Southwest Airlines (LUV  ) shares have been battered during the coronavirus pandemic. There was the immediate effect of all air traffic plunging by more than 90% due to shutdowns and people's fear of contracting and spreading the virus.

Then, there were concerns about the longer-term effects as many people may elect to not travel especially vulnerable populations, and people who interact with these populations. Many companies have already ended business travel for the rest of the year, shuttered conferences, and companies are moving towards work from home arrangements that are normalizing video conferencing. So, there are concerns that this may permanently displace some portion of business travel.

Southwest's Relative Weakness

Finally, airlines are being forced to adapt to a "social distancing" world, where they have to undergo more stringent cleaning protocols and potentially, fewer passengers per flight. Of course, these measures mean more cost and less revenue. These conditions are the most deleterious for discount airlines who make their profits on volume and whose customers are more price-sensitive.

Another issue for Southwest Airlines is its aggressive use of hedging fuel costs. In circumstances of rising oil prices, this is a blessing. However, it's less able to benefit from today's lower prices. These issues manifested in a depressed share price for Southwest Airlines.

Most stocks bottomed around March 23, however, Southwest kept trending lower following a brief, oversold bounce. It didn't decisively bottom until May 14, when it was 30% lower than its March 23 open. In contrast, the S&P 500 (SPY  ) was 24% higher, and the airlines ETF (JETS  ) was 5% lower.


Southwest has posted an impressive rebound from its May 14 low with a 32% gain. The major catalyst seems to be that the decline in air traffic has bottomed, and there are signs of demand picking up. Major airlines are reporting that bookings are now outpacing cancellations. Southwest has already cut capacity by nearly 50% and expects flights to be between 35 to 45% full, so a lot of bad news in the intermediate-term has been priced in.

TSA data is showing that the number of travelers going through TSA checkpoints is around 225,000 per day in May which is down from an average of 2.5 million in May 2019. However in April, the average number of passengers was hovering around 120,000, indicating a significant improvement.

The other constructive indication is that even with some areas reopening, there hasn't been a meaningful outbreak. Of course, it's too early to say this with confidence, but it increases the probability that the combination of social distancing, mask-wearing, and increased cleaning standards is sufficient to prevent spreads. Southwest's stock rebound reflects its situation going from bleak to bad with some hope.