Friday, January 23, 2009

Southwest Airlines: The Best For Less

I've never owned an airline stock; always thought it was a poor industry. Warren Buffett waded into U.S. Air a decade or so ago and reminded himself that, even if cheap, a poor company in a lousy industry isn't necessarily a good investment.

But I've always tried to fly Southwest when possible, both because of fare pricing and service, and found LUV to be an excellent experience. I've flown all the others and rarely find myself pleased. Even if ticket pricing is good, service isn't. The experience is clumsy and often irritating. So I've always watched Southwest's equity since it was the best operator in a tough industry. 

Several days ago the company reported their latest results and beat analysts expectations handily, pre-one time items. They walked investors through the capping of their fuel hedge program, reported on curtailing underperforming routes, and using the freed up aircraft on newly opening slots in Minneapolis and LaGuardia. All of their load factors and yields were good. And they hadn't forgotten about their customer experience as they remained adamant about not charging for baggage and other customer irritants.

The market heard Southwest's message and the share price went up several dollars. I was on the cusp of breaking my internal rule of investing in a bad industry and I was rescued by a rally in the stock. My potential book value purchase of the country's leading airline was derailed.

Today the market doesn't like Southwest and has pounded it down to the pre announcement  price range. You can buy the nations pre-imminent airline for .8XBook and at about 4.5 X Cashflow. You get sound management, an up-to-date fleet, happy customers, a reasonable cost structure, and a lid on the impact of rapid decreases and increases in fuel. 

As this piece is being written LUV is $7.90 and I've pushed the "buy" button. The industry will suffer during this  economic slowdown, but LUV has the balance sheet, operating margins, and management to do well at the expense of their competition.
I'm hopeful  that I don't learn the same lesson that Buffett must have as he no longer has any positions in the airline industry. 

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