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Bailout helps Southwest post a profit during the pandemic

Date: April 23, 2021

By David Slotnick, The Points Guy

Airlines have largely managed to slow or stop burning cash as travel demand begins to return, but the path to actually becoming profitable again is still a long ways uphill.

Except for Southwest.

The airline reported a $116 million profit for the first quarter on Thursday, making it the first U.S. airline to report net income for a quarter since the beginning of the COVID-19 crisis.

Despite an improvement in current demand and future bookings, however, the profit comes with a big asterisk. It was facilitated by federal aid distributed during the first three months of 2021.

Without the aid, the airline would have posted a loss of about $1 billion.

Still, other U.S. airlines reported losses for the quarter despite also receiving the aid. American Airlines said on Thursday that it lost $1.25 billion in the first quarter.

“The pandemic is far from over. We have to continue to fight like never before and ensure that when the green flag drops, American is out in front.”  American Airlines CEO Doug Parker and President Robert Isom said in a note to employees on Thursday. “But as our world makes daily strides in COVID-19 vaccination efforts, customers are returning to travel and there is no doubt the pace of the recovery is accelerating.”

For both airlines, the results reflected an improvement over the past few quarters, in line with what Delta and United have reported.

Improvements in travel demand, both in the form of immediate travel, and forward bookings for spring and summer, began to climb towards the end of the quarter as an accelerated pace of the vaccination campaign triggered a fresh wave of optimism among consumers.

Each major U.S. airline has said that bookings began to climb in March, leading to positive cash flow, short-term profitability, or a reduction in cash burn rates for the month.

One thing that helped: that new consumer optimism also coincided with spring break.

“Overnight we increased our flight activity mid-March, I think it was about March 11, by 50%,” CEO Gary Kelly said on CNBC Thursday morning. “We added 1,000 flights a day.”

Notably, the surging demand is almost entirely among leisure travelers and those visiting friends or relatives, rather than business travelers. Those customers, who tend to be more price conscious, generate lower yields for airlines. Business travel is not expected to begin returning substantially until the end of this year or 2022.

“We would be foolish to plan for a quick recovery of business travel,” Kelly said.

“The good news about Southwest,” he added, “is that we’re a low-cost business model. We’re very well suited for this environment. We’re certainly in a position where we can be prosperous and profitable with mostly leisure travel.”

Southwest also benefits from less exposure to the long-haul international market than its competitors, which rely on sales of highly profitable premium seats on trans-oceanic flights.

The airline plans to restore 85% of its pre-pandemic capacity in the second quarter.

Most U.S. airlines benefited from aid under the Payroll Support Program under the CARES Act. Southwest has received more than $5 billion in aid since April 2020, according to Treasury data, of more than $64 billion given to the industry in the form of grants and low-interest loans.

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