Air Freight News

Southwest spurs airline rally with ‘modest’ boost in demand

Southwest Airlines Co. sparked a rally in airline shares after saying improved leisure travel demand for August and September would help reduce its daily cash losses this quarter to about $20 million amid the coronavirus pandemic.

The carrier previously expected to burn an average of $23 million a day in the third quarter. “Recent modest improvements in revenue trends” were the primary reason for the better forecast, Southwest said in a regulatory filing Wednesday. Airlines accounted for four of the top seven gainers in the S&P 500 Industrials Index.

Keeping cash losses under control has become critical for airlines since demand collapsed as the pandemic worsened in late March and April and requests for refunds outweighed new sales at carriers worldwide. Carriers have parked planes, cut flights, reduced management ranks and offered leave and early retirement to workers to help reduce spending.

Southwest’s revised outlook could help the airline meet its goal of breaking even by year-end.

“The market is feeling better that everybody else should have a lower cash burn than they’ve indicated,” said Savanthi Syth, a Raymond James Financial Inc. analyst. “Clearly, what we all want to see is zero cash burn, or maybe cash build.”

Southwest rose 2.2% to $34.90 at 11:25 a.m. in New York. United Airlines Holdings Inc. climbed 4.4%, while American Airlines Group Inc. increased 3.3% and Delta Air Lines Inc., 2.2%. Southwest shares dropped 37% this year through Tuesday, the best performance on an S&P 500 index of the five biggest U.S. carriers.

Incremental Improvement

Alaska Air Group Inc. last week forecast that it would burn less than $125 million in August after going through $175 million in July “primarily due to ticket sales.”

“It’s a matter of increments,” Syth said. Demand remains below a surge that occurred in June, when some states lifted quarantine restrictions, but is improved from July when states began imposing new constraints after virus cases escalated.

Dallas-based Southwest also updated its outlook for capacity, projecting a third-quarter decline of 30% to 35% from a year earlier. It previously said capacity could drop as much as 30%. The airline warned of such a revision last month as demand improvements stalled in July amid a resurgence of coronavirus cases and broader travel restrictions.

“Year-over-year revenue declines remain significant, and passenger demand and booking trends remain inconsistent, which guided the company’s recent reduction” of capacity in August, September and October flight schedules, the carrier said.

The airline revised its projection for September capacity sharply lower: down 40% from a year earlier, rather than the 25% decline previously expected. Capacity will decline 27% this month and by half in October, Southwest said.

August operating revenue will be as much as 75% below a year earlier, the carrier said, consistent with an earlier outlook for a drop of 70%-80%, based on improved leisure travel demand. It is expected to fall 65%-75% in September.

Southwest decided not to take a second federal loan, crediting its success in raising cash. The carrier, which had signed a nonbinding letter of intent for $2.8 billion in funding, had $15.2 billion in cash and short-term investments and $12 billion in unencumbered assets, as of Tuesday.

Bloomberg
Bloomberg

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© Bloomberg
The author’s opinion are not necessarily the opinions of the American Journal of Transportation (AJOT).

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