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We generally have had a negative view of the airline industry. Historically, the airline industry, as a whole, has lost more money that it has made. However, there have been a few winners in this space with the most notable being Southwest Airlines (NYSE:LUV). In fact, last year, Southwest passed a very important milestone. As of June 2012, Southwest celebrated 40 consecutive years of profitable operation. We are not aware of another airline that has had such impressive long-term performance. Southwest's main advantage has been that it has been the low-cost operator in a highly competitive industry. After 40 years of consistent profits we believe that Southwest has demonstrated that it is one airline that is worth owning.

Southwest Airlines is ranked as the forth largest U.S. airline with a 15% market share (based on revenue passenger miles or RPM) in the U.S. serving 78 cities in 39 states. Southwest specializes in high-frequency, short-haul, point-to-point, low-fare passenger airline service. One aspect of Southwest's operation, which has been critical to its success, has been the focus on short turnaround times keeping the jets in the air with the absolute minimum time spent on the ground. To accomplish this, Southwest focuses on point-to-point routes that do not require passengers to connect to other flights. Over 70% of Southwest's passengers fly non-stop, never stopping at a hub airport to catch a connecting flight. In contrast, most other major airlines operate a hub and spoke type of operation where passengers are often flown to a hub airport where they must catch a connecting flight. Furthermore, Southwest avoids other inefficiencies such as feeder services and congested airports which plague the operations of many of its competitors. An efficient airline operation must minimize the time the jet is on the ground unloading and loading passengers.

Also, Southwest maximizes efficiency by focusing on short routes (average about 700 miles) in order to minimize food costs, ground service costs, and the number of leased airport gates that are needed to support its operations. Other efficiencies are related to Southwest operating one type of aircraft - the Boeing 737. Operating one type of aircraft helps Southwest to streamline its employee training, aircraft maintenance, and scheduling tasks. Most of the competitors operate many different types of aircraft with aircrews that are trained for a specific type. This situation is a training and scheduling nightmare compared to Southwest's operation where all pilots are trained to fly all of the aircraft in Southwest's fleet. Also, aircraft parts and maintenance efficiencies arise from operating a single type of aircraft.

For years Southwest was also very savvy in minimizing its second largest expense which is jet fuel. However, Southwest ran into some bad luck in 2008 when it bought fuel hedges at high prices when oil prices spiked that year. Fortunately, these unprofitable fuel hedges will be working their way off of the books in the first quarter of 2013 and will provide an excellent positive catalyst latter this year.

We believe that Southwest is a good buy for the following reasons:

  1. Southwest is selling at an attractive forward earnings multiple of 11.1 times 2013 projected earnings.
  2. Southwest has a solid balance sheet with $2.9 billion in cash and relatively little debt for an airline (31% of capitalization).
  3. Southwest has a very attractive PEG ratio of 0.42 and is selling for just 4.8 times TTM operating cash flow.
  4. S&P has a Buy rating on the stock (4 out of 5 stars) and a 12 month price target of $15.00 per share.

Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Southwest Airlines: 40 Consecutive Years Of Profits