Southwest Airlines Co. (NYSE: LUV) extended its losing streak to close 1.3% down at $29.71 on Wednesday, a multi-year low, as the aviation sector grapples with the novel coronavirus outbreak that has destroyed global and domestic travel demand.
Travel volume down 95%
Year-to-date, the stock has fallen by nearly 46%. In comparison, the Dow Jones Transportation average, one of the most widely recognized gauges of the American Transport Sector, is down 28.08%.
Since the spread of the virus in the U.S., domestic travel figures seem to have fallen off a cliff with TSA reporting a 95% drop in traveler figures.
One of the major problems facing the industry is the uncertainty over when customers will feel safe to travel in physical proximity to other passengers.
Southwest battles the virus
To relieve these concerns, airlines are experimenting with different methods to sterilize aircraft between uses. Southwest is testing new electrostatic sprayers that they say are far more effective than traditional sanitation equipment like foggers.
To retain its customer base, the company has also extended the use of cancellation funds of customers to 2022. This is a response to similar actions by competitors.
The company, like all other players in the sector, is primarily focused on curbing costs and cutting back on schedules to stay afloat. For June, Southwest has already cut capacity by nearly 50% earlier this month. According to FlightAware.com, the COVID-19 pandemic has forced the cancellation of up to 80 percent of the commercial flight volume across the world.
Among other efforts, the company is offering employees voluntary options such as Emergency Time Off (ETO), Leave Without Pay (LWOP), and Time Off Without Pay (TOWP).
The company reported that nearly 10% of its workforce opted for ETO, which gives them partial pay and the summer off, whilst retaining their employment benefits. Earlier in the week, the company extended the ETO program into July and August.
Southwest management has repeatedly stated their priority is to get through this crisis without any involuntary lay-offs, and the voluntary leave options stated above are offered to help the company achieve this target.
In response to the situation arising from the coronavirus, the U.S. government has provided the aviation sector a bail-out package under the CARES Act.
Southwest received $2.3 billion in payroll grants and a low-interest loan of nearly a billion dollars, on condition of not laying off any employees till the end of September.
According to Cowen’s research, post coronavirus demand will push revenue back to 2016 levels.
The analysts estimate it would take between two to five years for revenue to recover to its pre-corona status.
The stock seems to mirror this sentiment as Wednesday’s close was a 5 and ½ year low – a price last seen in mid-2014.
The analysts covering the stock are projecting a quarterly EPS in the range of negative $0.55-$1.10, with most estimates being in the -$0.40 region.
The charts of the stock and its peers are exhibiting a bearish pennant continuation. This is a reliable pattern that suggests temporary stability after a sharp positive or negative move. It portends that there could another downswing. Therefore, the stock may still have a way to go before it bottoms out.
The short term outlook for the stock looks grim due to the uncertainty of the post-corona economic scenario, particularly as it affects the travel and aviation sectors.