COVID Hits Southwest Airlines With $1.5B Q2 Loss

Southwest Airlines Co. LUV recorded a $1.5 billion adjusted net loss in the second quarter, a direct result of the devastating impact of the coronavirus pandemic on passenger travel.

Revenues plummeted 83% to $1 billion. Including special charges, Southwest's net loss was $915 million. Before taxes, Southwest lost $1.2 billion.

During the second quarter of 2019, Southwest had $5.9 billion in revenue and net income of $714 million.

Delta Air Lines, Inc. DAL, United Airlines Holdings, In.c UAL and American Airlines Group, Inc. AAL all reported multi-billion losses for the second quarter.

Airlines say the spark in business during May and June has tapered off with the resurgence of the coronavirus in the U.S. and travel quarantines in some states. Southwest said it too has seen bookings soften for future months, with a modest increase in trip cancellations. It estimates July operating revenues to decrease 70% to 75%, year-over-year, with capacity down about 30% and load factors in the range of 40% to 45%. In August, the airline plans to increase capacity, while revenues are expected to be 70% to 80% compared to 2019.

Southwest said it reduced operating expenses last quarter to $2.1 billion,  57% of the prior year's total. It returned five leased Boeing 737-700 aircraft, the least fuel-efficient planes in its fleet.

The Dallas-based carrier has about $15 billion in cash and short-term investments and unencumbered assets of $12 billion, including $10 billion in aircraft.

Southwest said it's second quarter load factor and passenger yield fell 55% and 21%, respectively. Freight revenue dropped 13.6% to $38 million. For the first half, freight revenue was down 11.5% to $77 million.

"We were encouraged by improvements in May and June leisure passenger traffic trends, compared with March and April. However, the improving trends in revenue and bookings have recently stalled in July with the rise in COVID-19 cases," said Chairman and CEO Gary C. Kelly. "We expect air travel demand to remain depressed until a vaccine or therapeutics are available to combat the infection and spread of COVID-19. We will adjust our flight schedule aggressively and frequently in response to this volatile demand environment."

His comments on the link between recovery and a vaccine, and being careful about resuming more flights, echoed United Airlines CEO Scott Kirby on Wednesday.

"We remain diligent in meticulously managing our cash burn. Since March, we have reduced annual 2020 spending by more than $7 billion compared with original plans. Average core cash burn decreased by nearly half during second quarter 2020, from approximately $900 million in April, or $30 million per day, to approximately $500 million in June, or $16 million per day, resulting in second quarter 2020 average core cash burn of $23 million per day, primarily due to strengthening revenue trends," Kelly said.

Average daily cash burn has increased this month to $18 million per day because of the weaker revenue environment.

"Due to the reversal in trends, we are re-evaluating our August and September 2020 capacity plans in an effort to improve our third quarter 2020 average daily core cash burn, which is currently estimated to be in line with second quarter 2020 of $23 million per day. We are laser-focused on returning to break-even cash flow, and we will continue exploring opportunities for further cost efficiencies," Kelly said.

About 16,900 employees, or 27% of the workforce, have accepted extended unpaid leave or separation packages, resulting in $400 million in expected fourth-quarter savings, Southwest said. Federal payroll aid under the Coronavirus Aid, Relief, and Economic Security Act expires on Oct. 1. Kelly said the strong take rate for voluntary work reductions has eliminated, for the time being, any need to pursue involuntary furloughs and layoffs.

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Photo: Southwest Airlines