In its first quarter guidance, Southwest Airlines notes that although it experienced “healthy passenger booking and revenue trends for the first two months of 2020”, with year-over-year increases in operating revenue per available seat mile (RASM, or unit revenues), the airline is now experiencing a significant decline in customer demand, as well as an increase in trip cancellations, which is assumed to be attributable to concerns relating to reported cases of COVID-19.
Based on these recent revenue trends, which are currently expected to impact the remainder of March 2020, Southwest now estimates its first quarter 2020 operating revenues to be “negatively impacted in the range of $200 million to $300 million, and RASM to be in the range of down 2 percent to up 1 percent, year-over-year, as compared with its previous guidance of a year-over-year increase in the range of 3.5 to 5.5 percent.
Southwest notes however that its cost outlook has improved, which is offsetting a portion of the estimated first quarter 2020 COVID-19 revenue impact. Based on its fuel derivative contracts and market prices as of March 3, 2020, Southwest now estimates its first quarter 2020 fuel costs to be in the range of $1.90 to $2.00 per gallon, including $.05 per gallon in premium expense, and no cash settlements (hedging gains) from fuel derivative contracts. This compares with its previous first quarter 2020 guidance in the range of $2.05 to $2.15 per gallon, including $.05 per gallon in premium expense, and $.01 per gallon in cash settlements (hedging gains) from fuel derivative contracts.
Southwest has not made any changes to its near-term fuel hedging positions, and remains approximately 60 percent hedged for full year 2020.
Southwest now estimates its first quarter 2020 operating costs per available seat mile (CASM, or unit costs), excluding fuel and oil expense and profitsharing expense, to increase in the range of 5 to 7 percent, year-over-year, as compared with its previous guidance of a year-over-year increase in the range of 6 to 8 percent, primarily due to less severe winter weather than expected during first quarter 2020, in addition to a strong operational performance.
The majority of Southwest’s year-over-year unit cost increase in first quarter 2020 continues to be driven by lower first quarter 2020 available seat miles (ASMs, or capacity) as a result of the grounding of the Boeing 737 MAX aircraft, including Southwest’s 34 MAX aircraft.
Southwest now expects its first quarter 2020 capacity, measured in ASMs, to decrease approximately 1 percent, year-over-year, as compared with its previous guidance of a year-over-year decrease in the range of 1.5 to 2.5 percent, primarily due to less severe winter weather than expected during first quarter 2020 resulting in a higher completion factor.
“While it is difficult for the Company to estimate the duration and severity of the impact from COVID-19, the Company remains financially strong. The Company has a strong, investment-grade balance sheet with ample liquidity. As of March 3, 2020, the Company had approximately $5.3 billion in cash and short-term investments and a fully available unsecured revolving credit line of $1.0 billion. The Company has low leverage and manageable debt and capital spending obligations in 2020.”