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Here's the Likely Coronavirus Toll on Southwest (LUV) Q1 Earnings

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Southwest Airlines Co. (LUV - Free Report) is scheduled to report first-quarter 2020 results on Apr 23.

Similar to other airlines, the coronavirus outbreak dealt a severe blow to the company. The pandemic only added to its woes as it was already under substantial pressure from the grounding of Boeing 737 MAX jets. It has 34 such aircraft in its fleet, the largest among U.S. carriers.

The Zacks Consensus Estimate for first-quarter earnings has been revised downward significantly over the past 60 days. Given this bleak backdrop, let’s delve into the factors that might have influenced the airline’s March-quarter performance.

Although, the carrier saw upbeat passenger bookings in January and February, performance took a beating in March when it witnessed more cancellations than bookings. Moreover, intensifying coronavirus concerns in the same month coupled with widespread travel restrictions weighed heavily on air-travel demand, forcing the airline to make massive capacity cuts. Consequently, passenger revenues (accounting for more than 90% of the top line) are expected to have declined substantially in the soon-to-be-reported quarter. Notably, the Zacks Consensus Estimate for passenger revenues indicates an 8.2% fall from the year-ago reported figure.

Additionally, coronavirus-induced supply-chain disruptions affected cargo demand, which is likely to get reflected in freight revenues. With Southwest carrying freight in the bellies of passenger aircraft, freight revenues might have also been hurt by low cargo carrying capacity due to significant capacity reductions. The Zacks Consensus Estimate for freight revenues suggests an approximate 1% slip from the first-quarter 2019 reported figure.

Due to the coronavirus-related demand slump, the airline anticipates total revenue per available seat mile (RASM: a key measure of unit revenues) for the first quarter to have either dipped 2% or inched up to 1% from the year-ago figure. The Zacks Consensus Estimate for the same implies a 4.9% decline from the year-ago reported quarter. Further, the carrier expects operating revenues to have decreased between $200 and $300 million in the to-be-reported quarter.

With fuel costs comprising a major chunk of airline expenditures, low fuel prices are expected to reflect on earnings, thereby partly offsetting the adversities from revenue declines. The Zacks Consensus Estimate for fuel price per gallon (inclusive of fuel tax: economic) hints at a 3.4% decline from the year-ago reported figure. Southwest anticipates fuel costs per gallon to have been in the $1.9-$2range for the first quarter compared with $2.05 reported in the year-ago period.

Southwest Airlines Co. Price and EPS Surprise

Southwest Airlines Co. Price and EPS Surprise

Southwest Airlines Co. price-eps-surprise | Southwest Airlines Co. Quote

Earnings Whispers

The proven Zacks model does not conclusively predict an earnings beat for Southwest this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, that is not the case here as elaborated below. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings ESP: Southwest has an Earnings ESP of -221.20% as the Most Accurate Estimate is pegged at a loss of 49 cents, wider than the Zacks Consensus Estimate of a loss of 15 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Southwest carries a Zacks Rank #3.

Highlights of Q4 Earnings

In the last reported quarter, the company witnessed a negative earnings surprise of 11.7%. The bottom line also declined 16.2% year over year due to higher costs from the MAX groundings. Meanwhile, operating revenues surpassed the Zacks Consensus Estimate and also increased marginally. However, passenger revenues dipped year over year.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Scorpio Tankers Inc. (STNG - Free Report) , Covenant Transportation Group, Inc. and Ensco plc (VAL - Free Report) as these stocks possess the right combination of elements to beat on earnings this reporting cycle.

Scorpio Tankers has an Earnings ESP of +12.30% and a Zacks Rank of 3.

Covenant Transportation has an Earnings ESP of +10.00% and is a #3 Ranked player.

Ensco has an Earnings ESP of +0.63% and is Zacks #3 Ranked.

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