Southwest Airlines (LUV): Three factors that work in favor of this airline stock

Shares of Southwest Airlines (NYSE: LUV) have gained 56% over the past 12 months and 22% since the beginning of this year. A key player in an industry that was hit hard by the COVID-19 pandemic, Southwest is recovering at a healthy pace. Looking ahead, there is a bullish sentiment around the stock taking into account a few factors that work in its favor. Here’s a look at them:

Demand trends

The airline industry in general has been seeing a pickup in demand for leisure travel with people wanting to get on with their vacation plans. The widespread distribution of vaccines is another factor that could help boost leisure travel this summer. Southwest has been seeing sequential increases in leisure passenger traffic and fares since March and this trend is likely to continue through June and July as well.

Although business travel remains soft, Southwest is seeing modest improvements in business passenger demand and bookings. Business revenues for May 2021 were down approx. 77% from May 2019, which is better than the 90% drop seen in February compared to the same month in 2019.

Revenue recovery

Southwest is seeing sequential increases in its operating revenues and expects this to continue in the near-term. Revenues in May improved sequentially from April and came in at the better end of the company’s guidance range. Southwest expects revenues to improve sequentially through June and July helped by improvements in leisure passenger traffic and fares.

May revenues are expected to be down approx. 35% from the same month in 2019 while revenues in June are expected to drop around 20% from 2019 levels. For July, revenues are estimated to decline around 15-20% from the same period in 2019.

Southwest expects its capacity for the second quarter of 2021 to increase approx. 87% year-over-year but compared to the same period in 2019, capacity is expected to be down around 16%. For August, the company expects capacity to be up approx. 39% YoY and to be comparable with August 2019.

Based on the improvement in its revenues, Southwest decided to add 34 Boeing 737 MAX 7 aircraft to its fleet increasing its total firm orders to 234.

Cash flow

The company has managed to reduce its cash burn significantly. In May, the average core cash burn was approx. $2 million per day. For Q2 2021, the company now expects its average core cash burn to range between $1-2 million per day versus its previous estimate of $1-3 million per day. This compares to average core cash burn of $23 million per day in Q2 2020. Southwest expects to achieve breakeven average core cash flow or better in June 2021.

According to TipRanks, the majority of analysts have given this stock a Buy rating and it has an average price target of $71.38, which reflects an upside of 25% from the current price level.

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