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I was never a fan of airline companies as an investment. The reason for this is that many of them have trouble remaining profitable and file for bankruptcy. The most recent bankruptcy was American Airlines (AAMRQ.PK) this past November. US Airways Group (LCC) filed for bankruptcy in 2002 and again in 2004. I could continue to list more bankruptcies, but I'm sure you get the point.

Despite the continuous headwinds in the airline industry, Southwest Airlines (NYSE:LUV) has never filed for bankruptcy. The company is a well-run, low-cost, profitable, customer-friendly airline. It is currently the largest low-cost carrier in the United States.

Southwest

US Airways

American Airlines

(AAMRQ)

United Continental (NYSE:UAL)

Forward P/E

Ratio

7.94

3.06

N/A

3.40

PEG Ratio

0.41

0.04

-0.64

0.19

Profit Margin

1.99%

1.74%

-12.72%

1.62%

Earnings per

Share

$0.44

$1.39

-$9.41

1.64

Total Cash

$3.26 B

$2.19 B

$4.98 B

$7.27 B

Total Debt

$3.28 B

$4.44 B

$10.68 B

$12.44 B

Debt to Equity

47.9

2218.50

N/A

823.58

Cash Flow (TTM)

$1.65 B

$544 M

$1.75 B

$1.53 B

Free Cash

Flow

$607 M

-$28.38 M

$154 M

$769 M

5 Yr. Annual

Expected Earnings Growth

26.45%

92.8%

3%

24.85%

Southwest just reported a 42% rise in earnings growth and a 12% rise in revenue for Q2 2012. This is encouraging news as the company continues to successfully navigate through a sluggish economy. The acquisition of AirTran was completed during the quarter. This deal erases a major competitor and strengthens Southwest's position against the other large airlines. The acquisition allows Southwest to expand in the New York, Atlanta, and Washington markets.

The stock is currently trading slightly under its book value per share. This is an attractive undervaluation which is reinforced by a forward P/E ratio of 7.94 and a PEG of 0.41.

Southwest is the best positioned airline in terms of debt to equity. Its total debt is approximately equal to its total cash. However, the other airlines have high debt in proportion to cash. The large debt becomes a burden to the point of being unable to pay it off, when bankruptcy ensues.

The airline industry is a low-margin business. Southwest's efficient operations allow the company to achieve the highest profit margin among the major players. By operating just a little better, Southwest maintains its edge over the competition.

Southwest's 'Bags Fly Free' policy is an example of how the company does the right things for its customers which gives it a competitive edge. The other airlines slap the extra bag fees onto customers at the time of travel creating unpleasant surprises for some unsuspecting flyers.

Southwest is planning to upgrade its fleet of airplanes. The company placed an order for 150 Boeing 737 MAX airplanes and 58 737NG airplanes. Southwest is in great financial shape to handle this upgrade. The upgrade further optimizes its fleet with fuel efficient aircraft to keep costs to a minimum.

The airlines are adapting to the new world of flight and Southwest is best positioned to thrive in this environment. The company has operated for 41 years and now looks poised to perform well for at least the next five years.

Source: Southwest Airlines: Best Of Breed In A Tough Industry