Key Takeaways

  • Adjusted EPS was -$0.15 vs. the -$0.05 analysts expected.
  • Load factor fell significantly, even more than expected.
  • Revenue also failed to meet analyst expectations.

What Happened

Southwest Airlines reported Q1 earnings on April 28, 2020, and it was bad across the board. Southwest's earnings per share were -$0.15, lower than the -$0.05 expected by analysts, and revenues were similarly disappointing. Southwest's load factor, how full its planes were, was down to 67.7%, meaning nearly a third of seats were empty. If there is a silver lining for Southwest, it's that much of this seems to have already been priced in to their stock, as it declined less than a percent after the earnings release at time of writing.

(Below is Investopedia's original earnings preview, published 4/17/20)

What to Look for

Southwest Airlines Co. (LUV), like the rest of the airline industry, is being hit hard by the coronavirus pandemic. Government-imposed travel restrictions and social-distancing measures mean fewer people are flying. That's going to hurt Southwest's load factor, which is a key measure of an airline's success. Investors will be looking to see how much damage the pandemic has done to the company's business when Southwest Airlines reports earnings on April 28, 2020 for Q1 2020. Analysts are expecting the airline to report negative adjusted earnings per share (EPS) on falling revenue and a declining load factor.

Shares of Southwest Airlines had been keeping pace with the broader market for much of the past year despite troubles related to the grounding of the Boeing 737 Max. The aircraft has been grounded since mid-March 2019, after being involved in two fatal crashes within the span of five months. At the time of the grounding, Southwest had 34 737 Max aircraft in its fleet, and has had to cancel thousands of flights. 

The company's shares began to plummet along with the rest of the market around the middle of February due to mounting fear of COVID-19 and its impact on the global economy. The volatile stock price has failed to recover even as the market has regained some of its losses. Southwest's shares have posted a total return of -41.0% over the past 12 months compared to the S&P 500's total return of -3.7%. All figures are as of April 16, 2020.

One Year Total Return
Source: TradingView.

Despite reporting lackluster earnings for Q4 2019 that failed to meet analysts' estimates, the company's shares jumped following the report. Southwest posted adjusted EPS of $0.98, a year-over-year (YOY) decline of 16.3%. It was one of just two quarterly earnings declines since Q1 2017. Revenue grew 0.4% compared to the same period a year ago, continuing a trend of decelerating growth that began in the first quarter.

Q4 2019 was significantly worse than Q3 2019. Southwest reported adjusted EPS growth of 14.4% YOY for Q3 2019, beating analysts' estimates. Revenue growth was 1.2% YOY. The company's stock rose following the report, but failed to retain the momentum throughout the rest of the year.

With the stock sitting around five-year lows analysts are expecting adjusted EPS to plummet 107.8%, dropping into negative territory for the first time in at least four years. Revenue is expected to fall 9.6% YOY, marking Southwest's first revenue decline since Q3 2016.

Southwest Airlines Key Metrics
  Estimate for Q1 2020 (FY) Actual for Q1 2019 (FY) Actual for Q1 2018 (FY)
Adjusted Earnings Per Share ($) -0.05 0.70 0.75
Revenue ($B) 4.7 5.1 4.9
Load Factor (%) 77.9 81.1 81.5

Source: Visible Alpha

Declining air travel due to government-imposed restrictions as well as individuals' voluntary decisions not to travel will affect Southwest Airlines' load factor, a key metric that investors should watch closely. Load factor measures the percentage of available seats that are filled with paying passengers. Because an aircraft's costs don't change much depending on how many people are on it, most of the costs an airline has are fixed. This means that airlines have a strong incentive fill every seat. Higher load factors mean an airline's fixed costs are spread across a greater number of passengers, making the airline more profitable.

Analysts are expecting Southwest's load factor to fall about 3.2 percentage points to 77.9% in Q1 2020 compared to the same quarter in 2019. It would be the lowest reported load factor for the airline in at least three years. The forecast Q1 drop is even more dramatic when compared to the load factor of 86.4% reported in Q2 2019, which was the highest level in the past three years. The grim forecasts are evidence of just how badly the pandemic is expected to hit the airline industry. In order to survive the crash, Southwest has secured more than $3.2 billion in payroll support through the U.S. government's Coronavirus Aid, Relief and Economic Security (CARES) Act.