Plenty to Love about Southwest Airlines
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The airline industry has a reputation among investors for being fickle, but Southwest Airlines (NYSE: LUV) has been doing pretty well amid the turmoil in the industry, as well as in the economy as a whole.
The low-fare, no-frills airline has had healthy earnings well over the past few quarters, after posting in the third quarter of 2011, which has been blamed on high fuel costs. Southwest, for its part, has been hedging fuel against such high costs, which is why the company is in better shape than some of its contemporaries.
Southwest posted a second quarter profit of $228 million. Any airline that can pull off profits in an industry with high operating costs and constant labor disputes is worth the attention of investors.
Southwest, like its contemporaries JetBlue (NASDAQ: JBLU) and Spirit (NASDAQ: SAVE), focuses on getting customers from Point A to Point B as cheaply for their passengers (and themselves) as possible. This market segment of the industry has done pretty well, in spite of the downturn in air travel that followed 9/11 and the spike in fuel prices. Revenues at both airlines have been climbing steadily, much as its planes do. Spirit posted a second quarter profit of around $76 million, while JetBlue posted $86 million for its second quarter profit, and both companies have very healthy free cash flows, which should buffer them against the unpredictability in the industry.
Since the major airlines have slashed their amenities to keep costs down (accelerating a process that started in the wake of airline deregulation in 1978), passengers have figured that if they're not going to get a free meal on board anymore, they might as well fly one of these low-cost carriers.
Southwest, like many other low-cost carriers, has developed a quirky corporate culture, from its ticker (based on its home base of Dallas's Love Field, as well as the "love" it gives to its passengers) to rapping flight attendants.
The low-cost airline segment, as well as the industry as a whole, is very competitive, and Southwest has realized it needs to grow if it wants to keep flying in the future. That's why it purchased AirTran last year. This is no haphazard acquisition. Southwest wants lucrative markets that it currently underserves or doesn't serve at all. These include Atlanta, New York's LaGuardia airport, and Washington D.C.'s Reagan National Airport, all of which AirTran has slots at. These are also highly coveted major destinations that should bring Southwest lots of profits over the coming years.
Southwest is still working on merging operations with AirTran. One advantage the two companies have is that they both have all-Boeing (NYSE: BA) fleets. Southwest flies the Boeing 737, the most popular airliner in the world, exclusively, while AirTran mainly flies the Boeing 717, with some 737s to keep things interesting.
Sales of newer fleets to replace aging gas-guzzlers seem to bolster Boeing's earnings, as the company posted a second quarter profit of $967 million. (Of course, it doesn't hurt to be a major military contractor. If the airlines won't buy their planes, then Uncle Sam will!)
Southwest is also the launch customer for the 737 Max, the new version of the plane, which is slated to roll off the assembly line in 2017. One of the major features of the plane is its fuel efficiency, which should help ease the indsutry's fuel woes.
The conventional wisdom in the investing world is to stay away from airlines, but even in an area where people can analyze stocks in their pajamas, people still need to actually travel from place to place, whether for business or leisure. Low-fare airlines like Southwest offer room to grow.
Even legacy carriers like United (NYSE: UAL) are doing well. United's managed to dig itself out of the hole it and a bunch of other airlines got into with the one-two-punch of the 2008 financial crisis and fuel costs. It's consistently turned a profit since then and with the merger with Continental, looks poised for future growth, once the merger kinks are worked out.
It looks like investors will have lots to love about Southwest and other airline stocks.
Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
