Southwest Airlines to maximize metrics for cash burn rates

Seeking Alpha has reported Southwest Airlines expects solid cash burn rates despite a lack of focus on maximizing those metrics, the news source said.

The industry has overestimated the daily cash burn rates due to not focusing on the PSP grant funds or the potential rebound in revenues.

Southwest´s stock remains a buy in the USD 30s when the pre-virus highs were above USD 60.

The company forecast via an 8-K filing that June capacity will only decline 40 to 50% as the airline continues to focus on limiting middle seats until September 2020 for social distancing purposes in a move that hurts load factors.

Despite this move to limit load factors by not over packing flights, Southwest Airlines could see June revenues reach 30% of 2019 levels.

The company now forecasts the June daily cash burn is between USD 20 million to USD 25 million for up to a USD 5 million improvement from the previous estimate. The airline would do far better by packing existing flights and possibly cut the daily cash burn to near zero when factoring in the Payroll Support Program grant funds of USD 2.3 billion or approximately USD 12.7 million per day.

On June 14, traffic reached a new post-COVID-19 rebound of 544K for 20.6% of 2019 levels. Traffic is now growing at a 3% daily compounded rate since the low on April 14.

In late April, the airline was forecasting up to a USD 35 million daily cash burn rate along with the Q1 earnings report. Now, with only a return to traffic at 20% of 2019 levels, the airline is forecasting a new metric called core daily cash burn of approximately USD 20 million. This number factors in Southwest Airlines generating up to USD 15 million per day in revenues above the higher costs for fuel, etc.

Last Q2, the airline generated USD 5.9 billion in quarterly revenues or the equivalent of nearly USD 2.0 billion per month. The new forecast for June alone at up to 30% of 2019 levels amounts to USD 600 million in revenues. Incredibly, analysts only have revenues for the quarter at USD 657 million.

Last year, the airline consumed 532 million gallons of fuel during Q2 or the equivalent of 177 million gallons during June. At about 45% of the flights flown last year, Southwest Airlines would only consume 97 million gallons of fuel this June. With the average fuel cost of USD 1.30 per gallon, the airline would spend about USD 126 million on fuel this year versus USD 377 million last June when fuel cost USD 2.13 per gallon. Southwest Airlines could save an additional USD 69 million by not flying above actual ticket demand around 75% capacity to push the daily cash burn down another USD 2.3 million.

The core daily cash burn of USD 20 million dips to only USD 5 million when excluding the PSP and the extra fuel costs. The airline would naturally save additional costs by flying fewer flights to reduce the cash burn.

The airline now estimates up to 24 months of liquidity without even optimizing for cash flows due to social distancing.