Please ensure Javascript is enabled for purposes of website accessibility

Southwest Airlines' Cash Burn Ticks Down Again

By Adam Levine-Weinberg – Aug 22, 2020 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The popular low-fare airline keeps proving that it has what it takes to survive the COVID-19 pandemic with no long-term damage.

There's no end to the COVID-19 pandemic in sight. As a result, air travel demand hasn't improved much following a steep drop earlier this year. In recent days, passenger throughput at TSA checkpoints has averaged less than 30% of year-ago levels -- despite widespread availability of bargain airfares during what would usually be the peak summer travel season.

In this environment, U.S. airlines have had to focus on what they can control. Most notably, that includes minimizing cash burn and bolstering their balance sheet flexibility. Last week, Southwest Airlines (LUV 2.95%) gave shareholders good news on both fronts.

Cash burn is slowing -- gradually

Back in April, Southwest Airlines projected that core cash burn would average between $30 million and $35 million a day in the second quarter of 2020. Fortunately, solid cost performance and an uptick in bookings (especially in June) allowed it to beat that forecast. Daily cash burn slowed from $30 million in April to just $16 million by June, putting average daily cash burn for the full quarter at $23 million.

In conjunction with Southwest's Q2 earnings report last month, management said that third-quarter cash burn would likely be in line with the company's second-quarter result, largely due to a slowdown in bookings during July as COVID-19 case numbers surged. Fortunately, a modest decline in reported new cases in recent weeks has paved the way for increased bookings, bolstering cash flow.

On Wednesday, Southwest Airlines said it expects August revenue to be at the high end of its previous guidance range, albeit still down 70% to 75% year over year. Furthermore, based on recent booking activity, it expects modest sequential improvement in September, with revenue down 65% to 75% year over year.

A Southwest Airlines plane parked on the tarmac

Image source: Southwest Airlines.

Meanwhile, Southwest has been steadily paring back its flight schedules since the initial uptick in bookings petered out in July. The airline now expects Q3 capacity to be down 30% to 35% year over year, compared to its initial forecast of a 20% to 30% decrease.

The combination of stronger booking activity and fewer flights is good for cash flow. Southwest says that daily core cash burn averaged about $17 million in July -- $1 million better than its initial expectation. Moreover, the company reduced its estimate for Q3 daily core cash burn to $20 million from $23 million previously.

The balance sheet remains rock solid

Southwest Airlines entered 2020 with the best balance sheet in the U.S. airline industry by a long shot. It's been very aggressive in raising additional capital, reasoning that there's no such thing as too much cash in a highly uncertain environment (even if it's incurring some extra interest expense as a result).

Indeed, Southwest held an incredible $15.2 billion of cash and investments on its balance sheet as of Aug. 18. That represented an increase of more than $1 billion since July 23. The company more than offset its cash burn by issuing about $1 billion of additional unsecured debt and receiving its final $326 million disbursement from the government payroll support program.

Based on Southwest Airlines' estimated Q2 cash burn rate of $20 million a day, this $15.2 billion cash stockpile would cover more than two years of cash burn. With demand likely to continue improving at least a little bit and greater flexibility with respect to labor costs going forward, Southwest's cash burn will probably be a good deal lower than that figure, extending its runway.

A solid pick for long-term investors

While Southwest Airlines stock has held up better than most airline stocks this year, it remains far below its pre-pandemic highs. The stock also sits more than 15% below the high it reached in early June, when investors were briefly optimistic about a relatively quick recovery.

Southwest's fortress balance sheet will enable it to weather the pandemic with ease and go on the offensive vis-a-vis weaker rivals once conditions start to improve. When that will happen is still anybody's guess, but with several vaccine candidates having begun Phase 3 trials over the past month, a meaningful recovery could begin as soon as next year.

As an airline stock, Southwest Airlines is certainly a risky investment. However, for patient investors who can afford to take some risk, the long-term upside in Southwest Airlines stock appears to substantially outweigh the potential downside.

Adam Levine-Weinberg owns shares of Southwest Airlines. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$32.43 (2.95%) $0.93

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.