There may be some trouble brewing at Southwest Airlines Co (LUV, Financial) with the pilots union preparing for a strike in case it can’t reach a deal with the management over the next few months, but this eventuality may never come to pass. In the meanwhile, the Dallas, Texas-based airline has left behind bigger competitors such as American Airlines (AAL, Financial) and Delta Airlines Inc. (DAL, Financial) when it comes to performance in the stock market in the last year, currently trading at about a 70% premium from its price a year ago. The results for last month’s performance announced by the company earlier this month were also quite solid and encouraged potential investors to consider this stock seriously.
Recent numbers
Last month, Southwest announced its first quarter results which were a significant improvement over the first quarter last year. Revenue grew by 6% to $4.4 billion and EPS (diluted) stood at $0.66 compared to $0.18 during the same quarter last year.
Earlier this month, continuing its good performance, Southwest announced its traffic figures for the month of April, and both its passenger traffic and overall capacity have increased. There has been a small decline in the revenue per available seat mile that the company makes, but this can be explained at least partially by the fact that new routes take some time to fill to capacity after being introduced, and therefore, this "lack of efficiency" can be expected to be overcome in the months to come.
The airline is also a favorite with customers, with the U.S. Department of Transportation receiving the least number of complaints against Southwest for the month of March, the period for which the latest data is available.
External factors
Another reason for lower profits for the company has been reduction of tickets prices on some its key routes in and out of Texas, in response to competitive pricing with Virgin America Inc. (VA, Financial). The impact of this has been limited due to the crash in oil prices which have reduced jet fuel costs for all airlines, including Southwest Airlines that did not hedge fuel contracts. The falling unemployment and improving consumer sentiment should also benefit the airline, since both businesses and individuals are likely to spend more on travel, including flying. Another factor that is currently in favor of Southwest, compared to Delta or American, is that its operations are mostly domestic and hence are not impacted much by the strong dollar. The bigger airlines, with significant international operations, are at a comparative disadvantage from currency headwinds which Southwest doesn’t have to deal with.
Love for shareholders
Earlier this week, Southwest Airlines announced an increase of its dividend payout by 25% and also announced a new share buyback program worth $1.5 billion. The dividend, to be paid on June 24, is the 155th consecutive quarterly dividend announced by the airline. This shows the company’s commitment to return value to its shareholders.
Conclusion
The Southwest management seems to be doing a good job of keeping customers happy, even if there is a possibility of some pilots striking later in the year. The airline is also expanding operations while maintaining a healthy balance sheet, despite offering cheap prices in some sectors, and is garnering more passengers. The company also maintains a low debt to equity ratio, compared with peers. All in all, this is a very likable stock in the airlines space and we recommend a BUY.
