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LUV - Southwest Airlines


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Surprised I didn't find a post on this one. I'm almost done reading a book on the company's culture which I highly recommend (link below)

 

Some highlights/thoughts

-By far the most profitable airline historically, hasn't lost money since it first became profitable in 1973

-Enormous shareholder returns, 20% in the last 40 years!!! Founder Herb Kelleher had definitely an Outsider like mindset

-Culture is the key difference and moat, all employees are hired for their attitude/personality and there are some weird things in the company like everyone hugs before a meeting starts and flight attendants can present the airline safety communication in anyway they want, some sing it others tell jokes etc. People seem to love working there.

-A lot of operational efficiencies, they only have 737s in their fleet saving A LOT on maintenance, training, purchase discounts from boeing, etc and another key operational achievement is their plane turnover time is the lowest in the industry by a factor of half or something (time it takes for the plane to get into the gate, get passengers off, new passengers on and takeoff) which increases utilization a lot.

-Not screamingly cheap but for a quality business it looks OK trading at ~15X forward earnings

-Not sure how much growth it has going forward, they have started to fly internationally but will this hurt their margins?

-Competition: airlines obviously very competitive, but most majors have tried to copy their business model and failed

 

No position, but on my watchlist. Hurts a little to see the run it had the last few months, I wish I would have read the book last year.

 

Anyone else have a different opinion? I have only flown twice in Southwest so would love to hear some more recent experiences.

 

Large position for Monish, here's a good Podcast where he talks about the business: https://www.theinvestorspodcast.com/tip121-pabrai-funds/

 

Link to book Nuts! https://www.amazon.com/Nuts-Southwest-Airlines-Business-Personal/dp/0767901843/ref=sr_1_1?s=books&ie=UTF8&qid=1497116654&sr=1-1&keywords=nuts+southwest+airlines

 

 

 

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-Competition: airlines obviously very competitive, but most majors have tried to copy their business model and failed

This is the pertinent point in every thing you've written. Earnings, ROE, margins, everything has blown out for all the airlines in the last two years. If you believe the Warren Buffet narrative that everything has changed for airlines, that competition is gone, then fill your boots, because LUV is going to produce out-sized returns. Personally, I am sceptical of the story, and think that buying a cyclical at 20x FCF is risky.

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Airlines haven't been long term value creators traditionally but, in this new era, the sky seems to be the limit.

Southwest appears to be special though.

A “culture” is hard to build and maintain, hard to replicate but I find it is difficult for outside investors to detect when the culture may be eroding.

 

When you look at airlines in general and also Southwest, it seems that the “story” in the last few years is too good to be true. Is it?

 

Any thoughts on their plan to expand (in Hawai and elsewhere)?

Any thoughts on the value of their frequent flyer program?

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  • 1 year later...

Has anyone followed Southwest or any other airlines since last year?  I looked into them initially, but didn't bite.  On the surface the valuations look better today than a year ago.  If Berkshire is going to buy an airline outright it would be Southwest, right? 

 

 

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I bought some shares of LUV in may 2018. Here is a rough translation of my notes from back then:

 

"Looks like it has good fundamentals. Not much debt. OK Return on Assets. Not magical, but ok. Steadily increasing EPS. Made a profit "forever"."

 

I bought at $52/share in may.

luv.png.af38cf351c8015a56da427d1294c3644.png

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  • 1 month later...

stock up 5% on rumors Buffett might acquire it.

 

From Southwest:

“There has been speculation circulating that Warren Buffett might be looking to acquire an airline for some time and that Southwest might be a good fit,” the company said in a statement Thursday. “As a policy, we do not comment on speculation, but appreciate Berkshire’s continued support of Southwest Airlines.”

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  • 2 weeks later...

Isn't it a bit strange that LUV is only down 3% or so since Friday, with them having the biggest (?) fleet of 737-Max? I get that they are not grounded (yet), but surely that must be a possibility? Even if they are not grounded, the negative PR and lost business (people not wanting to fly the 737-max) must be quite dramatic?

 

(I own some LUV-stock. I have not done any calculations, probably wouldn't know how to, so this is just thinking out loud really...)

(Edit: I sold my LUV-shares. This is probably straight out of the common-cognitive-errors textbook, selling based on anecdotes and feelings. But my feeling (because all good investment ideas are based on feelings  ::) ) is that for some reason there is not enough negativity baked into the price atm).

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According to the 2018 10-K:

 

"The Company added 18 Boeing 737 MAX 8 aircraft to its fleet in 2018 and ended 2018 with 31 Boeing 737 MAX 8 aircraft in its fleet. In 2019, the Company expects to continue its fleet modernization initiative through the scheduled delivery of an additional 37 Boeing 737 MAX 8 aircraft and the Company's initial delivery of seven Boeing 737 MAX 7 aircraft."

 

"Flight equipment and related assets make up the majority of the Company’s long-lived assets. Flight equipment primarily relates to the 699 Boeing 737 aircraft in the Company’s fleet at December 31, 2018, which are either owned or on capital lease. The remaining 51 Boeing 737 aircraft in the Company’s fleet at December 31, 2018, are operated under operating leases. "

 

Looks like 737 Max accounted for about 4% of Southwest's fleet at the end of 2018. It's not a big part of the fleet yet.

 

2018 10-K:

https://www.sec.gov/Archives/edgar/data/92380/000009238019000022/luv-12312018x10k.htm

 

 

 

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Anyone has comments on the maintenance union negotiations? I was flying SW a month ago and we were delayed 3 hrs for maintenance issues. I read at the time that the union was forcing lots of flights to stay grounded for maintenance issues as a negotiating tactic. Curious if anyone here following closely has an interpretation

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Anyone has comments on the maintenance union negotiations? I was flying SW a month ago and we were delayed 3 hrs for maintenance issues. I read at the time that the union was forcing lots of flights to stay grounded for maintenance issues as a negotiating tactic. Curious if anyone here following closely has an interpretation

 

have heard rumors that the unions have a history of using delay of take-off as a light form of extortion...Southwest will have to iron it out

 

the Boeing 737 Max will be a material problem for Southwest if grounded by an act of Congress...

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Anyone has comments on the maintenance union negotiations? I was flying SW a month ago and we were delayed 3 hrs for maintenance issues. I read at the time that the union was forcing lots of flights to stay grounded for maintenance issues as a negotiating tactic. Curious if anyone here following closely has an interpretation

 

not the first time, nor the last time this has occured with airlines and unions.

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  • 11 months later...

Picked up some shares today. Stock has come down nearly 25% from highs. Pre-tax P/E of a bit over 8 and almost no debt. If stocks keep dropping this is a good one to do a debt for equity swap. I don't see why Buffett wouldn't want to buy this one out. I know he said on TV the other day they'd never buy an airline but this one makes so much sense.

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  • 5 weeks later...

Any thoughts of this with today's price? Bankrupt in half a year, or a bargain? Or the sad middle ground which I tend to forget, the company survives but stock-holders are diluted to the point of almost nothing?

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