Southwest Airlines Earnings – What Is The Market Thinking?

Posts A Major Loss – First In 9 Years!

But The Stock Rebounds – Make Sense Of That!

by Ian Harvey
April 29, 2020


Southwest Airlines is the latest to present earnings, reporting a $94 million loss in the first quarter, and the CEO Gary Kelly warned the losses will get worse in May — projecting revenue to drop as much as 95%.

So why does the stock price go up? And this is not the only airline to see their stock prices rise!

Is this a case of over-enthusiastic optimism within a COVID-19 situation?

Southwest Airlines Co (NYSE:LUV)

Airlines are far from “out of the woods” – so why this sudden increase in stock prices yesterday? There appears to be a lop-sided situation being experienced where airline stocks still in a desperate state, and will be for quite some months – probably years – suddenly surging on the stock market? Other sectors, particularly tech, where certain stocks have done well during the pandemic lock-down as they provide an entertainment service, have suffered after earnings!

The COVID-19 crisis has decimated travel demand, with an unprecedented number of flight cancellations in the second half of March.

This doesn’t make any sense!

Southwest Airlines stock rose 2% to $29.69 in the stock market yesterday. Among other airline stocks, Delta Air Lines, which reported earnings last week, rose 9.8%. American Airlines (AAL), which reports Thursday, added 12%.

United Airlines (UAL) gained 11%. JetBlue Airways (NASDAQ:JBLU) picked up 11%, while Alaska Air Group (NYSE:ALK) was higher by 13% and Hawaiian Holdings (NASDAQ:HA) jumped 18%. Even budget airlines participated with Spirit Airlines (NYSE:SAVE) stock gaining 17%.

A Look At Delta Air Lines Report..... 

Delta Air Lines, Inc. (NYSE: DAL) reported last week – posting a $422 million pre-tax loss, or $0.51 per share, in the first quarter, for its first quarterly loss in almost a decade. 

Delta's total revenue clocked in at $8.6 billion, down 18% compared to the prior year, with total unit revenue down 13%. Cargo revenue fell 21% to $152 million.

But the stock price climbed!

As yet, the numbers are a concern as the ongoing pandemic didn’t affect a full quarter of business. On March 1st, the U.S. had less than 100 cases of novel coronavirus. January was business as usual and February shouldn’t have been too disruptive, although by then the American public was taking notice and some international flights were coming offline.

Delta is burning through cash, as all airlines would be doing at this stage. Delta said “With the significant impact of COVID-19 on Delta’s revenue, we were burning $100 million per day at the end of March. Through our decisive actions, we expect that cash burn to moderate to approximately $50 million per day by the end of the June quarter.”

Last week, Delta said passenger demand had fallen to "almost zero," as travel booking went silent and passengers canceled flights and scrambled for refunds. The people who were traveling, Delta said, were people who absolutely needed to, like first responders and "people who need to get to see sick people."

This is a major problem still and should be worrying many of the traders and investors that bought into the airline stocks yesterday.

Analysts and airline executives say it could take years for the airline industry to recover from the coronavirus pandemic, which prompted nations to close off global air travel and U.S. states to issue stay-at-home orders. Airline stocks have fallen hard, and still badly trail the S&P 500.

The government has stepped in with rescue aid, offering passenger carriers $25 billion in grants and loans to keep employees paid, and another $25 million in other loans. But analysts worry it won't be enough to prevent layoffs later this year.


Now, A Look At Southwest Airlines Report.....

Yesterday Southwest Airlines reported mixed first-quarter results as well as plans to raise more capital and a re-evaluation of its Boeing (BA) aircraft orders.

Southwest Airlines posted a $94 million quarterly net loss, its first in nine years, and warned of drastic revenue drops ahead as it sought to raise another $2.6 billion to help weather the coronavirus pandemic.

The result was a loss of 15 cents a share on revenue of $4.2 billion. Unit revenue fell 11.8%. April and May operating revenues were both expected to be down 90%-95%.

Southwest Airlines shares opened down 1% at $28.82 after it announced a public stock offering of 55 million shares, worth around $1.6 billion at Monday’s closing price of $29.11, and $1 billion worth of convertible debt.

However, this scenario changed with the stock climbing 4.7% during the day, reaching $30.48, before closing the trading day at $29.69, still up 1.99%.

And in after-hours trading the stock price was back up to $30.04.

