Southwest Airlines reported its first quarterly operating loss since the depths of the Great Recession 11 years ago.
Southwest (LUV) lost $77 million excluding special items, which was a bit better than Wall Street’s expectations. But it was the carrier’s first net loss since 2011, when it took a charge related to long-term fuel purchase contract. And it was the first operating loss since the first quarter of 2009. Revenue fell $915 million, or 18%, from a year earlier.
The company has long been one of the industry’s most profitable airlines, but coronavirus has dealt serious damage to airlines. Travel has fallen to virtually zero during the pandemic.
Southwest said the current quarter will also yield miserable results. It said revenue in April and May is expected to be down at least 90%, although trip cancellations have receded from their peak in March. And it said it sold only 6% of its seats to paying passengers in April.
“The current outlook for second quarter 2020 indicates no material improvement in air travel trends,” said the company.
Southwest, like the rest of the US airline industry, has accepted help from the US Treasury, in the form of a $2.3 billion grant and a low-interest loan of $948 million. It has received half of that total, $1.6 billion. It has also borrowed an additional $5.2 billion since the start of this year and already had $9.3 billion of cash on hand as of last Friday.
“We entered this crisis prepared with the US airline industry’s strongest balance sheet and most successful business model,” said CEO Gary Kelly. “While the impact of the pandemic is unprecedented, we believe demand for air travel will rebound. And we intend to emerge with ample liquidity.”
“It just doesn’t pay to not have enough cash in an environment like this,” Kelly said in an interview on CNBC.
He estimates that the company will burn through about $900 million in cash in April alone, with some easing in May and June. Then, he hopes, the situation will be “remarkably better in July.” But even with the additional cash and the government help, “we can’t sustain this kind of cash burn indefinitely,” he said.
What Southwest and the rest of the airline industry needs to get people flying again is for the country to open up businesses that give people a reason to travel, Kelly continued in the CNBC interview.
“They need to have something to be able to do once they get there,” he said. “Disney World needs to open back up. Restaurants need to open back up.”
But additional steps would be needed to make passengers feel safe, he noted – like masks and pre-boarding temperature screenings.
Kelly later told investors that he believes temperature screenings should be done to make people comfortable comfortable with the idea of flying again, but prefers that federal officials perform them rather than airlines.
Southwest is instituting a policy that employees who deal with customers must wear masks. But, Kelly said, Southwest is not not prepared to say that customers themselves will be required to wear masks, although it’s something being considered in the interest of making all customers feel safer.
“I think that we’re going to find that there’s a strong majority of people who aren’t comfortable unless everyone around them has a mask on,” he said on the investor call. “I think we’re all inclined to let people … use their own good common sense, but in this particular case, we may need to be more aggressive there. But we haven’t made that decision yet.”
And Kelly said that Southwest won’t book every seat on a flight, even when demand returns, as a way to allow more social distancing on flights.
“In the coming months, we’ll want customers to be comfortable that there will be spacing,” he added. “You can assume all the middle seats will be open.”
As part of the federal assistance package, Southwest has agreed not to furlough or cut staff pay through September 30. After that date, “if traffic doesn’t materialize then there’s no choice but to downsize the airline,” Kelly said. But as of now “it’s premature to make those judgments.”
Under terms of the federal bailout, airlines also are not allowed to pay dividends or buy back shares in the second or third quarter. But Southwest might not pay dividends or repurchase shares longer than that prohibition, saying that both were suspended “until further notice.” It will be the first time since 1977 it has not paid a dividend.
If the company’s losses extend through 2020, it would be first annual loss since 1972
Southwest uses only Boeing (BA) 737 jets and has more of the troubled 737 Max jets than any other airline. But the airline said Tuesday it doesn’t expect to use those grounded planes until November at the earliest, and it could push the use of the planes back beyond that. Boeing (BA) has said it expects to get approval to fly the grounded jets by the middle of this year.
Southwest has grounded 350 ofitsother jets because of the scaled back schedule, about half of its fleet. Southwest said it “is evaluating the need to temporarily remove or retire additional aircraft from its fleet.” And it said has agreed with Boeing (BA) to reduce the number of new jets that it will add to its fleet through the end of 2021.
Southwest originally planned to take delivery of 107 737 Boeing Max jets between from 2019 through 2021, and another 19 from aircraft leasing companies. But it so far has received only three of those planes due to the grounding. Under an agreement with Boeing, it will now take delivery of no more than 48 of those jets through the end of 2021, and defer orders for at least 59 others.
“We don’t need the Max right now. We don’t need all the airplanes that we have,” Kelly told investors.
Kelly said the company is eager to get the Max planes it owns back in service and that it would prefer to use the Max rather than older planes, because they are more efficient to operate.
When asked if Southwest would cancel orders for the Max and instead buy used aircraft that might now be available, Chief Financial Officer Tammy Romo dismissed the idea.
“I’ll just say that our preference is to get new airplanes from Boeing,” she said.
Correction: -- An earlier version of this story incorrectly stated when Southwest's last quarterly loss took place and the amount of its drop in revenue.
