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Southwest Airlines Won’t Take Loan Against Rapid Rewards

Southwest Airlines Won’t Take Loan Against Rapid Rewards
Joe Cortez

While the three legacy airlines are leveraging their loyalty programs to raise money during the COVID-19 pandemic, Southwest Airlines says they won’t Rapid Rewards as a funding source. The airline tells investors they are satisfied with the amount of money they have raised on the unsecured market and their investment-quality rating with all three agencies.

The latest trend among American carriers is to leverage their rewards programs to increase liquidity, as hopes of additional federal support are waning. All three legacy carriers – American Airlines, United Airlines and Delta Air Lines – have turned to their loyalty program profitability and user data to secure new funding as the COVID-19 pandemic rages on. Meanwhile, Spirit Airlines is making some changes to their loyalty program to attract even more flyers, as it sees Free Spirit as a potential profit center.

However, Southwest Airlines will not be joining the other carriers in using their loyalty program for additional liquidity. In an investor update filed with the U.S. Securities and Exchange Commission, the Dallas-based airline said they would not be using Rapid Rewards for a loan.

Southwest Claims $12 Billion in Unencumbered Assets, with 55 Percent Leverage

In their filing, the airline says they have $12 billion in unencumbered assets, consisting of $10 billion in aircraft and $2 billion in spare engines, ground equipment and real estate. As a result, their current debt-to-invested capital ratio is 55 percent, giving them some room for flexibility if needed.

Because of their leverage, and the fact that they are the only U.S.-based carrier with an investment-grade rating from all three rating agencies, the airline has opted to not to use the Rapid Rewards loyalty program as collateral for a loan. Instead, airline leaders say they are capable of securing additional funding from the open market if necessary.

“In addition to the value from aircraft and other physical assets, the Company has significant value from its Rapid Rewards® loyalty program,” the airline wrote in their SEC filing. “The Company does not currently plan to utilize its loyalty program should it need to secure additional financing; further, the Company was successful obtaining additional liquidity in the unsecured debt market as recently as July 2020.”

Furthermore, the airline may not necessarily need additional cash, based on their current reported financial status. Since the beginning of the year, Southwest has raised over $18 billion dollars, with the majority on debt issuances and sale-leaseback transactions. As of Sept. 15, they also have a balance of cash and short-term investments of $14.8 billion, even with an average daily core cash burn of $16 million.

Operating Revenue and Load Factor Continue to Decline

Even though Southwest may not be seeking additional funding from their loyalty program, their overall situation remains depressed. The airline reported operating revenue compared year-over-year is expected to be down by up to 75% over the next two months, with load factors cut in half.

Table courtesy: Southwest Airlines

As the airline moves forward, they anticipate the majority of their bookings will be leisure-oriented, and is inconsistent based on the region. To attract more customers, the airline will continue to leave middle seats unoccupied for flyers not traveling together through Nov. 30, 2020.

To follow the continued leisure growth, Southwest is planning to add service to both Miami International Airport (MIA) and Palm Springs International Airport (PSP), improving their presence at core leisure markets. The strategy is similar to JetBlue, which expanded its map to include more “Visiting Friends and Relatives” destinations.

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