Southwest Airlines faces uncertainty, but waives US airline loans
- South West continues to refine its downward capacity projections, even with some green pushes in booking trends for August-2020 and September-2020.
- The airline is also likely looking to change previous assumptions about its size at YE2020.
- South Westthe decision not to take out a loan from the we government could prove to be a competitive advantage.
South West continues to reduce its capacity, although some positive trends are emerging
South West recently said that until August 19, 2020, there had been a slight improvement in demand for local entertainment, and booking trends for September 2020 had also improved slightly.
“However, year-over-year revenue declines remain significant, and passenger demand and booking trends remain inconsistent…” the airline said.
At different times during the pandemic South West did not reduce capacity as aggressively as some we airlines and at one point the airline estimated it might be close to operating a full schedule by YE2020. But with the cases of COVID-19 in the we grow up quickly, South West saw its net bookings drop by 10 to 15 points year-over-year during part of 2Q2020.
See related report: Prospects for Southwest Airlines remain grim as COVID-19 rages
South West expects the revenue drop in August 2020 to be between 70% and 75%, which is an improvement over previous projects of a 70% to 80% drop. Its load factors for the month are expected to be between 40% and 45%, against an earlier forecast of 30% to 40%.
The airline’s capacity is expected to decline 27% year on year in August 2020, followed by a 40% drop in September 2020, which is a deeper reduction than its initial capacity reduction plan for the month of 20% to 25%. South West expects charges for the month to be between 40% and 50%.
Even with encouraging booking trends, which are probably due in part to South West injecting low fares into the market, the airline recognizes that demand remains unpredictable, given the growth of COVID-19 cases in the we.
Although the cases reported daily in the we fell from around 74,000 at the end of July 2020 to 44,000 on August 19, 2020, the total number of cases remains at around 5.5 million.
There is a growing consensus that a full recovery in demand for air travel will not occur until a vaccine becomes widely available. And there is no definitive timeline for when a viable vaccine could be mass produced.
Until that happens, there will likely be crises and departures when it comes to demand, and South West previously said it could reach a level where it would only be 25% smaller year over year by YE2020, the airline is also realistic about the unpredictability of demand trends.
However, towards the end of July-2020 South West CEO Gary Kelly acknowledged that “it’s really almost impossible to plan right now… the rule of thumb you should be using is that we’re going to be downsizing in Q4. [4Q2020] around 25%, and if the demand is as it is today, that will not be enough ”.
South West plans to reduce 3Q2020 capacity by 30% to 35% year over year, compared to previous estimates of a decline of between 20% and 30%. In October 2020, the first month of 4Q2020, the airline is reducing its capacity from 40% to 50%, indicating that the airline is revising its previous projections for its size at the end of 2020.
South West opt for a government loan – will this move create any benefits?
As a member of we The Government’s Coronavirus Aid, Relief and Economic Security Act (CARES), airlines and other aviation providers could access up to $ 25 billion in loans. A lot we airlines have signed letters of intent with the government to access the loans, and they have until the end of September 2020 to decide whether they will accept the terms of the loan agreements.
The airline has about $ 15.2 billion in cash, and the S&P rating agency recently reaffirmed its investment grade rating. However, its BBB rating is only two notches above the speculative rating.
Still, the airline has maintained its investment grade rating with S&P, Moody’s and Fitch. South West said she believed the company could get additional financing on favorable terms, if needed, without accessing government loans.
Previously, Mr Kelly had said the terms of government loans were onerous, including an “important portfolio of warrants … I think we would much prefer to avoid them.” And I think what’s dear to shareholders is that it places restrictions on dividends that I oppose and share buybacks. I am opposed to that too ”.
South West is well positioned as the pandemic continues to create uncertainty
At present, South West does not pay dividends or participate in share repurchases; according to the airline: “… but obviously we would like to have this flexibility in the future … so there are many reasons why we would like to avoid this [the onerous terms]”. Mr. Kelly remarked that if South WestCompetitors accept these conditions, they could potentially be at a disadvantage.
By opting out of a government loan, South West may have the ability to resume dividends and share buybacks faster than its peers. This will obviously make it a more attractive company to investors, and the good quality rating could be an advantage as the airline strives to restructure its balance sheet once demand reaches normal levels.
However, a return to this kind of normalcy will take years.