Southwest Airlines(NYSE:LUV) is navigating choppy waters as the coronavirus pandemic haunts the global economy. The company released it’s Q1 2020 numbers earlier today and reported it’s first loss since 2011 of $94 million(-$0.15 per share). Although the stock beat estimates, analyst consensus on the stock was weak as they projected an EPS of -$0.48 per share compared to $0.7 in the year ago period. The stock is 46% off it’s 2020 high and management says the worst is yet to come.(Nasdaq)
Turbulent Skies –
The company quarterly report stated, “Based on significant capacity reductions and shelter-in-place restrictions, the company currently expects the effects of the pandemic to impact its second quarter 2020 financial performance much more significantly than in first quarter 2020.”
On the earnings call, Southwest CEO Gary Kelly told shareholders that he projects second quarter revenues to be down as much as 95% and that trip cancellations were at unprecedented levels. He stated that after receiving government funding the airline had enough cash to get through the next 5 months but if things don’t get better, he expects to be running a much smaller airline.(Yahoo Finance)
It is also really unfortunate that the pandemic induced downturn came at a particularly bad time as it killed demand during the peak spring-summer season which is the most profitable part of the year for airlines and the company was also already losing revenue over the grounded 737’s in their fleet.
In scenarios like these, maintaining liquidity is imperative which is why the company announced today that it will be raising additional equity and debt to stay afloat. Till now, the airline has received $3.2 billion, in loans and grants from the government and revealed that it intends to apply for another $2.8 billion from the Treasury in the form of a secured loan.
The company also announced it will raise more capital through a new equity issue and $1 billion of convertible debt. The equity issue comprises of 55 million new shares available at Monday’s closing price. With the new issue, the airline will have raised nearly $6.8 billion this quarter, a record for the company.
Apart from raising additional finances, the airlines has committed to severe cost cutting measures by reducing operating costs by $2 billion and capital expenditure by $1 billion.
The airline is currently operating on 50% capacity and plans to reduce it to 30% in May as their planes are flying only 5%-10% full even after the reduction in capacity, compared to an average of 83% last year.(CNBC) The company has reduced it’s 737 MAX orders from an expected 123 deliveries till end 2021 to just 48 now.
The only silver lining for the company is that expected daily cash burn for the second quarter is between $30 million-$35 million, half of what was expected due to the collapse in oil prices and lower operating costs from reduced capacity. Black swan events like these are true tests of management competence and the next few months are extremely crucial for airline executives.