Mar 02,2007 00:00
Dear Mr. Berko: I think I'd like to own 125 shares of Southwest Airlines. My nephew joined Southwest a year ago and after working at United, USAir and Delta between 1989 and 2005 he says that this is the most fantastic airline in the world. He has even met the founder and chief executive officer, who he says are "regular guys." My nephew owns some stock and he says I should own some stock, too. Please advise me.
Dear B.E.: Southwest Airlines Co. (LUV-$15.10) is a no-frills - well, they have peanuts and Pepsi - short-haul (except to
The reason LUV, with a fleet of 445 B-737s serving 61 cities, has remained profitable can be summed up in one word - management - or in seven words: veritably, indubitably, peerless, caring and talented management.
That speaks volumes about the management at competing carriers and the high-energy, pasty-skinned MBAs hired to make decisions using expertise in game theory mathematics. When I called LUV to make a reservation, I didn't have to press 2 for English, then 18 to enter the system, wait for a prompt to press 72 and then 16 to reach a menu requesting that I input my PIN, press "pound" to be followed by my Social Security number and my mother's maiden name before I made a reservation.
When I called LUV, a live human voice in unaccented English answered with a smile and an attitude as though she just finished baking a batch of chocolate chip cookies. I asked, "Do you fly to
I nearly fell over. You gotta LOVE LUV and their happy employees, all of whom seem to have an infectious esprit de corps. I will go out of my way to fly LUV every time I can.
This management team and the folks working with them really know how to run an airline. Those yokels, yahoos and bumpkins at
As the legacy carriers emerge from bankruptcy with lower cost structures, they still won't be able to beat LUV's fares. Management's conservative approach to growth (most of which has been internally financed) has earned LUV a strong balance sheet. The LUV boys have more than $2 billion in a "war chest," and hundreds of millions in available credit. So LUV can easily weather an industry downturn as well as a war of attrition waged by other low-cost carriers, who are leveraged to the scalp.
LUV is managed smart. Founder and CEO Herb Kelleher, President Colleen Barrett (yep, a lady), CEO Gary Kelly and other top jocks will tell you that LUV's most valuable assets are employees. And on any given day, you may find these top jocks and lesser top jocks loading baggage, selling tickets or hosing down a B-737 in the hangar.
Continental Airlines (CAL), which lost billions and is now in the black, has zoomed from $3 a share to $39.50. I'll wager a Continental that soon in the next decade,
But LUV, which has always made a profit, enjoys superb operating margins, impressive net profit margins and a hugely attractive cash flow, meandered between $15 and $18 during the last 12 months. What does this tell you about the motives and morals of the investment banking community?
LUV doesn't have much sex appeal and its share growth will probably follow the market over the next 12 months or so. And though LUV may inarguably be the best-run airline in the world, I don't feel that its share price has compelling appreciation potential this year. There's just nothing exciting about a well-run, on-time, consistently profitable airline that provides excellent service.
I wouldn't buy the stock, but Goldman Sachs, Citigroup, UBS, Credit Suisse, Value Line, Standard & Poor's and Calyon Securities all have a "buy" recommendation and I hope they know something I have missed.
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