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Southwest (LUV) Q4 Loss Narrower Than Expected, Revenues Lag

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Southwest Airlines Co. LUV incurred a loss of $1.29 per share (excluding 25 cents from non-recurring items) in the fourth quarter of 2020, narrower than the Zacks Consensus Estimate of a loss of $1.69. In the year-ago period, the company had reported earnings of 98 cents per share. Results were affected by significant decline in passenger revenues as a result of persistent weakness in air-travel demand amid coronavirus concerns.

Meanwhile, operating revenues of $2,013 million lagged the Zacks Consensus Estimate of $2,117.5 million. The top line declined 64.9% year over year, with passenger revenues accounting for bulk (82.6%) of the top line, sliding 68.7%.

Operating Statistics

Airline traffic, measured in revenue passenger miles, declined 61.5% year over year to 12.78 billion in the quarter under review. With reduced passenger demand as a result of the coronavirus pandemic, capacity or available seat miles (ASMs) fell 40.6% to 23.76 billion. Load factor (percentage of seats filled by passengers) came in at 53.8%, down 2930 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 47.3% to 7 cents. Moreover, revenue per available seat mile (RASM) declined 40.8% year over year to 8.48 cents, owing to decline in load factor and passenger revenue yield.

Southwest Airlines Co. Price, Consensus and EPS Surprise

Southwest Airlines Co. Price, Consensus and EPS Surprise
Southwest Airlines Co. Price, Consensus and EPS Surprise

Southwest Airlines Co. price-consensus-eps-surprise-chart | Southwest Airlines Co. Quote

Operating Expenses & Income

In the fourth quarter, operating loss totaled $1,169 million against operating income of $665 million in the year-ago quarter. Total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expenses) dropped 23.1%, thanks to the company’s cost-cutting measures and reduction in salaries, wages and benefits, among other expenses.

Fuel cost per gallon (inclusive of fuel tax: economic) was down 40.2% to $1.25. However, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and profit-sharing expenses, and special items, increased 29.4% year over year to 11.96 cents due to significant reduction in capacity.

Liquidity

This Zacks Rank #3 (Hold) company had cash and cash equivalents of $11,063 million at the end of the fourth quarter, compared with $2,548 million at the end of 2019. As of Dec 31, 2020, the company had long-term debt (less current maturities) of $10,111 million compared with $1,846 million at 2019-end. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Outlook

Southwest stated that demand for January and February has stalled primarily due to continued rise in coronavirus cases as well as seasonal softness in leisure travel demand. However, with trip cancellations having stabilized, the airline anticipates operating revenues to decline 65-70% in January from the 2019 levels, compared with a decrease of 65-75% anticipated previously. The same is expected to drop 65-75% from the 2019 levels in February. The carrier expects capacity to decline approximately 41% year over year in January. The same is anticipated to fall 46% in February and 16% in March. With continued softness in travel demand as well as seasonally weak travel period in January and February, the company predicts average core cash burn to worsen in the first quarter to approximately $17 million per day from approximately $12 million per day in fourth-quarter 2020.

Thanks to the airline’s fleet modernization efforts, lower utilization of its 737-700 aircraft as well as anticipated benefits of the reintroduction of the MAX aircraft, the carrier expects fuel efficiency to improve 5-6% year over year in the first quarter of 2021.

Economic fuel costs per gallon are expected to be in the band of $1.60-$1.70 in the first quarter of 2021, compared with $1.90 in the year-ago period. The same for 2021 is anticipated in the range of $1.65-$1.75, compared with $1.49 in 2020.

The carrier anticipates operating expenses (excluding fuel and oil expenses and special items) to decline 15-20% year-over-year in the first quarter primarily due to lower capacity as well as as an estimated $400 million of cost savings from voluntary separation and extended leave programs. Having realized approximately $565 million of cost savings in 2020, the company expects additional savings of $600 million in the current year, owing to reduction in salaries, wages and benefits of approximately $1.2 billion from the 2019 levels. The company, having reduced capital expenditures significantly, does not expect the same to be more than $500 million.

Sectorial Snapshot

Let’s take a look at some of the other recently released earnings reports from companies within the Zacks Transportation sector.

United Airlines UAL, carrying a Zacks Rank #3, incurred a loss (excluding 6 cents from non-recurring items) of $7 per share in the fourth quarter of 2020, wider than the Zacks Consensus Estimate of a loss of $6.56. Meanwhile, operating revenues of $3,412 million lagged the Zacks Consensus Estimate of $3,420.4 million.

J.B. Hunt Transport Services JBHT, carrying a Zacks Rank #3, reported earnings of $1.44 per share, beating the Zacks Consensus Estimate of $1.27. Total operating revenues of $2,737.7 million also surpassed the Zacks Consensus Estimate of $2,514.3 million.

Delta Air Lines DAL, carrying a Zacks Rank #4 (Sell), incurred a loss (excluding $1.34 from non-recurring items) of $2.53 per share in the fourth quarter of 2020, wider than the Zacks Consensus Estimate of a loss of $2.43. Total revenues of $3,973 million topped the Zacks Consensus Estimate of $3,754.5 million.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report

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