|
Related Topics
|
Category: Stock Market and SouthWest Airlines (LUV)
Date: 29 Janaury 2021 Stock Price of Southwest Airlines: $44.60 We take a look at the 4th quarter earnings report of their 2020 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 4th quarter the group reported $2 billion in revenues and a net loss of $908 million.
|
- Gary C. Kelly, Chairman of the Board and Chief Executive Officer - The COVID-19 pandemic devastated the world, and our heart goes out to all those affected. The airline industry was hit especially hard in 2020, and we incurred our first annual net loss since 1972. Our annual 2020 operating revenues declined approximately 60 percent, year-over-year "
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 4th quarter 2020 earnings report
Data below refers to quarterly data unless specified otherwise:
- Revenues: $2.013 billion (down from $5.729 billion for the same period of the previous year)
- Revenues decreased by-64.9% over the last 12 months
- Operating expenses: $3.182 billion (down from $5.064 billion for the same period of the previous year)
- Operating expenses decreased by -37.2% over the last 12 months
- Net loss: -$908 million (down from $514 million from for the same period of the previous year)
- Diluted loss per share: -$1.54 (down from $0.98 for the same period of the previous year)
- Diluted weighted-average shares outstanding: 590 million (up from 527 million for the same period of the previous year)
- Cash and cash equivalents: $11.06 billion
- Cash and cash equivalents per share: $18.74
- Cash and cash equivalents makes up 42% of Southwest Airlines market capital
- Cash and cash equivalents makes up 31.9% of Southwest Airlines total assets
- Flight equipment: $20.8 billion
- Stockholders equity in Southwest Airlines: $8.876 billion
- Stockholders equity per Southwest Airlines share: $15.1
- Southwest Airlines is trading at 2.95times its stockholders equity per share which is within the expected range of between 2 and 5 that most firms tend to trade at
- The average price to book value of firms in the S&P 500 is 4.2
- Cash used by operations: $597 million
- Cash generated from operations per share: $1.01
Southwest Airlines' management commentary on their 4th quarter 2020 results
DALLAS, Jan. 28, 2021 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its fourth quarter and annual 2020 financial results:
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "The COVID-19 pandemic devastated the world, and our heart goes out to all those affected. The airline industry was hit especially hard in 2020, and we incurred our first annual net loss since 1972. Our annual 2020 operating revenues declined approximately 60 percent, year-over-year, and we experienced our largest monthly decline in operating revenues in April 2020, down 92 percent, year-over-year, when the pandemic spread and shelter-in-place orders and similar restrictions were implemented throughout the country. Travel and tourism industries face an ever-changing environment as the pandemic evolves. Nevertheless, our Employees have not wavered; rather, they have responded swiftly and with resolve. They adjusted our flight schedules numerous times; implemented new health and safety protocols for Employees and Customers; and developed and deployed remote work capabilities for back-office Employees and Call Center Representatives. On top of these notable accomplishments, our Employees delivered the U.S. airline industry's best Customer Service3, as well as a superb operational performance including exceptional ontime performance and baggage handling. I am forever grateful for the heroic efforts and results by our People in the most challenging year since we began flying in 1971. Their hard work and adaptability last year did not go unnoticed, as Southwest was just named the #1 U.S. airline in the Wall Street Journal's annual ranking for 2020, which ranks airlines on key operational performance metrics.
- Fourth quarter net loss of $908 million, or $1.54 loss per diluted share
- Excluding special items1, fourth quarter net loss of $761 million, or $1.29 loss per diluted share
- Annual net loss of $3.1 billion, or $5.44 loss per diluted share
- Excluding special items, annual net loss of $3.5 billion, or $6.22 loss per diluted share
- Ended 2020 with liquidity2 of $14.3 billion, well in excess of debt outstanding
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "The COVID-19 pandemic devastated the world, and our heart goes out to all those affected. The airline industry was hit especially hard in 2020, and we incurred our first annual net loss since 1972. Our annual 2020 operating revenues declined approximately 60 percent, year-over-year, and we experienced our largest monthly decline in operating revenues in April 2020, down 92 percent, year-over-year, when the pandemic spread and shelter-in-place orders and similar restrictions were implemented throughout the country. Travel and tourism industries face an ever-changing environment as the pandemic evolves. Nevertheless, our Employees have not wavered; rather, they have responded swiftly and with resolve. They adjusted our flight schedules numerous times; implemented new health and safety protocols for Employees and Customers; and developed and deployed remote work capabilities for back-office Employees and Call Center Representatives. On top of these notable accomplishments, our Employees delivered the U.S. airline industry's best Customer Service3, as well as a superb operational performance including exceptional ontime performance and baggage handling. I am forever grateful for the heroic efforts and results by our People in the most challenging year since we began flying in 1971. Their hard work and adaptability last year did not go unnoticed, as Southwest was just named the #1 U.S. airline in the Wall Street Journal's annual ranking for 2020, which ranks airlines on key operational performance metrics.
