Southwest Flying Towards New Territory

Issue 45

11.16.20 - As airlines have limped along through the COVID-19 pandemic, Southwest is doing no such thing. Southwest is aggressively expanding to quickly grab more market share while it’s competitors are weak.  The airline plans to have over 10 new cities by the end of 2021. While other airlines went to the government hat in hand in search of federal aid this March, Southwest was in no hurry.

The company’s financials are significantly stronger than its competitors.  It ultimately opted to take a $3.2 billion grant from Congress and the company signed a non-binding agreement to take a $2.8 billion loan from the Treasury Department.  However, in an August Federal Court filing, Southwest reversed course and turned down the loan.

Southwest ultimately did not see the value of the loan being worth the Treasury Departments cost: Any airline that accepts treasury loans would be forced to give the Treasury Department warrants to convert its debt into shares. The airline did not want to risk share dilution and a possible debt rating downgrade.

Today as it stands while Southwest has borrowed billions, it still has more cash than debt with a 47 year-long streak of profitability.

This isn’t the first time Southwest has stepped on the gas and preyed on it’s competitors while they were down.  After 9/11 it was one of the few airlines to remain profitable, when it’s rivals pulled back, they stepped forward, picked up market share and expanded into long haul routes previously dominated by bigger airlines. Today Southwest accounts for about 20% of domestic air travel only second to American. Even in a depressed market the expansion is still new revenue a move that may ultimately slowly put the company at the top of the industry.

Source: Wall Street Journal