QUOTE AND NEWS
Motley Fool  Jun 11  Comment 
Southwest Airlines and American Airlines continue to jockey for position in Los Angeles. Should United Continental even try to keep up?
Benzinga  Jun 10  Comment 
Hawaiian Holdings, Inc. (NASDAQ: HA) shares have gained 6 percent year-to-date. Credit Suisse’s Julie Yates initiated coverage of the company with a Neutral rating and a price target of $43. The analyst commented that there were several...
The Economic Times  Jun 8  Comment 
Convergys and Southwest Airlines were cited as examples where frontline performance is visually displayed and team competition is created to encourage staff.
Benzinga  Jun 8  Comment 
Southwest Airlines Co. (NYSE: LUV) revealed that its May load factor increased to 85.8 percent from 84.4 percent in the preceding year month. Southwest Airlines said that it flew 10.9 billion revenue passenger miles (RPMs) in May 2016...
newratings.com  Jun 8  Comment 
WASHINGTON (dpa-AFX) - Southwest Airlines Co. (LUV) said that it flew 10.9 billion revenue passenger miles or RPMs in May 2016, an increase of 6.4 percent from the 10.2 billion RPMs flown in May 2015. Available seat miles or ASMs increased 4.6...
Benzinga  Jun 7  Comment 
Southwest Airlines Co. (NYSE: LUV) disclosed Tuesday it was unveiling a three-day domestic and international sale offering extra low fares for fall travel to help consumers grab their ticket and go. According to the company, customers may take...
Forbes  Jun 2  Comment 
Looking at the universe of stocks we cover at Dividend Channel, on 6/6/16, Southwest Airlines Co (NYSE: LUV) will trade ex-dividend, for its quarterly dividend of $0.10, payable on 6/29/16. As a percentage of LUV's recent stock price of $42.20,...
Motley Fool  May 25  Comment 
Valuation and growth are both important, but the dividend decides the day.
Motley Fool  May 22  Comment 
Airline pilots are demanding big raises, now that their employers are raking in record profits.




 

Southwest Airlines (NYSE:LUV) is the largest domestic carrier by total passengers, carrying over 110 million passengers over 1 million flights. [1]

A key component of the Southwest business strategy is its low cost structure, which is designed to allow it to profitably charge low fares.[2] The company has lower unit costs, on average, than most major carriers. LUV's low cost structure is currently facilitated its reliance upon a single aircraft type, its operationally efficient point-to-point route structure, and its highly productive Employees. The use of a single aircraft type, the Boeing 737, enables Southwest to simplify scheduling, maintenance, flight operations, and training activities. The company has been profitable since 1972, an unprecedented record in the industry..[2]

Company Overview

Southwest Airlines offers short domestic-only flights with minimal service and a simple, cheap fare structure.[2] Southwest's low cost structure enables the company to offer low prices to its customers.

Business Growth[3]

  • Revenue: Revenue increased from $10.35 billion in 2009 to $12.10 billion in 2010, representing a 17% increase.
  • Net income: Net income increased from $99 million in 2009 to $459 million in 2010, representing a 78% increase in net income attributed to the recovery from the recession.

Business Segments[3]

Although Southwest officially reports only one business segment, revenues can be broken into two:

  • Passenger Revenues: 94.84% of total revenue.
  • Freight Revenues: 1% of total revenues.

The rest of the revenues are from miscellaneous sources.

Key Trends and Forces

Airline industries are more sensitive to the economy than other industries

Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[4] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.

Hedging of Oil Prices Leads to Significant Cost Savings

Southwest's key to financial success is its fuel hedging, where the company agrees to future fuel contracts that secure a particular price. As a result of different hedging strategies at each of the major airlines, oil fluctuations impact each of them differently. Southwest hedges more oil than any other airline, which has ensured the lowest prices on jet fuel during significant oil spikes. Southwest hedges around 70% of its fuel needs hedged, while most other major airlines have only between 20% and 30% of their fuel hedged.[5] However, the downside to hedging extensively is being subject to overpaying for oil when oil prices plummet or pursue a downtrend.

International Expansion Promotes Growth

Southwest is pursuing plans to expand its U.S. only service to include flights to Canada and Mexico.[6] By pursuing a code-sharing agreement with regional airlines, the company will sell tickets on each other's flights and share the revenue. Southwest's code-sharing agreements are lower risks because they enable the company to expand its service without adding aircraft and employees.[6] Southwest has also continued to expand domestically.

Competition

Southwest competes against many low-cost carriers or low-cost subsidiaries of larger carriers. Southwest's main low-cost carrier competitors are AirTran Holdings (AAI) and JetBlue Airways (JBLU). Its other competitors include American Airlines (AMR) (in Chicago, Texas, Los Angeles, and Miami), and United Continental Holdings (UAL). Because of its efficient cost-saving strategies, Southwest's 37-year streak of profitability is unmatched in the airline industry.[7]

AirTran Holdings (AAI): AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[8]

American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company has been recording net losses for many years and has experiences very weak demand for air travel driven, particularly during significant economic downturns. [9]

Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. [10]

JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other airline travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to over 50 destinations in around 20 states, Puerto Rico, Mexico, and the Carribean.[11]

United Continental Holdings (UAL) United Continental Holdings (UAL) is a holding company and its principals are United Airlines and Continental Airlines. The merger between United Airlines and continental took place on October 1st, 2010. Due to the merger, United Continental Holdings is the largest airline in the world. The combined entity operates approximately 5,800 flights a day to more than 375 U.S. domestic and international destinations.The company's hub and spoke system allows it to transport passengers between a large number of destinations with substantially more frequent service than if each route were served directly.

US Airways Group (LCC) US Airways is a major domestic air carrier approximately operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[12]



References

  1. Wikinvest SEC Files: LUV 2010 10-K, Item 6, Selected Financial Data
  2. 2.0 2.1 2.2 Wikinvest SEC Files: 2010 10-K LUV, Item 1, Business
  3. 3.0 3.1 Wikinvest SEC Files: LUV 2010 10-K, Item 8
  4. MarketWatch: Airline Stocks Hammered by Latest Economic Data, 08-19-2010
  5. "Southwest Airlines reaps benefits of fuel hedging strategy" LA Times 5/30/2008
  6. 6.0 6.1 "Southwest plans to sell travel to Mexico" CnnMoney.com 11/10/2008
  7. LUV 2009 10-K, Item 7
  8. Wikinvest Stock Summary: AirTran
  9. Wikinvest Stock Summary: AMR
  10. Wikinvest Stock Summary: DAL
  11. Wikinvest Stock Summary: JBLU
  12. Wikinvest Stock Summary: LCC
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