Southwest Airlines (LUV) earnings release for the 2nd quarter of their 2021 fiscal year
Category: Stock Market and SouthWest Airlines (LUV)
Date: 23 July 2021 Stock Price of Southwest Airlines: $51.29 Market Capital of Southwest Airlines: $30.3 billion We take a look at the 2nd quarter earnings report of their 2021 fiscal year of SouthWest Airlines, the airline operator that at its peaks sees more than 4000 weekday departures to 101 destinations across the United States and 10 other countries. For the 2nd quarter of their 2021 fiscal year the group reported $4 billion in revenues and a net loss of $348 million.
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- Gary C. Kelly, Chairman of the Board and Chief Executive Officer -
- Second quarter 2021 marked an important milestone in the pandemic recovery as leisure travel demand surged. We generated net income in June 2021, representing our first monthly profit without taking into account the benefit of temporary salaries and wages cost relief provided by PSP proceeds, since the negative effects of the pandemic began in March 2020. "
About Southwest Airlines
In its 49th year of service, Dallas-based Southwest Airlines Co. (NYSE: LUV) continues to differentiate itself from other air carriers with exemplary Customer Service delivered by more than 60,000 Employees to a Customer base topping 130 million passengers annually. Southwest became the nation’s largest domestic air carrier in 2003 and maintains that ranking based on the U.S. Department of Transportation’s most recent reporting of domestic originating passengers boarded. In peak travel seasons, Southwest operates more than 4,000 weekday departures among a network of 101 destinations in the United States and 10 additional countries.
Southwest coined Transfarency® to describe its purposed philosophy of treating Customers honestly and fairly, and low fares actually staying low. Southwest is the only major U.S. airline to offer bags fly free® to everyone (first and second checked pieces of luggage, size and weight limits apply, some carriers offer free checked bags on select routes or in qualified circumstances), and there are no change fees, though fare differences might apply.
Southwest is committed to returning value to its Shareholders. Since 2010, Southwest has returned more than $11.7 billion to Shareholders through share repurchases and dividends, through September 30, 2019. In the first nine months of 2019, Southwest returned $1.8 billion to Shareholders through the repurchase of $1.45 billion in common stock and the payment of $372 million in dividends.
Southwest coined Transfarency® to describe its purposed philosophy of treating Customers honestly and fairly, and low fares actually staying low. Southwest is the only major U.S. airline to offer bags fly free® to everyone (first and second checked pieces of luggage, size and weight limits apply, some carriers offer free checked bags on select routes or in qualified circumstances), and there are no change fees, though fare differences might apply.
Southwest is committed to returning value to its Shareholders. Since 2010, Southwest has returned more than $11.7 billion to Shareholders through share repurchases and dividends, through September 30, 2019. In the first nine months of 2019, Southwest returned $1.8 billion to Shareholders through the repurchase of $1.45 billion in common stock and the payment of $372 million in dividends.
Overview of Southwest Airlines 2nd quarter 2021 earnings report
- Second quarter net income of $348 million, or $.57 per diluted share, driven by a $724 million offset of salaries, wages, and benefits expenses related to the receipt of Payroll Support Program (PSP) proceeds under the Consolidated Appropriations Act, 2021 and American Rescue Plan Act of 2021
- Excluding special items¹, second quarter net loss of $206 million, or $.35 loss per diluted share
- Second quarter operating revenues of $4.0 billion, down 32.2 percent compared with second quarter 2019
- Generated second quarter operating cash flow of $2.0 billion and free cash flow¹ of $1.9 billion; achieved positive average daily core cash flow² in June
- Ended second quarter with liquidity³ of $17.9 billion, well in excess of debt outstanding of $11.4 billion
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Southwest Airlines' management commentary on their 4th quarter 2020 results
DALLAS, July 22, 2021 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its second quarter 2021 financial results
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "Second quarter 2021 marked an important milestone in the pandemic recovery as leisure travel demand surged. We generated net income in June 2021, representing our first monthly profit without taking into account the benefit of temporary salaries and wages cost relief provided by PSP proceeds, since the negative effects of the pandemic began in March 2020. While the rapid ramp up in June travel demand provided stability to our financial position, it has impacted our operations following a prolonged period of depressed demand due to the pandemic. Therefore, we are intensely focused on improving our operations as we restore our network to meet demand. I am beyond thankful for our People, who are heroes, and whose resiliency, hard work, and unwavering resolve is on display every day. I am pleased for them that we were able to accrue $85 million of profitsharing for our Employees in second quarter 2021, for a total of $109 million in first half 2021.
