During the 1980s and 1990s Southwest Air (LUV) was a great investment story. Since then the company's performance has stalled, and it now performs like any other airline stock -- which is to say, poorly.
I knew Southwest's story from my college days in Texas. I know why its symbol is LUV – its original hub was Dallas' Love Field. I knew that for years it avoided regulation by flying only within Texas, mostly in a triangle of Dallas, Houston and San Antonio. And I knew vaguely of what it had done since.
But living in Atlanta, I lost track of Southwest until my daughter went to college in Texas, and I found the only way to come back from driving her stuff there was to fly in through Birmingham and then have someone drive me home.
The carrier's fares were half those of all competitors flying into Atlanta, there were no bag fees, and my own experience with it was positive. They're frank about being a bus line. No romance of the air. Let's get along and we'll all get through this. Nice.
Once Southwest announced the acquisition of AirTran, I noticed immediately that Delta (DAL) matched its Birmingham prices, at least to Texas. That's one reason why its stock no longer performs like a tech stock. The hub-and-spoke guys find a way to match fares, then add up-charges (like the bag fees and change fees) once they get you in. I'd rather fly Southwest.
This was the first quarter where AirTran's results are plugged into Southwest's numbers. (Read a transcript of the earnings call here.) Southwest is complaining about fuel costs, like everyone else, so if the end of the Libyan civil war does indeed mean lower fuel prices, they will benefit on the bottom line.
The big news is that AirTran is being integrated into the larger whole. Despite its union contracts, despite its slightly different way of routing planes, despite its different fleet mix, the two are becoming one, and that process should be complete within a year.
Southwest also announced its first direct service through Atlanta, and once all AirTran flights are Southwest flights, I know things will change at Atlanta's Hartsfield-Jackson Airport. Delta will no longer be the sole owner of this market.
Question is, how much will they change, and will that change be enough to get Southwest's performance ahead of the airline pack again?
Despite its stock performance, Southwest retains many advantages over airlines like Delta. It has a better balance sheet. It's growing, not shrinking. It has no huge international exposure. It retains its generally good reputation for customer service, unlike discount rival jetBlue.
Right now Southwest stock is selling at a P/E of just 12, which is in line with the market as a whole. With the AirTran acquisition complete and the company starting to ramp up operations in the East and South, that should have a positive impact on earnings in 2012 and beyond. If you believe the U.S. economy is going to grow next year (and not everyone does) then I think Southwest will get more than its share of that growth.
If you are a bull on America, in other words, you should be a bull on Southwest Air too.