Southwest Airlines (LUV)

Southwest Airlines (LUV) is one of the lowest cost airlines out of the majors.  LUV has also been one of the most consistent airlines in terms of profitability, logging in 42 consecutive years of recording a profit.  So what, right?  Well, the airline industry has been an ugly duckling for quite some time, with multiple airlines recording negative profits and/or declaring bankruptcy in recent history.

So why take on a position in this ugly duckling industry?  Consolidation of airlines has decreased competition and allowed ticket prices to increase.  New fuel efficient planes have increased the profitability per flight.  Blah, blah, blah...

I'm invested in LUV because I believe in the company, its business model, and how it treats its employees.  Flying Southwest is an enjoyable experience.  I can't say the same for any other airline I've flown.  Southwest employees are generally friendly and charismatic.  Boarding the plane is simple, and the "bags fly free" policy is very convenient.  Oh, and the cancellation policy.  Muah!  Cancelling a flight on most other airlines costs you about as much as it would to abandon your ticket and purchase a new one.  Give me a break.  Southwest is just all around pleasant.

In every earnings conference call, LUV gives a shout out to its employees.  Here is an excerpt taken from the most recent earnings conference call:

Our 2014 profits earned our employees a well-deserved record $355 million in profit sharing and I just want to congratulate all of our wonderful employees on just the fabulous results which also represents our 42nd consecutive year of profit.

I have to believe, based on the conference calls and observing the employees in action, that the Southwest team, from top to bottom, wants the company to succeed.  Ahh, refreshing.

In the past, the knock on LUV is that many of its flights from Dallas were not non-stop.  Nobody likes layovers - that's a simple fact.  However, this limitation has recently expired, and LUV will now reap the benefits.  Non-stop flights will increase the attractiveness of LUV to business travelers, as has the business select ticketing option and the great rapid rewards program.  LUV is perfect for business travel.  And, when I'm not flying for business, I just prefer to see the smiling faces of LUV's employees.

What to watch for: Oil prices and ticket prices (competition).  Jet fuel makes up the majority of the airlines' costs.  When oil prices go up, airline stocks go down.  It is a simple fact that will likely never change.  Ticket prices can be tracked through the various metrics the airlines use, such as PRASM (Passenger revenue pre available seat mile), etc.  These are not the most straight-forward metrics, but when they decrease significantly, the airline stocks will decrease.

Common Cents Take: LUV is a great company with a great business model.  However, investing in airlines stocks has historically been tough due to fuel prices and competition.  LUV is likely not a long-term, buy and forget stock, but it will likely outperform the other airlines stocks.