Worthy Of Some Love

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Southwest Airlines (NYSE: LUV) just reported less than stellar fourth quarter earnings as the company was plagued by rising fuel, labor, and maintenance costs.

But, for all of 2012, the Dallas, Texas-based company earned $421 million, up from $178 million earned in the prior year. The gain marked Southwest’s  40th consecutive year of profitability in its nearly 42 years in operation.

On the significant milestone, Chairman and CEO Gary Kelly said in a statement, “Without a doubt this is a remarkable feat and a record unmatched in the airline industry. These solid earnings were achieved despite significant efforts and costs related to critical strategic initiatives. I expect these initiatives to produce substantial returns over the next several years.

In a sector that has seen its share of bankruptcies and not so fruitful mergers, Southwest’s prowess appears even more impressive.

The world’s largest low-cost carrier operates some 3,400 flights every day to some 78 destinations in 39 states, the newest being balmy Key West, Florida. The airline, which has grown amid acquisitions and word of mouth, also has a cache of cities serviced in code-sharing agreements.

Customers agree what keeps them happy is Southwest's no-frills, no fuss service, which also keeps costs down. Plus, Southwest wisely uses some secondary airports in usually congested and expensive cities. These airports are less costly to fly in and out of, and are also more convenient to scores of passengers.

Competitors include AMR Corp., operating in bankruptcy since November 2011. The parent company of American Airlines is aiming to team up with US Airways (NYSE: LCC). US Airways hopes the combination will allow it to better compete with larger rivals United Continental Holdings, and Delta Air Lines (NYSE: DAL), but not so much with LUV.

US Airways just reported its highest profit in the company’s history, and has notable aspirations for the upcoming year, including completing the merger with AMR.  While a nice move for US Airways shareholders, the deal leaves AMR shareholders with next to nothing.

Delta also struggled in the fourth quarter, hurt by rising fuel costs. The company is in the final stages of acquiring 49% of Virgin Atlantic, giving it a strong foothold in London air routes. The second largest airline by traffic is revamping its fleet in an attempt to boost revenue. In addition, Delta is shifting focus to its high-yielding elite flyers, which has turned some filers off who are worried they won’t be able to spend enough to qualify for the elite status they once enjoyed.  Delta has increased the number of miles and segments flown needed for the elevated status.

Southwest fliers are not concerned with elite status. They simply feel special when they are not charged for checking a bag or changing a flight on Southwest.  The no-fee company is toying will some for-fee perks such as a $10 Early Bird Check-In fee and a $40 fee that moves a passenger up in the boarding queue.

Southwest is upbeat as it moves into the new year. Kelly maintains that revenue trends and bookings “look very solid” for the first quarter of 2013. Seeing encouraging signs in the overall economy, Kelly said the company “is not seeing signs of any weakness.” Helping Southwest to add capacity and traffic in the months and years ahead is its conversion plans to planes with more seating.

Investing in airline stocks is not for the faint of heart, and turbulence should be expected. While lofty gains can be had, equities in this industry are known to lose quite a bit of altitude very quickly. Furthermore, a smooth ride and landing are never guaranteed.

But if history is any guide, Southwest deserves some love.   




DianeAlter has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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