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Category: Southwest Airlines (LUV)
Date: 29 June 2020 Stock price of Southwest Airlines: $35.25 We take a look at the investor update provided by Southwest Airlines in which the group mentions that they expect their core cash burn rate to average $20 million to $25 million a day while passenger numbers starts to recover gradually but not enough for them to cover all their overheads yet.
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The Company has continued to experience net positive bookings thus far in June 2020. The Company’s preliminary May 2020 operating revenues decreased, year-over-year, in the range of 85 to 90 percent; capacity decreased approximately 64 percent, year-over-year; and load factor was approximately 30 percent "
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.
Investor update from Southwest Airlines
The Company is providing updated guidance regarding its financial and operational trends. The Company continues to experience significant negative impacts to passenger demand and bookings in second quarter 2020 due to the novel coronavirus COVID-19 pandemic. As previously disclosed, the Company’s preliminary April 2020 operating revenues decreased, year-over-year, in the range of 90 to 95 percent; available seat miles (ASMs, or capacity) decreased approximately 58 percent, year-over-year; and load factor was approximately 8 percent. As previously disclosed, the Company saw a modest improvement in passenger demand, bookings, and trip cancellations, resulting in net positive bookings beginning in early May 2020, when new passenger bookings outpaced trip cancellations. This represented a reversal in the net negative booking trends experienced during the majority of March and April 2020, when trip cancellations outpaced new passenger bookings.
The Company has continued to experience net positive bookings thus far in June 2020. The Company’s preliminary May 2020 operating revenues decreased, year-over-year, in the range of 85 to 90 percent; capacity decreased approximately 64 percent, year-over-year; and load factor was approximately 30 percent; all in line with the Company's previous estimations. Along with the trend of net positive bookings, the Company has continued to experience a modest improvement in passenger demand and bookings in June 2020—primarily leisure-driven demand—with operating revenues currently estimated to decrease, year-over-year, in the range of 70 to 75 percent; capacity estimated to decrease in the range of 40 to 50 percent, year-over-year; and load factor estimated to be in the range of 40 to 50 percent. This compares favorably to the Company’s previous estimations of June 2020 operating revenues decreasing, year over-year, in the range of 80 to 85 percent; capacity decreasing in the range of 45 to 55 percent, year-over-year; and load factor in the range of 35 to 45 percent. Based on modestly improved passenger demand and bookings in July 2020, operating revenues are currently estimated to decrease, year-over-year, in the range of 65 to 70 percent; capacity is estimated to decrease in the range of 25 to 35 percent, year-over-year; and load factor is estimated to be in the range of 45 to 55 percent.
To support physical-distancing, the Company is currently limiting the number of seats sold on each flight to allow for middle seats to remain open for Customers who are not traveling together through at least September 2020, and will evaluate the possibility of extending this policy beyond September. The Company has published its flight schedule for sale through January 4, 2021. The Company currently estimates its second quarter 2020 capacity to decrease in the range of 50 to 60 percent, year-over-year. The Company currently has approximately 140 aircraft in long-term storage or temporary parking, including the Company's 34 Boeing 737 MAX aircraft that were grounded as of March 13, 2019, to comply with the Federal Aviation Administration emergency order issued for all U.S. airlines to ground all MAX aircraft. For the remainder of 2020, the Company continues to plan for multiple scenarios for its fleet and capacity plans given the uncertain revenue environment. As such, the Company’s actual flown capacity for the remainder of 2020 may differ materially from currently published schedules. In order to provide flexibility for the Company to prepare for the continuation of reduced flight activity for the remainder of 2020, it recently launched extended emergency time off and voluntary separation programs. Employees have until July 15, 2020 to elect to participate in these voluntary programs. Based on the Company's existing fuel derivative contracts and market prices as of June 11, 2020, second quarter 2020 economic fuel costs are estimated to be in the range of $1.25 to $1.35 per gallon, including $24 million, or $.12 per gallon, in premium expense and no cash settlements from fuel derivative contracts. This compares unfavorably with the Company's previous estimate of second quarter economic fuel costs in the range of $1.00 to $1.10 per gallon, including $24 million, or $.12 per gallon, in premium expense and no cash settlements from fuel derivative contracts.
