Southwest Airlines enters Leaseback Deal bringing in $815M

Southwest Airlines (NYSE: LUV) recently finalized a deal to enter in a sale-leaseback for 10 of its Boeing (NYSE: BA) 737-800. In addition the contract also includes 10 of their Boeing 737 MAX 8. This information was released in a recent filing which can be found on their website for Investors Relations.

The deal contains terms which include $815 million of gross proceeds that will be awarded to Southwest Airlines. The company has stated that a majority of these funds intend to be used to general corporate purposes. In the information provided it does not appear to reveal who the purchaser of the aircraft are or how long the agreement will last.

“I think we’ve seen the bottom in April. Each week after the first week of April has gotten successively better. I think May will be better than April was,” Southwest CEO Gary Kelly said in an interview on CBS News, adding ““I don’t think June will be a good month, but hopefully it will be a bit better than May.”

As many airlines in today’s current economy are looking into various options to maximize revenue and keep cash flow figures consistent, it is important for airlines to be able to receive financing and revenue through the resources that they have available.

One major benefit that has been playing a role in Southwest Airlines ability to remain operational is part of their business plan and operational expertise. Their routes are predominately within the United States.

This meant they did not experience the mandatory closing of routes due to international travel restrictions that are in place. Considering that a majority of their flights are domestic they were able to only reduce flight numbers and cut back on some flying. Having little dramatic affect to their network of routes.

Flight Path Ahead

The First Quarter financial results for 2020 have been released and the numbers reveal a scenario which is not as grim as the world paints it to be. Load factors for Southwest Airlines (NYSE: LUV) were reported to be sitting at 67.7% for the first quarter.

When we look at that and consider that in the last two months as the Nation has been on lock down and Southwest Airlines still managed to have 67.7% load factors that certainly starts to peak our curiosity. Fuel prices have significantly dropped around the world which have also been benefiting Southwest on their domestic flights.

Just to provide a bit of an understanding in how dramatic the price of Jet-A can play on airlines lets take for example the price of fueling a Boeing 737. The Maximum Fuel capacity is 6,875 U.S. Gal. When gas prices are up near $3 a gallon a full tank will cost $20,625. With the current rate of prices for Jet-A some vendors are offering $.60 at certain airports. Which would mean the same Boeing 737 can now be fueled up entirely for only $4,125 bringing a 80% in operating costs on fuel alone.

As a result their Operating revenue for the first quarter of 2020 is currently as $4.2 billion. They are reporting a net loss of $77 million for the quarter. In addition having returned over $639M to shareholders. The added a note stating that prior to COVID-19 Pandemic their financial trends were solid and in line with their original first quarter expectation. It was only during late February that the airline began to experience the unprecedented decline in passenger demand and bookings, resulting in first quarter 2020 net loss.

Technical Analysis

Looking at the chart will help new investors get a better understanding of the behaviors of how the stock price moves. The chart gives investors a visual representation of how fast the stock moves and how volatile the stock price is.

The chart allows us to use various charting tools and analysis algorithms to determine high-probability movements for the stock based on various indicators and strategies. Of course its important to understand that the charts cannot predict what will happen it can only tell you what has happened. Certain indicators are implied to be predictive based on high probability moves and ratios. Although it is important to remember that charts are only to be used are guides and as ways to track and monitor stocks and not as a means of predicting future movements.

When we look at comapnies like Southwest Airlines chart we like to first determine the ranges of the stock and how fast the price moves over a given period of time. This helps us determine the rate at which the prices moves over a given period of time. For example if we can analyze that for over a period of 7 Days the stock has a average of moving about $7 then we can use that metric to look for future possible trades.

Price is testing lower following a downwards channel from the outbreak of Coronavirus. Based on the technical indicators there is a strong downwards diagonal resistance that price has been unable to break above. We are currently creating a base to the downtrend and looking to test up again towards the resistance level.

Should price be able to break above technicians would then look for an opportunity to enter in a long bias based on a confirmed retest of the price level. This would then create a new support level and provide investors with a ground towards building upwards.

Failure to break above the resistance would signal that there is still respect towards that level and that price is unable to break above. As it continues to trend lower it will hold below that diagonal resistance until it is able to either break up above or reject it completely towards new lows for the summer.

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Disclosures
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf

Air Market Group content is provided solely by Air Market Group LLC and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. Air Market Group, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. Air Market Group is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. Multi-leg option strategies incur higher transaction costs as they involve multiple commission charges. Air Market Group is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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