Southwest Gets Upgraded – Here’s Why – Idaho Reporter


Southwest Gets Upgraded – Here’s Why

Southwest Airlines(NYSE: LUV) is the largest low-cost airline in the US and the world’s first low-cost airline. The company is the third-largest air operator in the US with a 16.8% market share in 2019. The company’s low-cost business model has paid off very well for investors as the company grew over 6x in the past decade. As we came into 2020, the market expected robust growth from the company, however, the spread of the coronavirus has served up a test of survival for all airlines.

The company’s stock is trading 56.5% down YTD at about $23, a six-year low. As the fear of contamination takes over travelers, passenger volumes have dropped by a staggering 92%. Also, investors panicked as market experts such as Berkshire Hathaway’s Warren Buffett and Renaissance Technologies’ Jim Simmons made their exits from the aviation sector. (Business Insider)

After receiving $3.2 billion in government stimulus and making relevant cost cuts, Southwest has positioned itself as a market favorite for a cyclical play in aviation. The company has the lowest expected cash burn of all major airlines at $30 million to $35 million, nearly half of majors such as Delta and American. Earlier in the week, Southwest was upgraded by Bank of America to a buy and was called the best bet in aviation by its analysts (Seeking Alpha). The company has the highest net profit margin of immediate competitors, with Southwest’s being 8.46% compared to an industry average of 7.49%. The company has the lowest debt-to-equity ratio of competitors, 71 for Southwest compared to Delta’s 168 and United’s 249. Southwest is currently operating at 66% capacity, and that combined with the crash US crude price has resulted in potential savings of about $2.2 billion over the year. (Motley Fool)

One of the biggest advantages of Southwest over competitors is its point-to-point business model. Competitors such as Delta and United have huge hubs in Georgia and California, to which passengers fly in, change planes and go on to their final destination. Southwest in comparison operates flights directly between the origin and destination, which is much faster and involves much lesser time spent at airports. As travelers fear COVID contamination, they will prefer to save time and avoid crowded airport hubs. Southwest has also managed to eke out major efficiency gains, they have managed to slash the distance traveled by their aircraft by 65% whilst reducing destination coverage by just 28%. With $9 billion in liquidity and a cash burn of just $30-$35 million, Southwest can easily stay afloat till the Q4, a very comfortable buffer assuming no recovery of demand. (InvestorPlace)

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