As I write this on July 15, Southwest (NYSE:LUV) is having an excellent day on the markets with LUV stock up more than 8% on the day and just a little more than 60 minutes of trading until the 4 p.m. bell.
The $2.81 move by Southwest puts it near its one-month high, a sign that its stock might be coming back to life. However, before you jump in, you might want to consider a couple of points that don’t work in its favor.
Donald Trump might like the novel coronavirus to magically disappear, but as anyone who’s studied science knows, the data doesn’t lie. The pandemic could be here in the U.S. well into 2021.
Dr. Robert Redfield, head of the U.S. Centers for Disease Control and Prevention, spoke at a July 14 webinar for the Journal of the American Medical Association, suggesting that the fall and winter could be the country’s worst public health crisis in its history.
“I do think the fall and the winter of 2020 and 2021 are going to be probably one of the most difficult times we’ve experienced in American public health because of … the co-occurrence of COVID and influenza,” Redfield said in the webinar.
“Keeping the health care system from being overstretched, I think, is really going to be important. And the degree that we’re able to do that, I think, will define how well we get through the fall and winter.”
Redfield makes it very clear that if people wear masks 100% of the time, they’re outside their home bubble, the country will have a much better time coping.
For Southwest’s sake, and that of its fellow airlines, mask-wearing is essential to a return to anywhere near the number of flights it had a year ago.
A Closer Look at LUV Stock
Unfortunately, I have almost no confidence in North Americans (yes, that includes Canada and Mexico) being conscientious enough to heed the call. And so, more people will die unnecessarily, and Southwest’s revenues will go back into the toilet.
Covid-19 is winning the battle in a landslide.
The Motley Fool’s Adam Levine-Weinberg does a good job highlighting why the improvements in air travel experienced between Memorial Day weekend and the July 4 holiday weekend are likely to be all for nothing.
“[S]everal cities and states are requiring 14-day quarantines for anyone arriving from COVID-19 hotspots. The list of hotspots on the tri-state quarantine list for New York, New Jersey, and Connecticut has grown to encompass 22 states, accounting for more than half of the U.S. population,” Levine-Weinberg wrote July 15.
Right now, according to the Transportation Security Administration (TSA), the number of people it is screening per day appears to have plateaued at 25% of last year’s figures. With Florida setting daily records of new cases, that number is likely to revisit 10% where it was in April.
Luckily for Southwest, it has a relatively healthy balance sheet compared to its largest rivals, which means it ought to be able to ride out any downturn over the next few months and into 2021.
The bad news, as Levine-Weinberg points out, is that a chunk of Southwest employees are going to get tossed to the curb come October when the restrictions on layoffs imposed as part of the airline bailout come to an end.
It’s impossible to know how many employees will be furloughed or laid off. However, because these employees must be given 60 days’ notice, investors will start getting a better idea come August.
Barring a miraculous disappearance of Covid-19 — something nobody anticipates except for President Trump — the numbers are going to be in the thousands. As of the end of 2019, Southwest had 60,800 employees. A 10% cut, which is not at all unthinkable, would be more than 6,000 people losing their jobs.
Like the coronavirus itself, the reality is far worse than anyone could have possibly imagined.
The Bottom Line on Southwest Airlines Stock
As I stated July 14, if you’re going to bet on Southwest — I wouldn’t — hedge your bet by putting 50% of that bet into the U.S. Global Jets ETF (NYSEARCA:JETS). It will soften the blow should the U.S. return to a full lockdown scenario.
With every passing hour, it’s looking more and more likely.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.