Southwest Airlines: Path Back To Normal

Aug. 20, 2020 10:34 AM ETSouthwest Airlines Co. (LUV)DAL47 Comments


  • Southwest Airlines continues to reduce daily cash burn rates despite a slow rebound in passenger traffic.
  • The airline has normalized EPS targets in the $4.50 to $5.50 range.
  • The stock remains a bargain stuck below $35.
  • This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Get started today »

The airline stocks haven't rallied in months, but the sector continues to see improvements worthy of higher stock prices down the road. Southwest Airlines (NYSE:LUV) is the latest company to report better than expected cash burn numbers despite a tough flying environment. My investment thesis remains bullish on the airline as the industry is headed to cash flow breakeven numbers.

Southwest Airlines logoImage Source: Southwest Airlines website

Eliminating Cash Burn

Despite a lot of protests by airline CEOs, the industry is quickly heading toward cash flow breakeven numbers. In fact, some airlines have already reached those levels when accounting for the Payroll Support Program funds from the U.S. Treasury.

When last discussing Southwest Airlines, the industry was happy to see daily passenger traffic headed towards 600K. Passenger growth has slowed in the last month, but the daily TSA traffic levels have flatlined up around 800K per prime weekend days, providing enough of a revenue boost to eliminate a large portion of the daily cash burn.

The airline was forecasting daily cash burn targets in the $20 million to $25 million range back in June, while the airline just predicted July fell to ~$17 million. In essence, the month after Southwest Airlines was proclaiming up to a $775 million cash burn level for the month, the airline only burned $527 million.

The coronavirus environment has made predicting financial targets in the airline sector very difficult, but investors need to realize that airlines such as Southwest and Delta Air Lines (DAL) constantly provide the most dire outcomes. The airlines are relatively close to breakeven, with traffic only back to 30% of 2019 levels.

Another prime example of this issue is the guidance from Southwest of the Q3 daily cash burn rate only dipping to $20 million. Yes, somehow the airline is predicting the rest of the quarter

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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