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Tim Smith
LUV Southwest airlines

Southwest Airlines Co. (LUV) shares rose 3.67% Wednesday after the low-cost carrier raised its September Load factor and flagged that its cash burn in the third quarter will be lower than expected.

The Dallas-based airline lifted its load factor this month to between 45- to 50% from its previous forecast of 40- to 50%. Looking further ahead, it sees the metric ranging between 45- and 55% in October. On the revenue front, Southwest reaffirmed its expectation of a top-line contraction of 65- to 70% in September and expects October revenue to fall 65- to 75%. While operating revenue declined 70% in August, the figure came in 5% better than expected.

The airline, easily recognized by its Disney-themed livery on selected jets, said summer leisure demand trends have so far continued into the early fall. Moreover, the company expects its third-quarter (Q3) cash burn to slow to $17 million a day, less than its earlier forecast of $20 million per day.

Through Wednesday’s close, Southwest stock has a market capitalization of $24.83 billion and trades 21.67% lower on the year. However, performance has taken off over the past three months, with the shares gaining around 15% as of Sept. 17, 2020.

Shrinking Capacity

Southwest expects Q3 capacity to decline by 30- to -35%, followed by a fall of between 35- and 40% in November due to its decision to leave middle seats unbooked on flights through Nov. 30 as part of its ongoing social distancing protocols during the pandemic. “As we transition into autumn and the upcoming Thanksgiving holiday season, we want Southwest customers to have the confidence of knowing that middle seats will remain open through Nov. 30 to accommodate their fall travel plans,” said vice president Ryan Green, per USA Today.

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Wall Street View

Sell-side analysts remain overwhelmingly bullish on the stock, impressed by the airline’s ability to attract holiday travelers amid a sharp slump in corporate demand. It receives 13 ‘Buy’ ratings and 8 ‘Hold’ ratings. No research firm currently recommends selling the shares. Twelve-month price targets range from as high as $54 to as low as $29, with an average consensus at $43.31. This indicates a modest upside gain of nearly 3% from Wednesday’s $42.10 close.

Technical Outlook and Trading Tactics

Southwest shares climbed to a five-month high Wednesday, closing comfortably above the 200-day simple moving average (SMA) on above-average volume. Given that the relative strength index (RSI) has recently moved into overbought levels, the stock may consolidate over the short-term before trying to push higher. Those who buy here should look to book profits near $48, where the price is likely to find overhead resistance from the August 2019 swing low. Protect capital by placing a stop-loss order somewhere beneath the 200-day SMA.

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