The Company continues to estimate its average daily core cash spending to be in the range of $30 million to $35 million in second quarter 2020, which represents the sum of cash expenses, capital expenditures, and debt service obligations; and excludes operating revenues. Further, including the estimated benefit of operating revenues, net of estimated trip cancellations, the Company now estimates its average daily core cash burn to be in the range of $20 million to $25 million in second quarter 2020, with an estimated average daily core cash burn of approximately $20 million in June 2020. This compares favorably with the Company's previous estimate of average daily core cash burn of approximately $25 million in second quarter 2020, and the low-$20 million range in June 2020, primarily due to modest improvements in revenue estimates in second quarter 2020.
The Company's average core cash spending and core cash burn 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). Since the beginning of 2020, the Company has raised a total of approximately $16.7 billion, net, including $12.2 billion in financings and sale-leaseback transactions, $2.2 billion through a common stock offering, and $2.3 billion of PSP proceeds.
The Company currently has cash and short-term investments of approximately $13.9 billion. Since the Company’s previous update of cash and short-term investments of approximately $13.0 billion as of May 19, 2020, the Company received its second disbursement of PSP proceeds in the amount of $652 million and received the remaining $205 million in proceeds from its previously disclosed sale-leaseback transactions. In addition, the Company recently issued $500 million of unsecured notes due 2023, issued $1.3 billion of unsecured notes due 2027, and raised $190 million through an aircraft-secured financing. Substantially all of the proceeds from the issued unsecured notes in June 2020 were used to repay the $1.7 billion of outstanding borrowings under the 364-Day Credit Agreement, as discussed in Item 1.02 above. As previously disclosed, the Company also repaid the $1.0 billion outstanding under its revolving credit facility, which is now fully available to the Company in addition to its current cash and short-term investments.
The Company expects to receive the remaining $978 million of PSP proceeds in two installments in June and July 2020. Based on current cash and short-term investments of $13.9 billion, the remaining $978 million of PSP proceeds to be received in June and July 2020, and estimated average daily cash burn of approximately $20 million in June 2020, the Company currently estimates approximately 24 months of liquidity1 . This compares favorably with the Company's previous estimate of approximately 20 months of liquidity, primarily due to modest improvements in revenue estimates in second quarter 2020. The Company currently has unencumbered assets worth approximately $12.0 billion, including approximately $10.0 billion in aircraft, an increase of approximately $4.5 billion from previous estimates as a result of collateral released due to the termination of the 364-Day Credit Agreement, as discussed in Item 1.02 above. The Company also has adjusted debt to average invested capital (leverage) of 49 percent and is the only U.S. airline with an investment-grade rating by all three rating agencies
The Company has continued to experience net positive bookings thus far in June 2020. The Company’s preliminary May 2020 operating revenues decreased, year-over-year, in the range of 85 to 90 percent; capacity decreased approximately 64 percent, year-over-year; and load factor was approximately 30 percent; all in line with the Company's previous estimations. Along with the trend of net positive bookings, the Company has continued to experience a modest improvement in passenger demand and bookings in June 2020—primarily leisure-driven demand—with operating revenues currently estimated to decrease, year-over-year, in the range of 70 to 75 percent; capacity estimated to decrease in the range of 40 to 50 percent, year-over-year; and load factor estimated to be in the range of 40 to 50 percent. This compares favorably to the Company’s previous estimations of June 2020 operating revenues decreasing, year over-year, in the range of 80 to 85 percent; capacity decreasing in the range of 45 to 55 percent, year-over-year; and load factor in the range of 35 to 45 percent. Based on modestly improved passenger demand and bookings in July 2020, operating revenues are currently estimated to decrease, year-over-year, in the range of 65 to 70 percent; capacity is estimated to decrease in the range of 25 to 35 percent, year-over-year; and load factor is estimated to be in the range of 45 to 55 percent.
To support physical-distancing, the Company is currently limiting the number of seats sold on each flight to allow for middle seats to remain open for Customers who are not traveling together through at least September 2020, and will evaluate the possibility of extending this policy beyond September. The Company has published its flight schedule for sale through January 4, 2021. The Company currently estimates its second quarter 2020 capacity to decrease in the range of 50 to 60 percent, year-over-year. The Company currently has approximately 140 aircraft in long-term storage or temporary parking, including the Company's 34 Boeing 737 MAX aircraft that were grounded as of March 13, 2019, to comply with the Federal Aviation Administration emergency order issued for all U.S. airlines to ground all MAX aircraft. For the remainder of 2020, the Company continues to plan for multiple scenarios for its fleet and capacity plans given the uncertain revenue environment. As such, the Company’s actual flown capacity for the remainder of 2020 may differ materially from currently published schedules. In order to provide flexibility for the Company to prepare for the continuation of reduced flight activity for the remainder of 2020, it recently launched extended emergency time off and voluntary separation programs. Employees have until July 15, 2020 to elect to participate in these voluntary programs. Based on the Company's existing fuel derivative contracts and market prices as of June 11, 2020, second quarter 2020 economic fuel costs are estimated to be in the range of $1.25 to $1.35 per gallon, including $24 million, or $.12 per gallon, in premium expense and no cash settlements from fuel derivative contracts. This compares unfavorably with the Company's previous estimate of second quarter economic fuel costs in the range of $1.00 to $1.10 per gallon, including $24 million, or $.12 per gallon, in premium expense and no cash settlements from fuel derivative contracts.
