The largest expert travel community:
  • 776,301 Total members
  • 5,325 Users online now
  • 1,732,184 Threads
  • 32,086,658 Posts
Airlines

Is Southwest Airlines Smarter for Opting Out of Government Loans?

Is Southwest Airlines Smarter for Opting Out of Government Loans?
Joe Cortez

In August 2020, Southwest Airlines announced they would not accept COVID-19 support loans from the federal government, even after a “phase four” support bill passes. But was it the right fiscal move for the Dallas-based carrier? New analysis suggests their move may be able to help the airline recover slightly faster than their competitors.

One of the biggest tenets of the CARES Act was the guaranteed financial support to airlines, in the form of loans and the Payroll Support Program. As both unions and airlines campaign for more funding in a “phase four” COVID-19 support bill from Congress, both are asking for a clean extension of all the programs.

However, Southwest Airlines made a defiant announcement in August 2020 that even if there was a second round of loans, the Dallas-based carrier said they would not take the loans provided by the treasury. Was it the best move to help them move forward during this airline crisis? New analysis from CAPA Centre for Aviation suggests the airline could put itself in a better position of financial recovery through manifesting their own destiny.

Without Loans, Southwest Could Improve Finances Faster

When the CARES Act was passed, all of the airlines announced their letters of intent to access loans secured by shares in their respective companies. Southwest initially intended to borrow $2.8 billion, but has since publicly withdrawn that request.

According to CAPA Centre for Aviation, the move isn’t necessarily a bad thing for the carrier. With $15.2 billion in liquidity and an investment grade rating from S&P, Moody’s and Fitch, the airline is sticking with their strategy to find additional financing in the markets, without giving up shares to the U.S. Treasury.

The move allows Southwest to reward investors who are sticking with the carrier throughout the COVID-19 pandemic. Without the restrictions that come with a government loan, Southwest is free to pay dividends on stocks, or participate in share buybacks.

“This obviously will make it a more attractive company to investors,” CAPA Centre for Aviation notes in its analysis. “And the investment grade rating could be an advantage as the airline works to restructure its balance sheet once demand reaches some sort of normal level.”

Their analysis closes with an ominous warning: “A return to that kind of normality is years away.”

COVID-19 Pandemic, Vaccines and Unpredictable Market Remain Wild Card Factors

Between today’s state and regaining profitability are three factors that Southwest may not be able to plan around: volatility in demand from flyers, the continued impact of the COVID-19 pandemic and mass availability of a vaccine. This fickleness requires the airline to be flexible in their planning, cutting routes where necessary. In August, the airline cut nearly 1 million seats they planned to fly between September and October 2020 due to a projected lack of customers.

Southwest is likely refining its projections about the airline's size at the end of 2020. Source: CAPA Centre for Aviation and OAG.

Chart source: CAPA Centre for Aviation and OAG.

Additionally, so long as the COVID-19 pandemic continues to ravage the American economy and discourage travelers from boarding aircraft, demand will continue to be unpredictable. None-the-less, the CAPA Centre for Aviation analysis suggests that there are a lot of positives going for the airline, including a reduced decrease in revenue and improvement from projected load factors.

CAPA Centre for Aviation concludes that Southwest could be well positioned to take on the remainder of the pandemic. Only time will tell if it’s the right decision.

Click to add a comment

You must be logged in on the FORUM to post a comment Login

Leave a Reply

More in Airlines

Singapore Airlines Considers “Flights to Nowhere” to Encourage Bookings

Joe CortezSeptember 15, 2020

European Carriers Send “Last Call” to Save Aviation During COVID-19

Joe CortezSeptember 15, 2020

Air Canada Starts Voluntary COVID-19 Arrival Testing

Joe CortezSeptember 14, 2020

Copyright © 2014 Top News Theme. Theme by MVP Themes, powered by Wordpress.

SIGN UP FOR FLYERTALK TIPS & NEWS


I want emails from FlyerTalk with travel information and promotions. I can unsubscribe any time using the unsubscribe link at the end of all emails