Southwest Airlines (LUV): Covid delta variant could ruin airline’s Q3 profit plans

Shares of Southwest Airlines Co. (NYSE: LUV) rose 1.5% during afternoon hours after falling earlier in the day following an updated guidance announcement from the company that hinted at the possibility of a loss for the third quarter of 2021 due to headwinds from the pandemic.

Strain on revenues

Operating revenues in July came in line with the company’s expectations thanks to strength in leisure passenger traffic and fares which were up from the levels seen in July 2019. Operating revenues were down around 12% compared to July 2019. Managed business revenues in July fell approx. 63% compared to the same month in 2019, in line with the company’s expectations.

However, Southwest has witnessed a slowdown in bookings along with a rise in cancellations in August due to the spread of the COVID-19 delta variant. If the number of COVID-19 cases continue to increase in the near term and the current revenue trends in August continue into September, it could put pressure on operating revenues for the third quarter of 2021.

Bleak outlook

In August, Southwest’s operating revenue is likely to be negatively impacted by 1-2 points compared to August 2019 due to less holiday travel as the Labor Day holiday weekend falls in September. So far, travel demand for Labor Day stands at a healthy level.

Operating revenues are expected to be down 15-20% in August and 15-25% in September compared to the same months in 2019. For the third quarter of 2021, operating revenue is estimated to drop 15-20% from the same quarter in 2019.

The load factor was approx. 87% in July and it is estimated to be around 80% in August. It is expected to range between 75-80% in September and between 80-85% in Q3 2021. Available seat miles are expected to be up around 49% in the third quarter of 2021 compared to the same period in 2020.

Southwest was profitable in July but the recent headwinds from the pandemic and their impact on August and September revenue will make it difficult for the company to be profitable in the third quarter of 2021.

Costs and cash

Southwest expects Q3 unit costs, excluding fuel and certain other items, to increase 1-5% compared to Q3 2019. Economic fuel costs are expected to range between $2.05-2.15 per gallon. As of August 9, 2021, the company had cash and short-term investments of approx. $16.9 billion.

Click here to read the full transcript of Southwest Airlines Q2 2021 earnings conference call