Southwest Airlines(NYSE: LUV) is a US-based low-cost airline. It is currently the third biggest airline in the US with a market share of 16.8%. The stock has been a market darling after growing nearly six times over the past decade. As aviation became cheaper and more consumers shifted to flying, low-cost aviation has become the growth driver for the aviation sector and Southwest Airlines has done well to take advantage of this.
Of all major US carriers, Southwest has the second-highest free cash flow and the highest cash flow when pro-rated for revenues. But 2020 has sent the sector to unprecedented lows as the coronavirus pandemic has decimated the sector and all others such as entertainment and hotels.
The stock was trading 47% down YTD at the end of last week and has tanked another 14% this week after Warren Buffett’s Berkshire Hathaway announced it’s complete exit from the aviation sector over the weekend. Warren Buffett’s views of the sector being altered for a long period of time due to the virus and a long road to recovery have sent a shiver down investors’ spines.
In response to the plight of the aviation sector, the government stepped in to provide $50 billion in care packages to all airlines. As part of the package, Southwest has received $3.2 billion in aid from the government, two-thirds of which does not have to be paid back and rest is an extremely low-interest loan (NY Times). Like all other players, Southwest is currently just focused on revenue generation, cost-cutting, and liquidity.
In order to adapt to the current scenario, Southwest has decided to deliberately cap capacities on its flights by 40%, suspending food and beverages, changing the boarding process to groups of just ten passengers at a time, and mandating the use of face masks. These measures should soothe the traveler’s social distancing concerns(Enterprise Record). In an attempt to generate more revenue and capitalize on ultra-low fuel prices the airline has announced a summer sale offering single and round-trip fares of $39 and $78. These fares are available to popular neighboring summer destinations such as Hawaii and Puerto Rico as well as popular US destinations. (Travel Pulse)
Southwest has one the lowest cash-burns of the major carriers at $30 million-$35 million a day, that too before the support it received from the government and the crash in oil. It should also be noted the extra debt/leverage taken by the airline is for even more extreme scenarios which are unlikely and the company expects to pay it back within the next 18-24 months. At the current liquidity level of $10 billion, the company has enough liquidity to last through the year at extremely low revenue levels. The company can also use the extra financial muscle to capitalize on opportunities that other carriers can’t due to their financial health.
Hence, Southwest has positioned itself as the best bet for investors looking to capitalize on the downturn of the sector.