Southwest Airlines (NYSE: LUV) said Wednesday that it will not participate in a U.S. Treasury-run loan program designed to support the airline industry, reaffirming its place among the healthiest companies in the aviation industry.
Southwest, like all airlines, has been hit hard by the coronavirus pandemic, which has condemned travel demand to evaporate and expose airlines. The CARES Act earlier this year provided up to $ 50 billion to support the sector, including $ 25 billion in payment support and another $ 25 billion in loans.
Image source: Southwest Airlines.
The airline took the payment support, and in July signed a non-binding letter of intent with the Treasury Department for a secured loan of about $ 2.8 billion. But the airline has also made stiff progress in cutting costs and increasing private capital, and has roughly two years’ worth of liquidity at current combustion rates.
In a statement submitted on Wednesday, Southwest said that “as a result of the key actions the company has taken to boost liquidity and its belief that it can secure additional funding on favorable terms, if necessary, the company has since decided not to to participate in the secured loan program. “
During a July interview with investors, CEO Gary Kelly called the terms of the loan “rather uneasy” (including the airline’s obligation to issue warrants in advance), and telegraphed that the airline would only take the cash if necessary.
It is unclear whether Southwest will be the only airline to deviate from the loans, but others included American Airlines Group have said they will participate in the program. Southwest is widely regarded as one of the strongest companies in the sector, and equity and debt markets are likely to remain open to them, even if conditions remain challenging.
In its latest update, the airline said it was “continuing to have significant negative impact on passenger demand and bookings” due to the pandemic, although it saw a “modest improvement” so far in August.
Southwest expects corporate revenues to rise by 70% to 75% year-on-year in August, and total capacity to decline by 30% to 35% in the third quarter. That’s down from Southwest’s previous guidance for capacity to reduce by 20% to 30% in the quarter.
