Southwest Airlines posts first loss since 2011, sees revenue down as much as 95% in May

Key Points
  • Southwest expects revenue in May to fall as much as 95% from a year earlier.
  • The airline disclosed plans for a public stock offering and $1 billion in additional debt as bookings dry up.
  • The coronavirus and stay-at-home orders have hit the airline industry especially hard.
Southwest Airlines sees revenue falling 90-95% for April, May
Southwest Airlines sees revenue falling 90-95% for April, May

Southwest Airlines on Tuesday posted its first quarterly loss since 2011 and predicted "no material improvement in air travel trends" this spring as the coronavirus devastates demand.

Southwest is scrambling to cut costs and reduce its daily cash burn, which it estimates will average $30 million to $35 million in the second quarter. It announced a public stock offering of 55 million shares, valued at around $1.6 billion based on Monday's closing price and said it would issue $1 billion in additional debt in an effort to shore up its finances amid a dismal demand outlook.

The airline said it expects its operating revenue next month to fall as much as 95% from a year earlier but warned it is "unable to reasonably estimate trends beyond May 2020."

Southwest follows Delta and United in posting a loss for the quarter. Travel is among the hardest-hit industries from the coronavirus and severe measures to stop it from spreading like shelter-in-place orders. Airlines including Southwest recently won a portion of $25 billion in government grants and loans that prohibit them from laying off or cutting the pay rates of workers through Sept. 30, though worker paychecks are lower because of reduced schedules.

CEO Gary Kelly told CNBC that if demand doesn't come back by that time the airline will have no choice but to downsize.

However, demand likely bottomed out in the first week of April and there have been modest improvements during the month, he said later on the company's earnings call.

"I would hope that, that would continue," he said. "We've got a pretty modest expectations."

First-quarter results reflect the start of coronavirus and of stay-at-home orders in the United States, where most of Southwest's network is located. Travel demand was still relatively strong early in the year, but losses are expected to deepen in the spring.

The timing of the coronavirus crisis couldn't be worse for the sector. The disease and accompanying economic downturn is sapping travel demand during the peak spring and summer travel season, usually airlines' most lucrative time of year.

Kelly said travelers will return to the skies when they feel safe, a sentiment shared by other airline CEOs. Airlines are starting to offer travelers face masks to avoid the spread of the coronavirus, while JetBlue on Wednesday said it would mandate them for passengers. Some airlines are blocking middle seats, but Kelly said the airline is leaning more toward underselling the flight in case travelers want to sit with their party, one of them in the middle seat.

"I don't accept that forever more, people are going to stay 6 feet apart from each other, and we're masked for the rest of our lives," said Kelly. "I just don't believe that. I think we'll get past this pandemic and with a little luck, we won't have one for another century."

Southwest, like other carriers, is now shrinking to better align with weak demand and the airline is planning to cut capacity by as much as 70% in May. Even with that reduction, it expects its planes to fly no more than 10% full. The airline has parked about 350 of its 742 aircraft.

The Dallas-based airline had a loss of $94 million in the quarter on revenue of $4.23 billion, an 18% decline in sales compared with a year earlier, and slightly weaker than analyst estimates. In the same quarter of 2019 it had a profit of $387 million. Its adjusted per-share loss came in at 15 cents, ahead of expectations. Southwest shares were up close to 4% in afternoon trading, less than its competitors.

Southwest said it raised $6.8 billion in the quarter, $5.2 billion of that through debt and the rest from the government payroll support program. It had $8 billion in unencumbered assets after recent debt activity.

Last year it had the opposite problem when the grounding of the Boeing 737 Max prevented it from expanding as planned. Government regulators around the world ordered airlines to stop flying the Max in March 2019 after two fatal crashes and it is still out of service. Southwest said it removed the plane from its schedule through Oct. 30.

Southwest said it is deferring orders for dozens of 737 Max planes and will take no more than 48 between now and the end of next year.

CFO Tammy Romo said the airline isn't canceling any of its 737 Max orders so far. Southwest is "still working through restructuring our order book with Boeing and just what we announced so far is just is a piece of that," she said on the earnings call.

Boeing, which reports first-quarter results before the market opens on Wednesday said it is working with all of its customers as they grapple with the impact from Covid-19.

"This is a dynamic time," the company said in a statement. "We will continue to monitor the situation and coordinate closely with our partners at Southwest Airlines on the delivery of their 737 MAX airplanes this year and the years ahead."