Entering text into the input field will update the search result below

Southwest Airlines Looks Promising At The Current Price

Sep. 03, 2019 8:40 AM ETSouthwest Airlines Co. (LUV)AAL, ALK, DAL, JBLU, JPM, UAL24 Comments
Eric Sprague profile picture
Eric Sprague


  • The use of a single aircraft type, the Boeing 737, helps keep costs under control.
  • Much of the loyalty revenue makes its way to the bottom line and it has been growing as a percentage of overall revenue.
  • Return on invested capital has been excellent in recent years.


My thesis is that there is a solid chance Southwest Airlines (NYSE:LUV) will outperform the S&P 500 over the next five years.

One of the reasons Southwest caught my eye is that it is listed in 100-Baggers by Christopher Mayer. The data date is 12/31/71 and it reached 100x in just 9.5 years. In other words, an investment of $10,000 in December 1971 turned into $1 million in less than 10 years. The total return is shown as 5,478 and that is through the book’s copyright date of 2015. It is remarkable that a company in a tough industry with a bourbon-loving founder produced these kinds of prodigious shareholder returns over the years.

Southwest Airlines has some parallels with low cost carriers [LCCs] JetBlue (JBLU) and Alaska Airlines (ALK) in terms of cost structure. They have some similarities with legacy carriers Delta Air Lines (DAL), United Airlines (UAL) and American Airlines (AAL) regarding the number of passengers served.

Among U.S. airlines, Southwest is at the top of the list for enplaned passengers:

Top U.S. Airlines

Image Source: BTS

There are plenty of obstacles for the airline industry in general and Southwest in particular. Investors must grapple with the large percentage of labor and fuel costs. The cyclical and capital-intensive characteristics of the industry are a challenge. The recent MAX groundings hit Southwest especially hard. I believe Southwest has a lot going for it despite these issues. Their return on capital in recent years has been excellent. Their loyalty revenue has been growing nicely and their cost structure helps keep things steady outside of labor and fuel.

Cost Structure

Southwest sticks with 737s in their fleet and this has economic benefits as smaller planes are more expensive on a per-seat basis. Glory Lost and Found by Era Seth Kaplan and Jay Shabat talks

This article was written by

Eric Sprague profile picture
I'm an individual investor heavily influenced by Warren Buffett and Charlie Munger. Munger's 1994 USC Business School Speech is something I think about a lot: ### Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result. ... Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you're going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15%—or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work. ### Feel free to follow me on twitter: https://twitter.com/ftreric

Analyst’s Disclosure: I am/we are long LUV, VOO. 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.

Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.