On Thursday, Southwest Airlines’ CEO, Gary Kelly, shared a video message in which he detailed travel demand and financial trends for the airline moving forward. While there were some bright spots, there are a few grim spots for the airline, and it culminated in Mr. Kelly stating business needs to double for the airline to break even this year.
Business needs to double
Right now, Southwest Airlines continues to burn cash. The airline is expecting a third quarter daily cash burn to be approximately $20 million a day. That was down from the previous estimate of $23 million a day. Mr. Kelly stated the following concerning the cash burn trends:
“It’s welcome progress, but we’ll need our business to double in order to break even. Fortunately, our cash position remains strong with around $15 billion in cash and short-term Investments. We’ve got to find a way to eliminate these huge cash losses and just get to the other side of this pandemic”
In July, Southwest’s operating revenues declined about 70-75% compared to a year ago. The airline’s load factor was 43%. Come August, there was an improvement in close-in leisure passenger bookings, and the airline expects year-over-year revenue decrease for the month to be 70-75% with a load factor between 40 and 45%– not too far off from July.
Looking ahead to September, the airline is seeing modest improvements in booking trends. However, Mr. Kelly noted that September is a heavier business travel month, especially after the Labor Day holiday. Business travel remains light still for Southwest, so the airline is still expecting operating revenues to be down about 65-75% year-over-year with a load factor again between 40 and 50%.
Note that Southwest’s load factor will remain low for the next few months as the airline continues to block middle seats on its aircraft. Currently, middle seats will remain open through October 31st. Delta, one of Southwest’s competitors, has pledged to keep middle seats open through January. Whether Southwest follows remains to be seen.
Throughout the summer, Southwest has been working to stimulate its bookings with fare sales. Very recently, the airline offered fares for as low as eight cents per mile. While that can help bring people on board planes, it does not necessarily mean that Southwest is turning a profit.
Supporting a CARES Act extension
In the first round of government funding for airlines, Southwest Airlines received $3.2 billion in payroll support. Mr. Kelly expressed his support for a clean six-month extension of that funding and highlighted the potential to avoid furloughs that other of its competitors have recently announced.
Thus far, Southwest Airlines has indicated it will not need to furlough any employees on October 1st. However, over 17,000 of its employees have agreed to take unpaid leaves. So, while Southwest did receive $3.2 billion early on in the crisis, it does not have the same payroll that it did then thanks to some departures already. While the money would help Southwest, it is unclear what the appetite in Congress is for an extension nor whether or not the funds would protect jobs if they are not currently at risk.
Schedules are shrinking
Southwest did pull back capacity across August, September, and October. The October cuts came a few days before Mr. Kelly’s video message. While the airline has published its schedules out to April, with several new routes, including to Steamboat Springs, Southwest Airlines is still managing schedules on a 30, 60, and 90-day basis.
September’s capacity is estimated to be down by about 40%. October capacity is estimated to be down between 40 and 50%, compared to 2019 levels. For reference, August’s capacity ended up being down about 27% compared to the same time last year.
Mr. Kelly called the schedules “high-quality.” There are still robust flight choices available for passengers. Note that, however, as the industry dynamic changes, some of those flights may be pulled and capacity redeployed across higher-yield markets. It is too soon to say whether specific flights will take off in November, December, March, or April, Southwest will likely continue to serve as many destinations as possible.
Ultimately, for now, it appears that Southwest Airlines is not going to turn a profit this year– like many of its competitors. However, Southwest is in a good cash position and should be able to emerge from the crisis.
What do you make of Gary Kelly’s statement that business needs to double? When do you think Southwest will become profitable again? Let us know in the comments!
