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Southwest Airlines Says It Won't Take Coronavirus Government Loan

By Lou Whiteman - Updated Aug 19, 2020 at 10:15AM

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The company's CEO had previously called the terms of the loan "pretty onerous."

Southwest Airlines (LUV -0.17%) said Wednesday it will not participate in a U.S. Treasury-run loan program designed to support the airline industry, reaffirming its place among the healthiest companies in the aviation industry.

Southwest, like all airlines, has been hit hard by the coronavirus pandemic, which has caused travel demand to evaporate and left airlines bleeding cash. The CARES Act earlier this year provided up to $50 billion to support the industry, including $25 billion in payroll support and another $25 billion in loans.

A Southwest plane in flight.

Image source: Southwest Airlines.

The airline took the payroll support, and in July signed a nonbinding letter of intent with the Treasury Department for a secured loan of about $2.8 billion. But the airline has also made steady progress cutting costs and raising private capital, and has about two years' worth of liquidity at current burn rates.

In a regulatory filing on Wednesday, Southwest said that "as a result of the significant actions taken by the company to bolster liquidity and its belief that it can secure additional financing at favorable terms, if needed, the company has since decided not to participate in the secured loan program."

During a July call with investors, CEO Gary Kelly called the terms of the loan "pretty onerous" (including requiring the airline to issue warrants for stock), telegraphing that the airline would only take the cash if needed.

It's unclear whether Southwest will be the only airline that turns down the loans, but others including American Airlines Group have said they will participate in the program. Southwest is widely considered to be among the strongest companies in the industry, and equity and debt markets are likely to remain open to it even if conditions remain challenging.

In its latest update, the airline said it "continues to experience significant negative impacts to passenger demand and bookings" due to the pandemic, though it did see a "modest improvement" so far in August.

Southwest expects August operating revenue to be down 70% to 75% year over year, and overall capacity in the third quarter to decrease by 30% to 35%. That's down from Southwest's previous guidance for capacity to decline by 20% to 30% in the quarter.

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