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Southwest's Revenue Expectations Improve as Demand Picks Up

·3 min read
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With easing travel restrictions, Southwest Airlines Co. LUV has been seeing improvement in passenger demand since early May, as a result of which new passenger bookings have been outpacing trip cancellations.

Owing to this uptick in demand, the airline’s operating revenues declined 85-90% year over year in May with capacity decreasing approximately 64% and load factor (percentage of seats filled by passengers) at around 30%. This is better than the 90-95% plunge in April operating revenues. April capacity decreased approximately 58% year over year, while load factor was a mere 8%.

For June, Southwest anticipates operating revenues to fall 70-75% year over year with capacity declining 40-50%. Load factor in the period is estimated in the 40-50% range. Previously, the company predicted June operating revenues to decline in the range of 80-85% with capacity anticipated to decrease 45-55% and load factor to be at 35-45%.

Southwest Airlines Co. Price
Southwest Airlines Co. Price

Revenues are expected to improve further in July. The carrier forecasts operating revenues to slide in the 65-70% range in July, with capacity anticipated to decline 25-35% and load factor expected in the band of 45-55%.

In the second quarter of 2020, capacity is expected to reduce in the 50-60% range. Economic fuel costs are predicted between $1.25 and $1.35 per gallon in the same period. Previously, the company estimated second-quarter fuel costs in the band of $1-$1.10 per gallon.

Thanks to modest improvement in passenger numbers, Southwest anticipates average daily core cash burn of $20-$25 million in second quarter, better than the previous expectation of an approximate $25 million daily cash burn. Additionally, the carrier now expects liquidity of approximately 24 months, compared with its previous estimation of an approximate 20 months of liquidity. This expectation for a stronger liquidity position is based on Southwest’s current cash and short-term investments of $13.9 billion, the remaining amount of $978 million to be received from the payroll support program in two installments in June and July, and an estimated $20 million of average daily cash burn in June.

Zacks Rank & Key Picks

Southwest carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Scorpio Tankers Inc. STNG, Teekay Tankers Ltd. TNK and Frontline Ltd FRO. While Frontline sports a Zacks Rank #1 (Strong Buy), Scorpio Tankers and Teekay Tankers carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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The Zacks Consensus Estimate for Teekay Tanker’s current-year earnings has been revised 35.6% upward in the past 60 days.

The Zacks Consensus Estimate for Frontline’s current-year earnings has been revised 17.1% upward in the past 60 days.

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Click to get this free report Southwest Airlines Co. (LUV) : Free Stock Analysis Report Frontline Ltd. (FRO) : Free Stock Analysis Report Teekay Tankers Ltd. (TNK) : Free Stock Analysis Report Scorpio Tankers Inc. (STNG) : Free Stock Analysis Report To read this article on Zacks.com click here.