Southwest Stock Gains Altitude
Low-fare king Southwest Airlines is known for serving little more than peanuts on its flights and charging little more than peanuts for a seat. But its stock? Now you’re talking about real money.
Owing to Southwest’s operating prowess in recent quarters--its first-quarter profit growth this year was “simply awesome,” one analyst said--its stock has been far outpacing its peers in the airline industry and the broader market.
The gains are especially striking because Southwest, led by its irrepressible chief executive, Herbert Kelleher, has been expanding into new areas in the East, such as New York and Raleigh/Durham, N.C., and flying longer routes that invite heightened competition from its bigger rivals.
Yet Southwest hasn’t missed a beat, and the carrier is reporting strong reservations for travel this summer too. “Even though we’ve been expanding considerably . . . it hasn’t impaired our profitability,” the 68-year-old Kelleher said in a telephone interview.
And with Wall Street growing nervous about a slowdown in the airline industry because of weakening passenger traffic, Dallas-based Southwest stands out as a likely exception to any pullback.
Southwest “may be slowed if a recession were to occur, but this company has come through previous recessions in relatively good shape, while the rest of the industry has been devastated,” said analyst Raymond Neidl of investment firm ING Baring Furman Selz in New York.
After posting a 36% gain in 1998 earnings, Southwest followed with a 37% surge in this year’s first-quarter earnings, during which it posted its highest profit margin in 18 years.
To put the quarter in perspective, Southwest earned more in the three months than its larger rivals, Continental Airlines and US Airways, even though Southwest had $1 billion less revenue than those two carriers.
Southwest accomplishes the feat by operating with one of the lowest cost structures in the business. The airline’s costs in the first quarter equaled a rock-bottom 7.30 cents per available seat mile--the industry gauge of how much it costs to fly one passenger one mile. Delta Air Lines’ cost, by comparison, was 9.04 cents.
Southwest does so by flying only Boeing 737s, which saves money on scheduling, training and maintenance. Southwest’s short, point-to-point flights and fast turnarounds keep its planes in the air longer and boost their productivity. The company has a strong balance sheet, so its earnings aren’t eaten away by debt costs. And of course, it saves on meals.
The result: Southwest’s stock has soared 60% during the last 12 months, triple the gain of the benchmark Standard & Poor’s 500 and a towering performance relative to the 14% drop in the American Stock Exchange Airline Index, which tracks the industry’s 10 major carriers. Southwest closed Friday at $30.69 a share, down 38 cents on the day, in New York Stock Exchange composite trading.
Just this year alone, Kelleher & Co. have added $3 billion to their stockholders’ wealth, a whopping 40% gain. And to add an exclamation point, Southwest recently announced a dividend hike and a 3-for-2 stock split effective July 19.
To be sure, Southwest is hardly perfect and, in fact, its current prosperity furthers its recovery from a mid-1990s slump, when Southwest’s reputation for sizzling annual growth was tarnished.
Founded in 1971 after Kelleher and a partner penciled the idea for an airline on a cocktail napkin, Southwest is legendary for providing cheap, frequent air service on short-haul routes that avoid the nation’s most crowded airports.
Southwest and its 27,000 employees operate about 2,400 flights a day to 55 cities, including Los Angeles, Burbank and Ontario. Its passengers’ average one-way trip is 441 miles, for which they pay an average of $75.
Though its crowded jets, lack of seat assignments and spartan fare often get Southwest the “cattle-car” tag, the airline keeps booking passengers faster than it adds seats.
Southwest also enjoys enormous brand recognition that’s helped the carrier fight off competition from other low-cost entrants in recent years, including UAL Corp.’s Shuttle by United in California and US Airways’ MetroJet in the East.
Then there is Southwest’s legendary reputation as a zany yet savvy corporation, a place that requires employees to have fun, where flight attendants tell jokes with their on-board announcements, where the stock ticker symbol is LUV and where pilots help clean their planes’ cabins. It’s also a company that annually makes Fortune magazine’s list of the best places to work.
The Southwest culture is nourished by the gregarious Kelleher, a self-deprecating, chain-smoking, whiskey-drinking lawyer by trade who’s famous for dressing up like Elvis at Southwest parties and earning the undying adulation of his work force.
But even Kelleher stumbled in the mid-’90s. Southwest’s purchase of a smaller carrier, Morris Air, sparked a string of operational snags. Southwest’s dominance in California came under attack when United Airlines launched its Shuttle in 1994, and it faced stronger competition and fare wars in the East from Continental, among others.
United, Continental and Delta also threw Southwest out of their computer reservation systems to protect their own routes. Kelleher said that didn’t hurt Southwest’s bookings, but the moves “affected the psyche of the stock market” toward Southwest.
All of which slowed Southwest’s momentum and, even though the airline kept turning higher profits, Southwest’s stock suffered a 40% loss from 1994 to 1997.
But the carrier overcame those problems, neutralized United’s Shuttle in California and launched major expansions into Florida and the Northeast that effectively made Southwest a coast-to-coast airline. Southwest also began flying dozens of longer routes to draw more passengers and, with the strong economy and falling fuel prices as a tail wind, its growth and stock price resumed their climb.
And Kelleher, who has 18 months left on his current contract as CEO, isn’t finished. The carrier has plenty of expansion room left, especially in the East, and last year Southwest received requests for its service from 171 U.S. cities.
It’s likely that three of those cities will get their wish in the coming 18 months, Kelleher said. He won’t name them yet, but when asked if the cities are east of the Rocky Mountains, Kelleher said “yes.” Then he added coyly: “I’m glad you didn’t ask me if they’re east of the Appalachians.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Taking Flight
Shares of Southwest Airlines have surged on the strength of the low-fare carriers earnings, which have climbed despite Southwest expansion into new markets.
Weekly changes and latest:
Friday: $30.69
Source: Bridge Information Systems
