Why Southwest’s $4 Billion Cash Reserve Will Be Critical For It To Tide Over The Coronavirus Crisis

by Trefis Team
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Airline stocks have taken a beating as the WHO first declared the COVID-19 outbreak a global health emergency and finally, a pandemic.  Southwest Airlines (NYSE: LUV) stock declined by nearly 34% from $55 in early February to $36 by the end of last week before trending slightly higher on Monday. With the U.S. airline industry looking for a $54-billion bailout package from the government to avoid bankruptcy in the wake of the global outbreak, we believe that Southwest is at a much stronger financial position compared to its peers with $4 billion in cash on hand and just $654 million of debt obligation. This key factor will play an essential role in helping the low-cost airlines’ stock outperform the S&P 500 once the economy recovers from the coronavirus impact.

Trefis highlights Southwest Airlines’ stock performance with the broader market (S&P 500) during the 2007-08 financial crisis in an interactive dashboard, ‘2007-08 vs. 2020 Crisis Comparison: How Did Southwest Airlines Stock Fare Compared with S&P 500?. We observe that the company’s stock recovered by 95%, more than the S&P 500 as the markets recovered. We also provide a detailed comparison of -28% Coronavirus crash vs. four historic market crashes in a separate interactive dashboard.

 

Southwest Airlines is the fourth-largest carrier in the U.S. with $22 billion in annual revenues and $4 billion of operating cash flow

  • With the growing number of COVID-19 cases in the U.S., the CDC released a travel advisory restricting domestic travel.
  • Thus, the airline industry has observed sharp declines in demand, which led to a significant loss of value across airline stocks last week.
  • As the demand crunch is likely to weigh on all airline stocks until the containment efforts of COVID-19 find success or a vaccine gets developed, Trefis observes Southwest Airlines’ cash position and debt obligations to highlight stock’s recovery post-crisis.
  • In 2019, Southwest generated $22.4 billion in revenues and $4 billion of operating cash flow.

 

The company had $4 billion of cash and cash equivalents and $1 billion of debt and operating lease obligations

  • At the end of 2019, the company reported $4 billion of cash and cash equivalents.
  • All airlines have a thin operating margin of 5-10%, where fuel costs and employee salaries are the biggest expense heads.
  • The company incurred $4.3 billion in fuel costs and $8.3 billion of salary expenditure in 2019.
  • Southwest’s plan to reduce capacity by 20% will reduce fuel costs by roughly that amount. But despite a hiring freeze, the company’s salary expenditure will likely remain around levels seen last year.
  • At the same time, the negligible amount of air travel has all but dried up revenues for the company. And Southwest will have to burn more cash the longer travel restrictions stay in place.
  • We highlight the future debt payment schedule and operating lease liabilities in a separate interactive dashboard about the debt position of U.S. airline companies.
  • For 2020, the company has a debt obligation of $654 million and operating lease liability of $392 million – implying a net cash balance of roughly $3 billion.
  • This would mean that Southwest has enough cash in hand to cover its primary fixed costs for roughly three months after accounting for any debt and lease obligations.
  • Considering a temporary suspension of the airline’s operations for a month, we believe that Southwest Airlines has a good cash position to weather the storm.

For the timeline of the 2007-8 crisis and more detailed charts, view our dashboard analysis 2007-08 vs. 2020 Crisis Comparison: How Did Southwest Airlines Stock Fare Compared with the S&P 500?

 

You can also read about the impact of the coronavirus outbreak on the stock of major U.S. companies, including Netflix, Disney, and P&G, among others on the Trefis coronavirus topic page.

 

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