This price rise has me baffled! Is this a case of “wishful thinking,” “herd mentality” or is it a case of “electronic trading” fooling the traders and investors.


The Situation Before The Report.....

Southwest Airlines reported yesterday, before the market opened.

The consensus estimate was for a loss of $0.48 per share on revenue of $5.01 billion; and the Whisper number was a little better at ($0.46) per share.

Consensus estimates are for earnings to decline year-over-year by 168.57% with revenue decreasing by 2.70%.

Overall earnings estimates have been revised lower since the company's last earnings release.

It was expected that the scene for the major U.S. airlines reporting first quarter earnings this week, would not be “pretty”. The trade group Airlines for America (A4A) warned that COVID-19 had “decimated” airline passenger volume and the carnage will continue. At the end of January there were an average 111,000 flights every day worldwide. Last week the number averaged 28,000.

In the U.S., domestic flights, as of April 18, averaged just 10 passengers even though the airlines have scrambled to cut capacity. A4A says the carriers have grounded 2,711 aircraft or 44% of the fleet and they plan to cut capacity even more. Net bookings are down 99.5% year over year and booked revenue is down 103%, according to A4A.

Shares of Southwest Airlines have fallen to a 5 1/2-year low despite disclosing that it received some of the government aid it has requested.

Even with the support from the federal government, airlines are still looking for ways to cut costs as TSA passenger counts drop 95 percent from last year.

Southwest Airlines Chairman and CEO Gary Kelly joined a growing group of airline executives who have warned employees about what will happen if current travel demand levels persist through the summer.

"If things don't improve dramatically over the May, June, July time periods we'll have to prepare ourselves for a drastically smaller airline," Kelly told employees in a video message last Thursday.

Southwest Airlines had already halved its schedule and recently extended the window employees can take paid and unpaid leave through August as it looks to trim costs. As of mid-April, over 7,000 Southwest employees opted for Emergency Time Off in May, which offers employees partial pay and their benefits. Over 5,000 employees signed up for ETO in June.

Shares of the airline had lost 20.05% in the past month.

Dallas-based Southwest, like other carriers, has experienced dramatic falls in customer demand. Despite previous capacity slashes, the airline is experiencing low load factors on remaining flights and even had a day last week where it flew 56 flights with no passengers on-board.

Reasoning Behind The Gains.....

It appears that despite the losses across the market, the hard-hit airline industry did quite well yesterday as investors are betting that they'll be able to recover in the long run.

And, shareholders are ready to write off much of the first half of 2020 as long as things can start to recover in the second half.

Yet the airline companies aren't entirely comfortable even with that time frame. Delta and JetBlue have asked the Department of Transportation to suspend flights to certain airports. Delta's request focuses on smaller markets, while JetBlue includes some huge markets like Chicago, Atlanta, Houston, and Seattle.

There's going to be a lot of uncertainty in the airline industry for months to come, as companies wait to see if travelers return to the skies.

Therefore it is expected that volatility will continue, and yesterday's gains could be just the latest bump in the turbulent environment airlines face – and the stocks will retreat to levels they should be at based on the negative factors they face!

Will masking up be the answer? Again there is some doubt as to the effectiveness of this in an already air-conditioned space where the filters are already apparent. Passengers cannot effectively be spaced in such a confined area – and if so, then many seats will need to be vacant – not very cost efficient.



Investors “bottom-fishing” have pushed airline stock prices to heights that seem greatly unwarranted under the circumstances; and I would not be surprised, in the near future, if many of them are “burnt” badly.

At the moment, the market appears to be proving me wrong; but I doubt if airline stocks have actually found their bottom prices.

After taking a beating on our option put trades for Delta and now Southwest Airlines, I will not be rushing to recommend any trades on airline stocks in the near future to Stock Options Made Easy Members until some clarity is forthcoming.

Therefore, we will concentrate on areas that have a more sensible approach in their views to earnings reports.

This is not to say that sensibility to airline stocks will not eventually win out, and the market, in the future, will trade accordingly.

Are You Ready To Get On-board With Our Future Options Trades?

What Trades Are We Anticipating?

Do You Wish To Be Part Of This Action?

Join us here at Stock Options Made Easy, and find out our trades moving forward.



An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.

It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!

Best of Trading,
Ian Harvey
Director of Stock Options Made Easy


”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

Back to Stock Options Made Easy Home Page from Southwest Airline Earnings – What Is The Market Thinking?