Wednesday, September 30, 2020

Southwest Airlines to issue stock, debt amid travel collapse

Apr 28. 2020
A Boeing 737-700 operated by Southwest Airlines flies into California's San Diego International Airport on April 27, 2020. MUST CREDIT: Bloomberg photo by Bing Guan
A Boeing 737-700 operated by Southwest Airlines flies into California's San Diego International Airport on April 27, 2020. MUST CREDIT: Bloomberg photo by Bing Guan
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By Syndication Washington Post, Bloomberg · Mary Schlangenstein · BUSINESS 

Southwest Airlines is selling shares and $1 billion in convertible bonds in a push to add liquidity as the coronavirus pandemic all but erases demand for flights.

The carrier will offer 55 million shares plus an option for the underwriters to buy another 8.25 million to cover over-allotments, according to a company statement Tuesday. The combined total represents about 12% of Southwest's current outstanding shares. The underwriters can also buy an extra $150 million in the bonds, which are due 2025.

Southwest is following United Airlines in offering shares amid the biggest crisis in the history of the industry, as carriers rush to shore up liquidity even after receiving billions of dollars in government aid. Southwest is also cutting the number of Boeing Co. 737 Max jets it will take through December 2021 by more than half and said the travel outlook demand remains bleak.

"The U.S. economy has been at a standstill, and the current outlook for second quarter 2020 indicates no material improvement in air travel trends," Chief Executive Officer Gary Kelly said in a separate statement as Southwest reported a first-quarter loss. "Trip cancellations remain at unprecedented levels, though they have receded from their peak in March."

The shares fell 1% to $28.81 ahead of regular trading in New York. Southwest has dropped 46% this year, the best performance on a Standard & Poor's index of major U.S. carriers.

Morgan Stanley, Bank of America Corp., JPMorgan Chase & Co., BNP Paribas and Citigroup Inc. are serving as the joint book-running managers of the offerings.

Southwest's Max deliveries from Boeing will total no more than 48 through the end of next year. Also, the carrier will remove the Max from its schedule until late October of this year, as Boeing works to end a grounding that began in March 2019 after two deadly crashes.

The Dallas-based airline had been scheduled to receive 123 Max jets from Boeing and aircraft lessors through the end of 2021, Chief Financial Officer Tammy Romo said. Under the reworked delivery schedule, the company this year will take fewer than the 27 jets it had been expecting.

With dramatically fewer customers on planes, operating revenue will fall as much as 95% in April and May and revenue trends are too hard to predict after that, Southwest said.

Despite slashing capacity over the two months, the proportion of seats filled per plane will average 6% in April and 5% to 10% in May, the airline said. The average last year was more than 83%.

Cost-cutting efforts and a dramatically reduced flight schedule should lower 2020 operating costs by $2 billion and capital spending will fall $1 billion, Southwest said.

The company has temporarily parked 350 aircraft, or roughly half its fleet. It has also frozen hiring, cut executive salaries and offered workers a mix of voluntary unpaid leave and time off at reduced pay.

Southwest has raised $5.2 billion in debt since the start of the year and still has nearly $8 billion in unencumbered assets. Daily cash burn during the second quarter is estimated at $30 million to $35 million -- about half as much as the airline said it had initially expected.

The airline intends to apply for a $2.8 billion secured loan with the U.S. Treasury Department, but hasn't decided whether it will ultimately take the funds. Southwest earlier got more than $3.2 billion -- part grant and part loan -- in payroll support from the Treasury. The company said it is now "actively pursuing" other options for additional liquidity.

Southwest reported an adjusted loss of 15 cents a share in the first quarter, a narrower shortfall than the 30-cent loss expected by analysts. The carrier had adjusted earnings of 70 cents a year earlier. Sales fell 18% to $4.23 billion in the first three months of this year, trailing the $4.52 billion average of analyst estimates compiled by Bloomberg.

If stay-at-home restrictions start to be lifted, some improvement in travel demand may begin in June, Kelly said.

"A lot of people have made summer vacation travel plans and I think some people are anxious to begin to get back to their lives," he said. "Seeing what demand is in July and August is real critical."


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