Southwest Airlines has a credibility problem ahead of the second quarter results

<p>Due to the unsurpassed new coronavirus pandemic and the resulting government response, all industries were affected. But few sectors absorbed the kind of damage that the aviation industry did. Even financially stable entities such as Southwest Airlines (NYSE: LUV) were not safe from the fallout. Even worse, what was once perceived as an outbreak of Covid-19 infections has turned into a nightmare, leaving LUV layers hanging in no man’s land.

Source: Eliyahu Yosef Parypa /

If there was not enough pressure, keep in mind that Southwest is scheduled to release its second-quarter earnings report on Thursday, July 23 before opening time. On paper, covering analysts expect the company to deliver a $ 2.66 earnings per share loss. Individual estimates range from a loss of $ 3.75 to a loss of $ 1.30 per share.

During the quarter last year – and without the specter of a weakening pandemic – Southwest delivered a profit of 1.37 dollars against a goal of 1.34 dollars. But the disappointment is not unexpected. For the period covering the second quarter, the US air passenger volume averaged only 11% compared to 2019 levels. Thus, you should not expect LUV shares to move much based on EPS alone.

The same applies to the revenue front. Analysts expect Southwest to call $ 930.3 million. Estimates were all over the map, ranging from $ 429.6 million to $ 1.8 billion. In this context, the company generated $ 5.9 billion in the second quarter of 2019. Regardless of the number produced, it therefore looks relatively ugly.

So no, do not expect any “paper” fireworks from LUV warehouses. Instead, Wall Street is looking for answers, especially boosting expectations for the rest of the year. If management produces a credible story, equities could swing higher as a reactionary move.

But the more I dive into the details of aircraft, the less optimistic I become.

Mixed Messaging can return to Bite LUV storage

On June 4, most, if not all, of the airlines’ shares jumped significantly higher. On that day, American Airlines (NASDAQ: AAL) announced that it intended to add more domestic and international flights. Based on its analysis at the time, management felt confident about consumer trends.

According to Vasu Raja, America’s senior vice president of network strategy, “We are seeing a slow but steady increase in domestic demand … After a careful review of data, we have built a July schedule to match.” Over the next few weeks, other aircraft made similar encouraging statements, including Southwest in its “WOW Fall Fare” sale.

This collective industry announcement sent a clear signal that the American consumer was ready to return to the air. This also indicated that the economy was on the right track. So far so good for LUV shares.

Suddenly the story turned suddenly. Last week, American warned its employees that the company may be overstaffed by more than 20,000 workers this fall. The only reason management does not get the ax out now is due to the terms of the federal wage support it accepted. This prevents carriers from laying off workers until 1 October.

But it’s not just American Airlines. Southwest stated that it needed passenger volume to triple by the end of the year to prevent redundancies. Between 6 July and 16 July, the volume is only 26% of 2019 levels.

Granted, what has led to this sudden change of heart is the escalating Covid-19 crisis. Obviously, this is not easy to predict. However, Americans are getting tired of the mixed and contradictory message.

First, we should not wear masks. Then it turned out that we should level out the curve. And when we did just that, we could fly. Except now we can not.

Airplanes are a hot mess

If you thought the airline messages were confusing to the passenger, imagine what it’s like to try to navigate the LUV stock as a Wall Street fund manager. With coronavirus throwing one basket ball after another, it is extremely difficult to decipher the best approach.

That said, if I read correctly between the lines, the outlook for LUV shares is more negative than positive. Since the first days when the infection curve was noticeably flattened, Americans were more concerned about their health than about resuming the economy. About a month later, that sentiment has not changed.

It is true that most people are worried about the economy. However, they believe that the highest priority should be to control the spread of the virus. It was the end of May / beginning of June. This has been particularly the case for color communities that have been disproportionately affected.

Today, everyone is watching cases fall to surprising daily records. The aviation industry has received this dumping fire and implicitly warns that demand is not close to its previous forecasts. Basically, both the government and the business community underestimated the coronavirus. And that finally puts the LUV stock in a bad way.

Josh Enomoto, a former senior business analyst at Sony Electronics, has helped broker larger contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including legal, construction management and healthcare. At the time of writing, he had no position in any of the above securities.