Southwest vs Spirit: Which Airline Stock Has A Better Route To Recovery?


The airline industry continues to face the fallout from the coronavirus pandemic and 2020 could be the worst financial year for the industry as travel restrictions and rising COVID cases continue to hurt business. Back in June, the International Air Transport Association or IATA estimated that global airlines could lose a whopping $84.3 billion this year.

Earlier this month, IATA also disclosed that the passenger demand in July (as measured in revenue passenger kilometers or RPKs) was at critically low levels of 79.8%. This came in well below July 2019 levels but was an improvement compared to the 86.6% Y/Y decline recorded in June.

We will compare Southwest Airlines and Spirit Airlines and use the TipRanks’ Stock Comparison tool, to see which stock is poised to recover better.

Southwest Airlines (LUV)

Unlike legacy carriers like American Airlines, Delta and United Airlines, Southwest has never filed for bankruptcy. The low-cost carrier is viewed as the best positioned among the industry to withstand the current crisis. In June, the company said that despite the significant cash burn it has enough cash to carry on business for the next two years.

In the second-quarter conference call, Southwest’s CFO Tammy Romo highlighted, “In closing, we have the U.S. industry’s strongest balance sheet. We are the only domestic airline to be rated investment-grade by all three rating agencies even after debt raises.” Southwest ended the second quarter with cash and short-term investments of $14.5 billion.

Southwest’s second-quarter operating revenue declined 82.9% to $1.0 billion as the pandemic hurt passenger demand and bookings. The carrier’s capacity was down 55.3% compared to 2019’s second quarter. The average cash burn was $23 million per day in the quarter.

As per the latest update, Southwest’s operating revenue fell between 70% to 75% Y/Y in July as traffic trends were “stalled” due to rising COVID cases. The airline experienced a modest improvement in August and cited delayed school start dates and virtual classroom instruction as the reasons. It sees continued modest improvements in booking trends in September. However, choppy demand is forcing the airline to cut back its flight schedule.

August’s operating revenue is now expected to decline between 70% to 75% compared to the previous estimate of 70% to 80% decline. And September revenue is predicted to fall by 65% to 75%. Overall, Southwest now predicts third-quarter cash burn at an average $20 million per day compared to its prior estimate of $23 million a day. (See LUV stock analysis on TipRanks)

On September 2, Berenberg analyst Adrian Yanoshik upgraded Southwest Airlines to Buy from Hold and raised the price target to $45 from $37 citing its ability to achieve cash break-even more quickly than peers. Yanoshik stated, “Southwest has taken domestic revenue share in excess of its capacity share in recent quarters.”

The analyst added, “It is cutting less domestic capacity than its competitors, adding leverage into an admittedly slow recovery. It will avoid the cash drag stemming from languid intercontinental demand. Further, its 737 MAXs offer lower break-even load factors when they re-enter the fleet, in our analysis.”

Overall, 10 Buys, 3 Holds and zero Sell ratings add to a Strong Buy consensus for Southwest Airlines. The average analyst price target of $42.90 implies an upside potential of about 9% in the stock, which has declined 27% so far this year.   

Spirit Airlines (SAVE)

As an ultra-low-cost-carrier Spirit Airlines is well-positioned to benefit from a gradual recovery in leisure travel even as corporate travel might continue to be dismal as businesses have turned online. Amid challenging conditions, travelers might be attracted by the Spirit’s low fares. However, traffic trends continue to be quite unpredictable due to the pandemic.

In the second quarter, Spirit’s revenue plunged 86.3% to $138.5 million as COVID-19 crushed travel demand and the company’s capacity came down 83.2% Y/Y. The company ended the second quarter with $1.2 billion of cash and short-term investments.

In late July, Spirit predicted an average daily cash burn of $3 million to $4 million for the third quarter and a 65% revenue decline based on a 32% reduction in capacity Y/Y.

However, in an update provided on August 31, Spirit stated that it expects its third-quarter revenue to be slightly better than its July guidance based on expectations of higher operating yields. Moreover, the company now expects average daily cash burn for the third quarter to come in at the lower end of its July forecast. (See SAVE stock analysis on TipRanks)

On August 31, Spirit also announced its plans to raise $600 million of senior secured notes backed by its credit card and loyalty programs. Citigroup analyst Stephen Trent reiterated his Buy rating for Spirit Airlines with a price target of $21 following the announcement and also in reaction to the improved outlook.

Year-to-date, SAVE stock has declined over 55% and the average analyst price target of $18 does not indicate much upside over the next 12-months.

Which airline looks better?

Spirit’s low-cost structure and lower exposure to international markets are favorable aspects in the current crisis. It might take years for travel volumes to rebound to pre-COVID levels. But Southwest’s strong balance sheet ultimately sees the Street favor Southwest over Spirit.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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