"Compared to the last four quarters, second quarter 2021 operating revenues significantly improved, decreasing 32.2 percent compared with second quarter 2019. June 2021 operating revenues decreased 20.7 percent, compared with June 2019. Monthly operating revenue trends improved sequentially throughout the quarter. Leisure passenger traffic in June 2021 rebounded above June 2019 levels, while passenger fares were comparable with June 2019. Based on current bookings, leisure passenger traffic and fares in July are expected to trend higher than July 2019 levels. Business revenues continue to lag leisure revenue trends; however, we are encouraged by the improvement in business revenues in second quarter 2021, and we continue to experience steady weekly improvements in business bookings, thus far, in July 2021.
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "Second quarter 2021 marked an important milestone in the pandemic recovery as leisure travel demand surged. We generated net income in June 2021, representing our first monthly profit without taking into account the benefit of temporary salaries and wages cost relief provided by PSP proceeds, since the negative effects of the pandemic began in March 2020. While the rapid ramp up in June travel demand provided stability to our financial position, it has impacted our operations following a prolonged period of depressed demand due to the pandemic. Therefore, we are intensely focused on improving our operations as we restore our network to meet demand. I am beyond thankful for our People, who are heroes, and whose resiliency, hard work, and unwavering resolve is on display every day. I am pleased for them that we were able to accrue $85 million of profitsharing for our Employees in second quarter 2021, for a total of $109 million in first half 2021.
"Compared to the last four quarters, second quarter 2021 operating revenues significantly improved, decreasing 32.2 percent compared with second quarter 2019. June 2021 operating revenues decreased 20.7 percent, compared with June 2019. Monthly operating revenue trends improved sequentially throughout the quarter. Leisure passenger traffic in June 2021 rebounded above June 2019 levels, while passenger fares were comparable with June 2019. Based on current bookings, leisure passenger traffic and fares in July are expected to trend higher than July 2019 levels. Business revenues continue to lag leisure revenue trends; however, we are encouraged by the improvement in business revenues in second quarter 2021, and we continue to experience steady weekly improvements in business bookings, thus far, in July 2021.
"Second quarter 2021 jet fuel prices increased significantly compared with first quarter 2021 and second quarter 2020. Despite cost penalties of technology and weather disruptions, our second quarter 2021 non-fuel cost performance was in line with guidance. We currently expect higher fuel prices and capacity-driven cost increases in third quarter 2021, year-over-year. To support the return of flight activity, we expect to recall the vast majority of our Employees early from voluntary time-off by the end of third quarter 2021, which is expected to reduce our prior forecasted savings from voluntary leave programs beyond second quarter 2021. Absent the costs associated with fewer Employees on leave, along with ramp up costs and premium pay offered for Operations Employees, third quarter 2021 non-fuel unit costs, excluding special items and profitsharing, are forecast to trend in line with, or below, 2019 levels⁴.
"Our balance sheet strength remains unmatched in the U.S. airline industry and a competitive differentiator. As of June 30, 2021, our total liquidity was $17.9 billion. Average core cash burn² was approximately $1 million per day in second quarter 2021; however, as anticipated, we achieved positive average core cash flow in June 2021, which was approximately $4 million per day. Based on our current booking trends and cost outlook, we are hopeful to be profitable, both on a GAAP and non-GAAP basis, again in third and fourth quarter 2021. Should the pandemic negatively affect our current trends, we are prepared to manage through it.
