Skip to Content
Stock Analyst Update

Difficult Quarter for Southwest as Air Traffic Grounded

We are reducing our fair value for Southwest Airlines as we incorporate a somewhat more bearish 2020 into our forecast.


We are reducing our fair value for Southwest Airlines ((LUV) ) by 8.5% to $42 per share as we incorporate a somewhat more bearish 2020 into our forecast and account for the firm’s capital raise. Management indicated that more difficult days remain, and the firm intends to dramatically reduce capacity by at least 60% in the second quarter. The firm disclosed that they generated a cash burn  (including capital expenditures but excluding sales refunds) of roughly $900 million in April, which is just shy of 15% of 2019’s operating profit. As these losses are not sustainable, the firm is raising roughly $1.6 billion of equity and $1 billion of debt to fund operations. While we respect the need for the firm to raise capital to survive in an unprecedentedly challenging operating environment, we think these capital raises would be value destructive if they are used to fund unprofitable operations, as they would dilute ownership and introduce liabilities without increasing the long-term value of the firm.

Southwest disclosed that operating revenue is down roughly 90% to 95% in April due to substantially reduced demand. As a substantial portion of the firm’s cost base is fixed, a dramatic reduction in revenue leads to operating losses. While it’s difficult to say with any certainty when air traffic will return, we are confident that demand will eventually bounce back. We’re modeling demand beginning to normalize in 2021 and that the firm will reach 2019 capacity levels once again in 2022. We think the primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums. We think the best-positioned airlines are firms like Southwest, which came into this crisis with relatively little debt and an efficient cost base. We still think that Southwest looks cheap for investors with a strong stomach and a willingness to accept a wide dispersion of outcomes.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Burkett Huey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.