A month has gone by since the last earnings report for Southwest Airlines (LUV). Shares have added about 8.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Southwest due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Narrower Than Expected Loss in Q3
Southwest Airlines incurred a loss of $1.99 per share (excluding 3 cents from non-recurring items) in the third quarter of 2020, narrower than the Zacks Consensus Estimate of a loss of $2.44. In the year-ago period, the company had reported earnings of $1.23 per share. Results were affected by significant decline in passenger revenues as a result of persistent weakness in air-travel demand amid coronavirus concerns.
Moreover, operating revenues of $1,793 million surpassed the Zacks Consensus Estimate of $1,678.2 million. The top line declined 68.2% year over year, with passenger revenues accounting for bulk (81.1%) of the top line, sliding 72.2%.
Airline traffic, measured in revenue passenger miles, declined 63.9% year over year to 11.89 billion in the quarter under review. With reduced passenger demand as a result of the coronavirus pandemic, capacity or available seat miles (“ASMs”) fell 32.8% to 26.46 billion. Load factor (percentage of seats filled by passengers) came in at 44.9%, down 3860 basis points on a year-over-year basis as the decline in traffic was wider than the capacity contraction.
Passenger revenue per available seat mile (“PRASM”: a key measure of unit revenues) dropped 58.7% to 5.49 cents. Moreover, revenue per available seat mile (“RASM”) declined 52.7% year over year to 6.78 cents, owing to decline in load factor and passenger revenue yield.
Operating Expenses & Income
In the third quarter, operating loss totaled $1,411 million against operating income of $819 million in the year-ago quarter. Total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expense) dropped 17.1%, thanks to the company’s cost-cutting measures and reduction in salaries, wages and benefits among other expenses.
Fuel costs per gallon (inclusive of fuel tax: economic) was down 40.6% to $1.23. However, consolidated unit cost or cost per available seat mile (“CASM”) excluding fuel, oil and profit-sharing expenses, and special items, increased 23.4% year over year to 11.24 cents due to significant reduction in capacity.
The company had cash and cash equivalents of $12,109 million at the end of the third quarter, compared with $2,548 million at the end of 2019. As of Sep 30, 2020, the company had long-term debt (less current maturities) of $10,135 million compared with $1,846 million at 2019-end.
With steady improvement in leisure-travel demand, Southwest anticipates operating revenues to decline 65-70% year over year in October. Previously, the same was estimated to drop 65-75%. For November, the carrier expects operating revenues to fall 60-65% year over year. Load factor is predicted to be in the range of 50-55% in October and November. Previously, the company estimated October load factor to be between 45% and 55%.
Average core cash burn is forecast to be approximately $12 million per day in October, while the same is expected to be approximately $11 million per day in the fourth quarter.
Due to capacity reductions, the airline anticipates fuel efficiency to improve 10% year over year in the fourth quarter of 2020. Economic fuel costs are estimated in the range of $1.2-$1.3 per gallon in the current quarter. In the fourth quarter of 2019, the same was $2.09 per gallon.
Southwest estimates cost savings from voluntary-separation programs for its employees to be approximately $400 million in the fourth quarter. The same is forecast to be approximately $1.1 billion in 2021. However, the company expects to incur approximately $300 million and $500 million in voluntary program cash payments in the fourth quarter and in 2021, respectively.
The company predicts operating expenses (excluding fuel and oil expense, special items, and prior year profitsharing expense) to decrease 20-25% year over year in the ongoing quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -7.99% due to these changes.
At this time, Southwest has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Southwest has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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