LUV in the Time of Corona

After catching up on Buffett dropping all airline stocks last week in this post, I decided to do a deeper dive into the airline industry.

After all, whether with or without a crystal ball, one thing is for certain:

In a normal world, we need airlines in order to function properly as an economy.

Which means sooner or later,  airlines will be running again (or flying I suppose).

Given that airline stocks have had such a huge beat down, I decided to analyze the ones that Buffett dumped. For one reason or another, they were once investable in his eyes, but now no more.

Analysis of Buffett’s Four Airlines

  • American Airlines (AAL)
  • Delta Airlines (DAL)
  • Southwest Airlines (LUV)
  • United Airlines (UAL)
Source: Calculations Using Data from Yahoo! Finance

Let me begin by saying that I’ve always had a bias towards Southwest Airlines. I was even invested in them as part of my dividend growth portfolio. Their company is a great, economy-class flight, that’s very reasonable and affordable. Every flight I’ve been on is almost always full.

With that said, as you can see from the numbers above, Southwest Airlines is positioned better in terms of liquidity and solvency in relation to its other three peers.

They have the highest liquidity ratios indicating that they have sufficient cash set aside to cover their outstanding debt and interest payments in the near term.

Additionally, their interest coverage ratio is 28.22, which far exceeds the other 3 airlines, indicating that they could cover the next 28 interest loan payments at their current state. As such, they’re the only company that does not need a bail out.

Their debt-to-assets and debt-to-equity ratios are also lower indicating a lower use of leverage and borrowings.

Dividends

Of the four airline companies, only three paid dividends: American Airlines, Delta Airlines, Southwest Airlines.

However, amidst this pandemic, Delta has been added to the list of companies suspending dividend payments.

AAL has a history of paying a dividend of $0.10 per share, with the last payment back in February.

LUV has been paying $0.18 per share recently, with the last payment back in March.

Southwest Still Has Huge Risks

Given these numbers, it’s clear that Southwest is in a better position than the other airlines on paper. We’re still unsure whether there’ll be a full bailout of these airlines.

Edit: As it was pointed out to me, Southwest Airlines operate on the 737, not the 737 MAX which is where Boeing had problems.

However, I would be very cautious with Southwest for the time being.

They have a huge risk right now, and that Southwest operates using ONLY the Boeing 737 planes.

As you may have heard in the news, there’s been a lot of problems with the aircraft in regards to its computer problems.

Southwest’s success depends on either Boeing fixing this issue or switching to a new airliner altogether.

Switching airplanes would hit them with a hard number in capital expenditures. Given that the majority of their airplanes are owned and only a few are leased.

Burning Through Cash

Additionally, Southwest is burning through $30 million in cash per day. According to their CEO, they may have to drastically restructure if they’re not in a better position by September 30.

In my eyes, this may involve its 737 planes I mentioned earlier.

Oil Prices

As I mentioned in this post, WTI hit a phenomenon and went negative for the first time in history. Lower oil prices due to a supply shock is good for the airline industry as approximately 40% of their operating expenses come from oil prices.

Unfortunately all that means nothing when states are locked down and travel restrictions are imposed.

CARES Act

As part of the CARES act, if Southwest takes money as part of the stimulus package, they will have to suspend dividend and share buybacks for 12 months. As of now, they haven’t drawn out any money, but by September 30th, we could see this change. Especially since the SEO expects a decision to be made by that time.

If that’s the case, Southwest will be paying no dividends until September 30, 2021.

Conclusion

While Southwest looks better on paper than any of the other airlines, we don’t know whether or not now is the right time to invest. Could the stock go down another 5 points? 10 points? It’s very possible. Or maybe we’ve seen a bottom for airlines. Who knows.

What we do know is that Southwest is cheaper now than before. If this price point is comfortable for you, sure why not?

Disclaimer: I do not have any holdings or derivatives of any airline stocks mentioned in this post.

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