"We came into the year well-prepared with significant financial strength and started the year strong with an outstanding operational performance and solid net income growth, year-over-year, in January and February 2020, combined. In late February 2020, we began to experience a precipitous drop in passenger demand and bookings due to the pandemic. The situation escalated dramatically, and by mid-March 2020, trip cancellations began to exceed new bookings. We took swift action to address the unprecedented decline in passengers and revenue by significantly reducing available seat miles (ASMs, or capacity), costs, and cash spending. Annual 2020 capacity decreased approximately 34 percent, year-over-year, and we reduced annual 2020 cash outlays by approximately $8 billion, compared with original plans. We implemented voluntary separation and extended leave programs to better align staffing levels and overhead costs to reduced flight schedules. I sincerely appreciate the 15,000 Southwest Family Members who participated in those crucial programs to reduce our annual 2020 salaries, wages, and benefits expense by approximately $565 million. We also raised cash of $10.9 billion, net of repayments and excluding Payroll Support Program (PSP) proceeds, and ended 2020 with liquidity of $14.3 billion and approximately $12 billion in unencumbered assets4.
"Average core cash burn5 was approximately $12 million per day in fourth quarter 2020, and we expect average core cash burn of approximately $17 million per day in first quarter 2021, as a result of continued softness in demand and a seasonally weaker travel period in January and February 2021, as well as rising fuel prices. Including certain changes in working capital, we expect average core cash burn in first quarter 2021 to be in the range of $10 million to $15 million per day, compared with approximately $15 million per day in fourth quarter 2020. While vaccine availability should mark the beginning of the end of this pandemic, current passenger booking trends do not indicate significant improvement through March 2021. In response to current trends, our capacity plans remain conservative through, at least, March 2021, and we will continue to monitor bookings and adjust flight activity, accordingly. While we hope to achieve cash burn break even in 2021, it is wholly dependent upon a substantial rebound in passenger traffic and revenue; and, it is difficult to predict the timing of such a rebound, especially with respect to business travel. In order to achieve cash burn break even, we continue to estimate operating revenues will need to recover to a range of 60 to 70 percent of 2019 levels, which is roughly double current levels.
"We are tremendously grateful, once again, for the work of our federal leaders to extend payroll support (the PSP Extension) under the Consolidated Appropriations Act, 2021, to support the airline industry and the communities it serves. Given this much-needed PSP Extension stimulus, we intend to avoid involuntary furloughs and pay cuts through 2021—preserving our unprecedented 50-year history of providing job security to Employees.
"Since the Federal Aviation Administration (FAA) issued official requirements in November 2020 that enable airlines to return the Boeing 737 MAX (MAX) to service, we have been working to meet the FAA's requirements by modifying certain operating procedures, implementing enhanced Pilot training requirements, installing FAA-approved flight control software updates, and completing other required maintenance tasks specific to the MAX aircraft. I recently had the opportunity to fly on one of our MAX operational readiness flights, which only reaffirmed my supreme confidence in Southwest's ability to operate the MAX safely. I am very proud of our many Teams who are working diligently to prepare us for returning the MAX to revenue service on March 11, 2021, once all FAA requirements are met and all active Pilots have received updated, MAX-related training.
"Preparedness has always been a strength of Southwest Airlines. We came into 2020 well-prepared with the U.S. airline industry's strongest balance sheet and most successful business model—with low costs that enabled low fares across a robust network of point-to-point service with a strong presence in top leisure and business markets. Even with our preparedness and swift response to the pandemic in 2020, we are not standing still. We are aggressively pursuing new revenue streams by adding new airports to our route network and launching participation in global distribution systems (GDS) to grow our share of corporate travelers. We remain steadfast in managing costs and cash spending, and we are focused on maintaining significant liquidity. Our primary financial goals for 2021 are to preserve the strength of our balance sheet and investment-grade credit rating; arrest cash operating losses; and achieve and sustain break even, or better, cash flow and earnings as the airline business recovers. The pandemic persists and travel demand remains depressed, but we celebrate our 50th year of service in 2021 with renewed hope and optimism about the future of Southwest Airlines."
Revenue Results and Outlook
The Company's fourth quarter 2020 total operating revenues decreased 64.9 percent, year-over-year, to $2.0 billion, as a result of continued negative impacts to passenger demand and bookings due to the pandemic. Fourth quarter 2020 operating revenue per ASM (RASM, or unit revenues) was 8.48 cents, a decrease of 40.8 percent, primarily driven by a load factor decline of 29.3 points and a passenger revenue yield decrease of 18.7 percent, all year-over-year.
Following a modest sequential improvement in passenger traffic trends in October 2020, the Company began to experience a deceleration in improving revenue trends in November 2020 that continued through the remainder of 2020, due to the spike in COVID-19 cases and hospitalizations, as well as renewed quarantine requirements, travel restrictions, and related government orders. The Company also experienced an increase in trip cancellations in November and December 2020, although leisure passenger demand was more resilient for the holiday travel periods compared with non-holiday weeks.
