The Southwest Airlines Co (NYSE: LUV) is having a run of bad luck. Just as air travel was recovering from COVID-19 computer outages forced Southwest to cancel and delay hundreds of flights.
Southwest (LUV) canceled 500 flights and delayed almost 1,300 flights on 15 June 2021, the Associated Press reports. Moreover, the Federal Aviation Administration (FAA) held all Southwest flights for 45 minutes because of a computer problem.
June 15 was the second day of computer problems at Southwest. The airline delayed 1,500 flights on 14 Monday 2021,Travel + Leisure estimates. They blamed the delays on “technology-related issues” and Southwest’s weather data provider.
Will Computer Problems Kill Southwest Airlines?
The delays led to long lines in airports, angry crowds, and demands for refunds. Such delays can be costly, in 2016, Delta Air Lines (NYSE: DAL) lost $150 million because of a data center outage.
The source of Southwest’s computer problems is unknown. However, The Washington Post reports Southwest was one of many organizations hit by internet outages on 14, 15, and 16 June 2021. Other organizations suffering problems included United Airlines (NASDAQ: UAL), the Commonwealth Bank of Australia, and the Hong Kong Stock Exchange.
The outages could have started at Akamai Technologies content delivery network services provider in Cambridge, Massachusetts, The Washington Post speculates.
Is Southwest Airlines Making Money?
The internet outages come at a terrible time for Southwest Airlines (LUV). Southwest’s quarterly revenues fell from $4.234 billion on 31 March 2020 to $2.052 billion a year later.
Notably, Southwest reported a negative quarterly gross profit of -$770 million on 31 March 2021. The quarterly gross profit fell from $610 million on 31 March 2020. In contrast, Southwest’s quarterly operating income rose from -$110 million on 31 March 2020 to $199 million on 31 March 2021.
Incredibly, Stockrow estimates Southwest’s revenue growth fell by -51.54% in the quarter that ended on 31 March 2021. The revenue growth fell by -17.17% in the quarter ending on 31 March 2020 and an astounding -82.94% in the quarter ending on 30 June 2020.
Southwest suffers Catastrophic Revenue Collapse
Southwest is suffering from a catastrophic revenue collapse. However, Southwest generates some cash. It reported a quarterly operating cash flow of $645 million on 31 March 2021. The quarterly operating cash flow rose from -$377 million on 31 March 2020.
Conversely, Southwest’s quarterly ending cash flow rose from $3.94 billion on 31 March 2020 to $11.971 billion on 31 March 2021. Thus, Southwest can still generate enormous amounts of cash.
Southwest has borrowed enormous amounts of money. It reported quarterly financing cash flows of $1.1774 billion on 31 March 2020 and $7.182 billion on 31 March 2021.
Predictably, Southwest’s Total Debt grew from $6.349 billion on 31 March 2020 to $12.785 billion on 31 March 2021. Thus, Southwest’s total debt more than doubled in a year.
What Values Does Southwest Airlines have?
Southwest Airlines (LUV) added value over the past year. Notably, Southwest’s cash and short-term investments grew from $5.45 billion on 31 March 2020 to $14.348 billion on 31 March 2021.
Similarly, Southwest’s total assets grew from $26.885 billion on 31 March 2020 to $35.493 billion on 31 March 2021. Hence, Southwest has added value and Mr. Market has noticed.
Mr. Market paid $34.36 for LUV on 22 June 2020 and $55.75 for Southwest on 21 June 2021. Thus, Southwest is experiencing some growth. Moreover, the company retains enormous amounts of cash.
Is Air Travel Recovering?
I think Southwest’s revenues could start growing again soon because there is evidence air travel is recovering.
For example, the Transportation Security Administration (TSA) estimates the number of people passing through its airport checkpoints rose from 587,908 on 18 June 2020 to 2.081 million on 18 June 2021. That number is still below the 2.273 million passengers the TSA counted on 18 June 2019.
Thus, passengers are returning to airports which could help Southwest make money again. Unfortunately, computer problems and ransomware could disrupt Southwest’s operations and throttle fresh growth. Importantly, CBS reports that there is no indication Southwest’s problems were caused by malicious actors.
In the final analysis, I consider Southwest (LUV) too risky to buy. In addition, I think Mr. Market overvalued Southwest at $55.75 on 21 June 2021. My advice for investors is to avoid Southwest and airlines because it will take a long time for this sector to recover. I think airlines will keep losing money and their stocks could crash.
Originally published at https://marketmadhouse.com on June 22, 2021.