Southwest Airlines (LUV) expects business travel to remain down well into next year

Shares of Southwest Airlines Co. (NYSE: LUV) were up over 2% in afternoon hours on Friday. The stock has gained 35% over the past three months. The company reported better-than-expected results on Thursday and shared its demand outlook.

Southwest expects to see better revenues and lower costs in the fourth quarter compared to Q3 and the company is looking to unblock the middle seats from the start of December which should help absorb the 50% increase in seats offered for sale as demand improves.

Quarterly performance

Operating revenues fell 68% year-over-year to $1.8 billion and adjusted loss amounted to $1.99 per share compared to EPS of $1.23 last year. The company saw revenues decline across all of its segments with passenger revenue dropping 72%.

Demand trends

Demand and bookings were hindered at the beginning of the quarter by the effects of the COVID-19 pandemic. July revenues dropped 71% year-over-year and capacity was down 31%. The trend improved slightly in August with the revenue decline at 69% and capacity down 27%. September saw revenues drop 66% while capacity was down 41% as the airline reduced its schedules to rightsize its capacity for post-summer demand.

Southwest is currently seeing more demand for leisure travel while business travel remains weak. Corporate managed travel was down 89% for the third quarter, which was in line with Q2, and the company believes business travel trends will remain feeble through the end of this year and well into 2021.

Looking into the fourth quarter, Southwest hopes to see a modest improvement in leisure travel as the holiday season nears. Demand and bookings improved in October compared to September but the company still expects revenues to drop 65-70% year-over-year along with a decrease of around 45% in available seat miles.

The bookings for Thanksgiving in November are looking good. The company is projecting revenues to fall 60-65% in November and capacity to be down around 35% year-over-year. Although Southwest does not have much visibility into December, the holiday demand appears to be fairly healthy. Available seat miles are expected to be down 40-45% year-over-year in December.

Total available seat miles, or capacity, for the fourth quarter are estimated to be down around 40% year-over-year. Southwest believes that domestic business travel will return slowly and that by the end of 2021, domestic business could be down 50-60%.

Outlook

Southwest expects to generate salaries, wages and benefit cost savings of approx. $550 million in the second half of 2020 with $143 million realized in the third quarter and over $400 million in the fourth quarter.

Fuel price is expected to range from $1.20-1.30 per gallon in the fourth quarter versus $2.09 per gallon in the same period a year ago. Core cash burn for October is expected to be approx. $12 million per day while cash burn for Q4 is estimated to be around $11 million per day which compares to the average core cash burn of $16 million per day seen in the third quarter.

Click here to read the full transcript of Southwest Airlines Q3 2020 earnings conference call