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Why Southwest Airlines Shares Were Up Today

By Lou Whiteman – May 19, 2020 at 4:16PM

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Is the worst of the travel slump now behind us?

What happened

Shares of Southwest Airlines (LUV -0.60%) were up 5.2% on Tuesday afternoon after the carrier reported modest improvement in travel demand. The airline sector has been hit hard by the COVID-19 pandemic, but we're beginning to see initial signs indicating the worst might be behind us.

So what

Southwest shares have lost nearly half of their value year to date as the airline and its peers have dramatically cut flights and grounded planes in response to a pandemic-induced travel slump. Southwest, which famously was able to avoid layoffs after the attacks of Sept. 11, has warned it might be forced to cut jobs this fall if traffic doesn't return.

A ground worker guides a plane to the gate.

Image source: Getty Images.

In a regulatory filing Tuesday, the airline gave investors reason for optimism, saying it "has recently experienced modest improvement in passenger demand, bookings, and trip cancellations," and so far this month, new passenger bookings have outpaced trip cancellations. That's a change from March and April, where cancellations came in ahead of new bookings.

Southwest said it expects its load factor -- roughly a measure of how full its planes are -- to be in the range of 25% to 30% for May, an improvement over the previous estimate of 5% to 10%. The company also said it has "recently experienced a modest improvement in passenger demand and bookings in June 2020."

The airlines have cut costs and raised liquidity and have the cash to survive into the summer, even if demand remains depressed. But for the companies to survive, long-term demand has to come back sooner rather than later. Southwest's comments suggest that perhaps that recovery has begun.

Now what

It's worth noting that planes flying at 30% full is nothing to celebrate in normal times, and it remains far from certain a recovery is taking hold. In comments on Tuesday, Delta Air Lines CFO Paul Jacobson discussed his company seeing a slight demand uptick, but noted it's yet to be seen whether ticket buyers today will actually follow through and fly or if economic or health concerns cause those bookings to eventually be cancelled.

And even if we see demand improving, it could still be years before travel returns to pre-pandemic levels and the airlines are in expansion mode, again.

There's still more we don't know about the recovery than what we do know, so investors should remain cautious. But Southwest's update is undoubtably good news. The airline looks like one of the best bets to survive the crisis, so it's no surprise shares are on the upswing today.

Lou Whiteman owns shares of Delta Air Lines. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.

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