This article will explore increases in two of the largest costs for Southwest Airlines (NYSE:LUV): Fuel and Labor. As of right now Southwest Airlines is trading at 9.6x FY 2017 earnings which looks great on the cover. Within this article I will discuss what it may look like if fuel and labor cost keep increasing.
Overview
Source: Southwest Airlines 2017 10-K
Southwest Airlines is the largest domestic carrier in the United States. The company has recorded 45 consecutive years of profitability which is remarkable in an industry that is very cyclical and has seen plenty of bankruptcies.
The reason for these 45 year of profits is due to the low cost and customer serve focus that Southwest implements. Southwest states within its 2017 10-K:
The Company's strategy includes the use of a single aircraft type, the Boeing 737, the Company's operationally efficient point-to-point route structure, and its highly productive Employees"
Southwest airlines only purchases and flies one type of aircraft the Boeing (BA) 737 and variants of it, which helps reduce maintenance and training costs. Instead of the traditional hub and spoke model that legacy airlines operate under, Southwest operates its flights on a point to point model which allows for its flights to go to less congested ports to help minimize the amount of time on the ground and further increase asset utilization. Southwest also has great fuel initiatives like fuel price hedging and increasing aircraft fuel efficiency by purchasing new models.
Southwest's highly productive employees support the other pillar of strategy - superior customer service.
Source: Southwest Airlines Investor Relations
As can be seen by the company's mission Southwest Airlines is focused on providing its flyers a great experience. You can see it throughout the company by looking at its logo and even the ticker symbol. To provide this great
