LUV (LUV, Financial) is the largest and most profitable airline in the U.S. with 24% total domestic market share and 66% share in its top 100 city pairs. LUV has been profitable for 45 consecutive years, despite competing in an industry that has been littered with bankruptcies. The company has been on Fortune’s list of “World’s Most Admired Companies” every year for nearly a quarter of a century. LUV’s brand recognition and strong customer loyalty stem from its outstanding service, efficient operations and refusal to nickel-and-dime on fees. The company’s above-average operating margins are enabled by a lower cost model compared to network carriers. LUV has a strong balance sheet and returns most of its free cash flow to shareholders through significant share repurchases and dividends. Despite these positive characteristics, we were able to purchase the shares at only a mid-single digit multiple of normal operating income due to short-term pressure from the run-up in fuel prices and the suspension of marketing following the recent passenger fatality.
From David Herro (Trades, Portfolio)'s Oakmark Global Fund second quarter 2018 shareholder letter.