"Average core cash burn5 was approximately $12 million per day in fourth quarter 2020, and we expect average core cash burn of approximately $17 million per day in first quarter 2021, as a result of continued softness in demand and a seasonally weaker travel period in January and February 2021, as well as rising fuel prices. Including certain changes in working capital, we expect average core cash burn in first quarter 2021 to be in the range of $10 million to $15 million per day, compared with approximately $15 million per day in fourth quarter 2020. While vaccine availability should mark the beginning of the end of this pandemic, current passenger booking trends do not indicate significant improvement through March 2021. In response to current trends, our capacity plans remain conservative through, at least, March 2021, and we will continue to monitor bookings and adjust flight activity, accordingly. While we hope to achieve cash burn break even in 2021, it is wholly dependent upon a substantial rebound in passenger traffic and revenue; and, it is difficult to predict the timing of such a rebound, especially with respect to business travel. In order to achieve cash burn break even, we continue to estimate operating revenues will need to recover to a range of 60 to 70 percent of 2019 levels, which is roughly double current levels.
"We are tremendously grateful, once again, for the work of our federal leaders to extend payroll support (the PSP Extension) under the Consolidated Appropriations Act, 2021, to support the airline industry and the communities it serves. Given this much-needed PSP Extension stimulus, we intend to avoid involuntary furloughs and pay cuts through 2021—preserving our unprecedented 50-year history of providing job security to Employees.
"Since the Federal Aviation Administration (FAA) issued official requirements in November 2020 that enable airlines to return the Boeing 737 MAX (MAX) to service, we have been working to meet the FAA's requirements by modifying certain operating procedures, implementing enhanced Pilot training requirements, installing FAA-approved flight control software updates, and completing other required maintenance tasks specific to the MAX aircraft. I recently had the opportunity to fly on one of our MAX operational readiness flights, which only reaffirmed my supreme confidence in Southwest's ability to operate the MAX safely. I am very proud of our many Teams who are working diligently to prepare us for returning the MAX to revenue service on March 11, 2021, once all FAA requirements are met and all active Pilots have received updated, MAX-related training.
"Preparedness has always been a strength of Southwest Airlines. We came into 2020 well-prepared with the U.S. airline industry's strongest balance sheet and most successful business model—with low costs that enabled low fares across a robust network of point-to-point service with a strong presence in top leisure and business markets. Even with our preparedness and swift response to the pandemic in 2020, we are not standing still. We are aggressively pursuing new revenue streams by adding new airports to our route network and launching participation in global distribution systems (GDS) to grow our share of corporate travelers. We remain steadfast in managing costs and cash spending, and we are focused on maintaining significant liquidity. Our primary financial goals for 2021 are to preserve the strength of our balance sheet and investment-grade credit rating; arrest cash operating losses; and achieve and sustain break even, or better, cash flow and earnings as the airline business recovers. The pandemic persists and travel demand remains depressed, but we celebrate our 50th year of service in 2021 with renewed hope and optimism about the future of Southwest Airlines."
Revenue Results and Outlook
The Company's fourth quarter 2020 total operating revenues decreased 64.9 percent, year-over-year, to $2.0 billion, as a result of continued negative impacts to passenger demand and bookings due to the pandemic. Fourth quarter 2020 operating revenue per ASM (RASM, or unit revenues) was 8.48 cents, a decrease of 40.8 percent, primarily driven by a load factor decline of 29.3 points and a passenger revenue yield decrease of 18.7 percent, all year-over-year.
Following a modest sequential improvement in passenger traffic trends in October 2020, the Company began to experience a deceleration in improving revenue trends in November 2020 that continued through the remainder of 2020, due to the spike in COVID-19 cases and hospitalizations, as well as renewed quarantine requirements, travel restrictions, and related government orders. The Company also experienced an increase in trip cancellations in November and December 2020, although leisure passenger demand was more resilient for the holiday travel periods compared with non-holiday weeks.
Southwest Airlines (NYSE: LUV) stock price chart over the last 5 years
The image below, obtained from Google, shows the stock price history of Southwest over the last 5 years. And was a pretty good time for Southwest stockholders until the Covid-19 pandemic hit. Over the last 5 years the stock of Southwest Airlines increased by 7.8% 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 (NYSE: 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 $53.40 a stock. 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 price (full value price) which in this case is $53.40. Therefore we believe a good entry point into Southwest Airlines stock is at $48 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 well below 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 $53.40. Therefore we believe a good entry point into Southwest Airlines stock is at $48 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 well below our suggested entry price we rate the stock as a buy
Next earnings release date for Southwest Airlines
It is expected that Southwest Airlines 1st quarter 2021 earnings report will be released in late April 2021.