The year was 1972. The 'Swingin' A's would take down the 'Big Red Machine' in a seven game World Series. The Miami Dolphins would complete a perfect 14-0 regular season and go on to defeat the NFC Champions now known as the Washington Football Team in that season's Super Bowl. Oh, and incumbent President Richard Nixon would win reelection in an absolute landslide. It was also the year that Jethro Tull released the album "Thick as a Brick". Oh, one more thing. Southwest Airlines (LUV) lost money that year. At that time, the business was just a (very) regional airline, confined really just to the state of Texas. Forty-seven consecutive years of profitability would eventually place Southwest as the fourth largest U.S. passenger carrier. Forty-seven consecutive years would also be as far as that streak would go.
Exciting And New
Wait, that's "The Love Boat." I meant LUV... ahh, okay. Losses might be new, but not so exciting. Southwest Airlines reported the firm's fourth quarter performance on Thursday morning. The firm posted adjusted EPS of $-1.29, which sounds awful, but did beat consensus by almost 40 cents. Even backing of the adjustments, GAAP EPS of $-1.54 still beat the street. Quarterly revenue generation amounted to $2.01 billion, down 64.9% year over year, and a mild ($100 million?) miss of what had been projected. For the full fiscal year of 2020, Southwest lost a net $3.5 billion (adjusted). Full year revenue landed at $9 billion, down from $22.4 billion in FY 2019.
The problems faced by not just Southwest, but by the entire airline and more broadly the travel industries in 2020, is no secret. American Airlines (AAL) posted an even uglier loss earlier in the day, while both United Airlines (UAL) and Delta Air Lines (DAL) had already done the quarterly ugly dance prior. The impact of this pandemic has been startling. For Southwest, operating revenue per seat mile fell 40.8% for the period reported. Passenger revenue fell 18.7%, while operating expenses per available seat mile increased 5.8%. The firm stated that average core cash burn was a rough $12 million per day in Q4 2020, and expects average core cash burn to rise to $17 million per day for Q1 2021, as the pandemic meets up with what is usually a depressed seasonal impact on air travel.
Remember too, gang... that this poor performance across the industry comes even after the federal government dropped a cool $50 billion on the industry to keep it operating and to keep people employed. According to CNN, American, Delta, United, Southwest, and Alaska Air (ALK) lost an aggregate of $28.8 billion between the five of them in 2020.
While I watch American Airlines outperform Southwest this morning, I am drawn back to why Southwest is the only airline on my book. Southwest is a domestic business, while most of the rest rely as much upon international travel as on the domestic side. It is my belief that domestic travel recovers well ahead of global travel. This is also probably why as of year's end, AAL ran with short positions comprising 33.7% of the entire float, while for LUV that number was just 3.4%. This huge short position has obviously caught the attention of the swarm this morning as well as the momentum "bots" that will try to exacerbate any price discovery overshoot. I'll stick to my thesis that Southwest and maybe Alaska Air recover ahead of the pack. I know that's a fundamental argument and fundamentals aren't cool anymore, but I kind of have a track record, and I'll stick to it. I'll day trade with the lunatic fringe for sport, but for investment, I have to have something to believe in.
Readers will note that since early November, Southwest has been mired in a basing period of consolidation after a fairly brisk pace of recovery from the pandemic inspired lows of last May through that point. The "flat base" is real. Resistance at $49 has been tested four times, while support at $44 also has been tested four times. That makes $49 out pivot. You give me $49, I think I can get you $59. The greater risk right now is to the downside. My net basis in this one is just above $38, so my original panic point was $35 (8% discount to net basis). At this point while leaving the target where it is, I am moving my panic point up to $41 (8% discount to established support), basically locking in a net profit, unless something stupid happens when I'm sleeping.