Southwest Pops Almost 6% As May Passenger Bookings Outpace Cancellations

Shares in Southwest Airlines Co. (LUV) rose 5.7% after the U.S. carrier said that it has seen a “modest improvement” in May demand as new passenger bookings outpaced trip cancellations.

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In the month through May 18, the U.S. airline recorded net positive bookings reversing net negative booking trends prevalent during most of March and April, where trip cancellations outpaced new passenger bookings, it said in a SEC filing disclosing preliminary figures. The reversal drove shares up 5.7% to $28.58 in early afternoon U.S. trading.

The value of Southwest’s shares has almost halved this year as stringent travel restrictions tied to the coronavirus pandemic have brought travel demand to an almost halt. U.S. airlines have been burning through billions of dollars in the first quarter incurring huge losses and implementing broad cost-cutting plans, as well as taking steps to shore up its cash buffers.

Southwest said it expects average daily cash burn in June to be in the low-$20 million compared with average daily core cash spending of $30 million to $35 million in the second quarter.

In May, capacity is set to decrease 60% to 70%, compared with an estimated decline of 45% to 55% in June, according to the preliminary figures. This month, the load factor is expected to be in the range of 25% to 30%, compared with a range of 35% to 45% expected in June.

Bernstein analyst David Vernon last week maintained his Hold rating on the stock with a $29 price target, saying that although Southwest has some of the highest industry margins, it will have steeper capital spending as it upgrades its fleet with Boeing (BA) 737 MAX planes on order.

“The company has the healthiest balance sheet among the four [U.S. airlines] and the equity dilution risk is already baked in,” Vernon wrote in a note to investors.

Southwest said it currently has $13 billion in cash and short-term investments. Since the beginning of the year, it raised about $13.9 billion, including $10 billion in financings and sale-leaseback transactions and $2.2 billion through a common stock offering. Based on the preliminary figures, it currently estimates to have about 20 months of liquidity, it said.

Overall, Wall Street analysts are cautiously optimistic on the stock. The 15 analyst ratings are divided between 9 Buys and 6 Holds adding up to a Moderate Buy consensus. The $42.50 average price target indicates 49% upside potential in the shares in the coming 12 months. (See Southwest Airlines stock analysis on TipRanks).