points to buy future flights.

How has Southwest Airlines stock trended amid the COVID-19 pandemic?

The COVID-19 pandemic has taken a toll on the travel and tourism industry. Business and international travel have been especially hit hard, which has negatively impacted most airlines including Southwest Airlines. Southwest Airlines stock hit its lowest point in 2020 on May 15 when it traded at $23.87. Since then, the stock price has continued to trend higher. Year-to-date, the stock has lost 29 percent of its value. 

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Due to the coronavirus pandemic, Southwest was forced to cancel almost 1,500 flights per day. The company also suspended international travel on March 22. Recently, the company announced that it won’t keep the middle seat empty starting Dec. 1. In August, Southwest said that the improved leisure demand for August and September should cut its losses.

Does Southwest Airlines pay dividends?

In April 2020, Southwest Airlines, like many airlines, suspended its dividends until further notice due to the negative fallout from the coronavirus pandemic. Before Southwest suspended its dividends, it had paid dividends since 1976. On Jan. 29, the company declared its 174th consecutive quarterly dividend. Southwest's last dividend payment was on March 25, when it paid a dividend of $0.18 per share. 

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Did Southwest Airlines accept the government bailout?

Southwest Airlines received $3.2 billion in financial aid, which included nearly $1 billion as an unsecured loan from the federal government under the CARES Act. However, the grant can only be used to pay airline employees' salaries and benefits through Sept. 30. Similar to other airlines accepting the bailout, Southwest had to agree to not involuntarily layoff any workers through that date. 

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What is the airline industry's outlook?

According to several airlines, the airline industry is in for a prolonged downturn. The travel demand isn't expected to recover to pre-COVID-19 levels for several years. In July, the IATA (International Air Transport Association) pushed back its estimates for the airline industry's full recovery by a year. The IATA doesn’t expect passenger traffic and revenues to return to last year’s level until 2024. While the cash burn rate for airlines has fallen in the third quarter sequentially, they aren't expected to break-even in the near term.

Should you buy Southwest Airlines stock?

Airlines' fortunes are tied to air travel demand. If the demand doesn’t improve, Southwest will keep burning cash. However, out of the major U.S. airlines, Southwest seems like the most solid bet. First, the airline's cash burn rate has reduced significantly due to a rise in air traffic and cost-cutting. The company expects it to reduce it more. 

Southwest's balance sheet is one of the best in the industry. The company's debt metrics are much better than its peers with a long-term debt-to-EBITDA ratio of close to 0.7x. The ratio is 1.9x for Delta Air Lines, 2.7x for United Airlines, and 4.8x for American Airlines. If the air traffic demand picks up, Southwest should be able to turn profitable faster than its peers.


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