Southwest Airlines (NYSE:LUV) Handles the Debt Well Through Turbulences

Stjepan Kalinic
January 31, 2022
Source: Shutterstock

According to old-school investors like Warren Buffett, airlines are notoriously bad businesses. They have high costs, thin profit margins, and – as seen in 2020, are highly susceptible to exogenous events.

Yet, this doesn’t mean they cannot be an investment opportunity in certain situations, especially if they use the debt as reasonably as Southwest Airlines Co.(NYSE: LUV).

Click here for our latest analysis of Southwest Airlines

Full-year 2021 results:

  • EPS: US$1.65 (up from US$5.44 loss in FY 2020).
  • Revenue: US$15.8b (up 75% from FY 2020).
  • Net income: US$977.0m (up US$4.05b from FY 2020).
  • Profit margin: 6.2% (up from a net loss in FY 2020).

Revenue was in line with analyst estimates. Earnings per share (EPS) missed analyst estimates by 1.3%.

Over the next year, revenue is forecast to grow 39%, compared to a 49% growth forecast for the airlines' industry in the US.

After a recovery rally in 2020 and early 2021, Southwest gave back over half of those gains. Yet, the stock did much better than the broad market in January, remaining flat over the first 4 weeks.

Reflecting on the earnings results, CFO Tammy Romo noted the higher fuel costs and additional cost pressures related to Omicron and winter weather. Furthermore, the company continues to experience inflationary cost pressures, primarily in labor and airport-related costs. Yet, strong leisure demand and the new co-brand card agreement with Chase contributed to a US$85m profit in Q4.

Meanwhile, we’d point out the Southwest Airlines operating model as an advantage in the current environment. They operate point-to-point, with fewer layovers and more direct flights. They also maintain smaller airports – providing a less crowded experience through the pandemic. Finally, they are domestic-focused, thus less exposed to international travel restrictions.

Outlining the Debt

As you can see below, at the end of December 2021, Southwest Airlines had US$10.7b of debt, up from US$9.80b a year ago. Click the image for more detail.

However, it does have US$15.5b in cash, offsetting this, leading to net cash of US$4.78b.

NYSE: LUV Debt to Equity History January 31st, 2022

How Healthy Is Southwest Airlines' Balance Sheet?

The latest balance sheet data shows that Southwest Airlines had liabilities of US$9.16b due within a year and liabilities of US$16.7b falling due after that. Offsetting these obligations, it had cash of US$15.5b as well as receivables valued at US$1.36b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.05b.

Southwest Airlines has a substantial market capitalization of US$25.4b, so it could very likely raise cash to ease its balance sheet if the need arose. But we want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Southwest Airlines boasts net cash, so it's fair to say it does not have a heavy debt load. The balance sheet is the area to focus on when analyzing debt. Still, the business's future profitability will decide if Southwest Airlines can strengthen it over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year, Southwest Airlines wasn't profitable at an EBIT level but managed to grow its revenue by 75%, to US$16b.

How Risky Is Southwest Airlines?

Although Southwest Airlines had earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$977m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term.

The good news for Southwest Airlines shareholders is that its revenue growth is strong, making it easier to raise capital if need be. Overall, while airlines are a risky business, it looks like this one handles the debt better than many others.

The balance sheet is the obvious place to start when analyzing debt levels. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Southwest Airlines you should be aware of.

If you're more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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