Southwest Airlines Down On Coronavirus-Induced Q1 RASM View

Shares of Southwest Airlines (NYSE:LUV) shed more than 3% of value on Mar 5 to close the trading session at $45.25. This downside was induced by the bearish unit revenue projection for first-quarter 2020 (detailed results will be out on Apr 23, 2020) due to tepid demand following the coronavirus outbreak. However, at the same time, the carrier issued an improved view with respect to non-fuel unit costs.

Southwest Airlines’ Revised Guidance

Management stated that the carrier now expects first-quarter total revenue per available seat mile (TRASM: a key measure of unit revenues) to either dip 2% or increase up to 1% from the year-ago figure. The company had earlier anticipated a RASM increase in the 3.5-5.5% range for the March quarter.

Notably, this Dallas, TX- based Zacks Rank #3 (Hold) airline witnessed upbeat passenger bookings in January and February (the first two months of the quarter). However, recently, demand declined significantly coupled with an increase in trip cancellations. The carrier expects the drop in demand to persist in the remainder of March given the rapid spread of the coronavirus. Consequently, first-quarter operating revenues are expected to decline between $200 and $300 million.

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With the coronavirus wreaking havoc in the airline space, other airline stocks like American Airlines (NASDAQ:AAL) , United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) might also follow suit in trimming their first-quarter unit revenue outlook.

Coming back to Southwest Airlines, the improved cost outlook is, however, likely to mitigate the negative impact of the coronavirus on the revenue stream. The company expects fuel costs per gallon for the March quarter between $1.9 and $2. The carrier had earlier anticipated fuel costs per gallon in the $2.05-$2.15 range. In fact, the company expects 2020 expenses on fuel and oil to decrease approximately $1 billion.

The company now expects first-quarter cost per available seat miles (CASM) excluding fuel and expenses on oil and profit-sharing to increase between 5% and 7% (earlier guidance: 6-8% range). This bullish projection is owing to better operational performance and a favorable weather.

Moreover, with all the 34 Boeing (NYSE:BA) 737 MAX planes being grounded, capacity is low. The same is now expected to decrease roughly 1% in the March quarter. The earlier guidance had hinted at a dip of 1.5-2.5%. A not-so severe winter resulted in a higher completion factor, leading to a marginal cut in capacity guidance

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