"We have tremendous flexibility and opportunity with our Boeing 737 MAX (MAX) order book. In addition to committing 55 aircraft to 18 new cities and approximately 37 aircraft to Hawaii by the end of this year, we intend to utilize new aircraft next year and beyond to restore most of our pre-pandemic routes and frequencies, and pursue new market opportunities. We can choose to accelerate fleet modernization efforts if these growth opportunities do not materialize. We believe 2022 will be another transition year in the pandemic recovery, and our primary goals will be to deliver operational reliability with optimized resources; generate solid profits and margins; restore and grow the route network; and reduce carbon emissions intensity.
"We recently announced I will transition to Executive Chairman in February 2022, at which time Bob Jordan, Executive Vice President, will become Chief Executive Officer. Bob is well-prepared to take on this important role as a gifted and experienced executive with 33 years of broad experience at Southwest. A smooth transition is underway, and we remain focused on managing through the pandemic, as well as sharpening up our strategic plan with a crystal clear set of initiatives for the next five years. In addition to restoring our route network and core operational efficiency, these initiatives include the continued rollout of Global Distribution System (GDS) access for corporate travelers; the acceleration of fleet modernization efforts to replace our 737-700 aircraft with the MAX; and the development of tangible steps to minimize our carbon footprint and support our goal to be carbon neutral by 2050. I have the utmost confidence in Bob, our Southwest Leadership Team, and the People of Southwest Airlines to successfully implement these initiatives and lead the Company forward. And I'm proud to continue to be a part of the Team for years to come."
Revenue Results and Outlook
The Company's second quarter 2021 operating revenues increased 297.6 percent, year-over-year, to $4.0 billion, but decreased 32.2 percent compared with second quarter 2019 due to the pandemic. Second quarter 2021 operating revenue per available seat mile (RASM, or unit revenues) was 11.99 cents, a decrease of 18.9 percent, compared with second quarter 2019, primarily driven by a passenger revenue yield decrease of 18.9 percent and a load factor decrease of 3.5 points.
The Company performed significantly better than expected at the outset of the quarter. The Company experienced sequential monthly improvements in operating revenues during second quarter 2021, driven primarily by improvements in leisure passenger traffic and fares. While business travel demand continued to lag leisure trends, June 2021 managed business revenues were down approximately 69 percent, which represented another sequential improvement compared with a decrease of 77 percent in May 2021, and a decrease of 80 percent in April 2021, all compared with respective 2019 levels.
"Our balance sheet strength remains unmatched in the U.S. airline industry and a competitive differentiator. As of June 30, 2021, our total liquidity was $17.9 billion. Average core cash burn² was approximately $1 million per day in second quarter 2021; however, as anticipated, we achieved positive average core cash flow in June 2021, which was approximately $4 million per day. Based on our current booking trends and cost outlook, we are hopeful to be profitable, both on a GAAP and non-GAAP basis, again in third and fourth quarter 2021. Should the pandemic negatively affect our current trends, we are prepared to manage through it.
"We have tremendous flexibility and opportunity with our Boeing 737 MAX (MAX) order book. In addition to committing 55 aircraft to 18 new cities and approximately 37 aircraft to Hawaii by the end of this year, we intend to utilize new aircraft next year and beyond to restore most of our pre-pandemic routes and frequencies, and pursue new market opportunities. We can choose to accelerate fleet modernization efforts if these growth opportunities do not materialize. We believe 2022 will be another transition year in the pandemic recovery, and our primary goals will be to deliver operational reliability with optimized resources; generate solid profits and margins; restore and grow the route network; and reduce carbon emissions intensity.
"We recently announced I will transition to Executive Chairman in February 2022, at which time Bob Jordan, Executive Vice President, will become Chief Executive Officer. Bob is well-prepared to take on this important role as a gifted and experienced executive with 33 years of broad experience at Southwest. A smooth transition is underway, and we remain focused on managing through the pandemic, as well as sharpening up our strategic plan with a crystal clear set of initiatives for the next five years. In addition to restoring our route network and core operational efficiency, these initiatives include the continued rollout of Global Distribution System (GDS) access for corporate travelers; the acceleration of fleet modernization efforts to replace our 737-700 aircraft with the MAX; and the development of tangible steps to minimize our carbon footprint and support our goal to be carbon neutral by 2050. I have the utmost confidence in Bob, our Southwest Leadership Team, and the People of Southwest Airlines to successfully implement these initiatives and lead the Company forward. And I'm proud to continue to be a part of the Team for years to come."