The Company continues to estimate its average daily core cash spending to be in the range of $30 million to $35 million in second quarter 2020, which represents the sum of cash expenses, capital expenditures, and debt service obligations; and excludes operating revenues. Further, including the estimated benefit of operating revenues, net of estimated trip cancellations, the Company now estimates its average daily core cash burn to be in the range of $20 million to $25 million in second quarter 2020, with an estimated average daily core cash burn of approximately $20 million in June 2020. This compares favorably with the Company's previous estimate of average daily core cash burn of approximately $25 million in second quarter 2020, and the low-$20 million range in June 2020, primarily due to modest improvements in revenue estimates in second quarter 2020.
The Company's average core cash spending and core cash burn 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). Since the beginning of 2020, the Company has raised a total of approximately $16.7 billion, net, including $12.2 billion in financings and sale-leaseback transactions, $2.2 billion through a common stock offering, and $2.3 billion of PSP proceeds.
The Company currently has cash and short-term investments of approximately $13.9 billion. Since the Company’s previous update of cash and short-term investments of approximately $13.0 billion as of May 19, 2020, the Company received its second disbursement of PSP proceeds in the amount of $652 million and received the remaining $205 million in proceeds from its previously disclosed sale-leaseback transactions. In addition, the Company recently issued $500 million of unsecured notes due 2023, issued $1.3 billion of unsecured notes due 2027, and raised $190 million through an aircraft-secured financing. Substantially all of the proceeds from the issued unsecured notes in June 2020 were used to repay the $1.7 billion of outstanding borrowings under the 364-Day Credit Agreement, as discussed in Item 1.02 above. As previously disclosed, the Company also repaid the $1.0 billion outstanding under its revolving credit facility, which is now fully available to the Company in addition to its current cash and short-term investments.
The Company expects to receive the remaining $978 million of PSP proceeds in two installments in June and July 2020. Based on current cash and short-term investments of $13.9 billion, the remaining $978 million of PSP proceeds to be received in June and July 2020, and estimated average daily cash burn of approximately $20 million in June 2020, the Company currently estimates approximately 24 months of liquidity1 . This compares favorably with the Company's previous estimate of approximately 20 months of liquidity, primarily due to modest improvements in revenue estimates in second quarter 2020. The Company currently has unencumbered assets worth approximately $12.0 billion, including approximately $10.0 billion in aircraft, an increase of approximately $4.5 billion from previous estimates as a result of collateral released due to the termination of the 364-Day Credit Agreement, as discussed in Item 1.02 above. The Company also has adjusted debt to average invested capital (leverage) of 49 percent and is the only U.S. airline with an investment-grade rating by all three rating agencies
Stock price history of Southwest Airlines (LUV) over the last 5 years
The image below shows the stock price history of Southwest Airlines (LUV) over the last 5 years. And as it shows its been a very volatile time for Southwest Airlines stockholders. Over the 5 year period the stock of LUV has returned just 0.5% to stockholders. The stock of LUV has lost almost 60% of its value since the start of March 2020 as the covid-19 pandemic hit local and international travel
Our last stock valuation of Southwest Airlines (LUV)
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 (full value) price for Southwest Airlines stock at $57.40 a stock (down significantly from our last valuation of Southwest Airlines). We therefore believe that the stock of Southwest Airlines is undervalued
We usually suggest that long term and fundamental investors get in at least 10% below our target (full value) price which in this case is $57.40. Therefore we believe a good entry point into Southwest Airlines stock is at $51.70 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.
We usually suggest that long term and fundamental investors get in at least 10% below our target (full value) price which in this case is $57.40. Therefore we believe a good entry point into Southwest Airlines stock is at $51.70 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.