Revenue Results and Outlook
The Company's second quarter 2021 operating revenues increased 297.6 percent, year-over-year, to $4.0 billion, but decreased 32.2 percent compared with second quarter 2019 due to the pandemic. Second quarter 2021 operating revenue per available seat mile (RASM, or unit revenues) was 11.99 cents, a decrease of 18.9 percent, compared with second quarter 2019, primarily driven by a passenger revenue yield decrease of 18.9 percent and a load factor decrease of 3.5 points.
The Company performed significantly better than expected at the outset of the quarter. The Company experienced sequential monthly improvements in operating revenues during second quarter 2021, driven primarily by improvements in leisure passenger traffic and fares. While business travel demand continued to lag leisure trends, June 2021 managed business revenues were down approximately 69 percent, which represented another sequential improvement compared with a decrease of 77 percent in May 2021, and a decrease of 80 percent in April 2021, all compared with respective 2019 levels.
Southwest Airlines (LUV) stock price chart over the last 5 years
The image below shows the stock price history of Southwest over the last 5 years. And was a pretty good time for Southwest Airlines stockholders until the Covid-19 pandemic hit. Over the last 5 years the stock of Southwest Airlines increased by 39.2% which is pretty impressive considering the impact of Covid-19 on their business.
The stock of Southwest Airlines is trading at a lot closer to its 52 week high than it is to its 52 week low which to us is a clear indication that the short term sentiment and momentum of Southwest Airlines is positive at this point in time.
The stock of Southwest Airlines is trading at a lot closer to its 52 week high than it is to its 52 week low which to us is a clear indication that the short term sentiment and momentum of Southwest Airlines is positive at this point in time.
Southwest Airlines (LUV) vs American Airlines (AAL) stock vs Delta Airlines (DAL)
The image below shows the stock price performance of Southwest Airlines (LUV), American Airlines (AAL) and Delta Airlines (DAL) over the last 5 years. And from the image it is clear that it's not been a good time for any of the airlines over the last 5 years. Especially since the start of February 2020. The summary below shows the return of the three airline stocks in question over the last 5 years.
So Southwest Airlines have been by far the best performer over the last 5 years while the stock of American Airlines have been by far the worst performer over the last 5 years.
- Southwest Airlines (LUV): 7.8%
- Delta Airlines (DAL): -18.1%
- American Airlines (AAL): -55.5%
So Southwest Airlines have been by far the best performer over the last 5 years while the stock of American Airlines have been by far the worst performer over the last 5 years.
Southwest Airlines (LUV) latest stock valuation
So what is Southwest Airlines stock worth based on the release of their latest earnings report? Based on the earnings report and fiscal guidance provided by Southwest Airlines our our valuation models provide a target price (full value price) for Southwest Airlines stock at $56.70 a stock. We therefore believe that the stock of Southwest Airlines is slightly undervalued
We usually suggest that long term and fundamental investors get in at least 10% below our target price (full value price) which in this case is $56.70. Therefore we believe a good entry point into Southwest Airlines stock is at $51 or below. We expect the stock price of Southwest Airlines to increase to levels to closer to our target price in coming weeks and months.
Since the stock of Southwest Airlines is trading at close to our suggested entry price we rate the stock as a buy
We usually suggest that long term and fundamental investors get in at least 10% below our target price (full value price) which in this case is $56.70. Therefore we believe a good entry point into Southwest Airlines stock is at $51 or below. We expect the stock price of Southwest Airlines to increase to levels to closer to our target price in coming weeks and months.
Since the stock of Southwest Airlines is trading at close to our suggested entry price we rate the stock as a buy
Next earnings release date for Southwest Airlines
It is expected that Southwest Airlines 3rd quarter 2021 earnings report will be released in late October 2021.