Southwest Airlines Co. (LUV)

All company expansion has been halted except for their hub of Love Field in Dallas. Company is expected to struggle with overhead issues in the coming year as growth is truncated. Yeah... underperform.

With oil down over 50%, LUV's hedges will lose a lot of money

Best of breed; but a high P/E and stock near its 52 week high. Also airline is expanding when its marginal fuel costs are the same market rate as everyone else.

severe headwinds.

Shorting Airlines.

They are cutting down many of their flights. Although they are opening new ones, some of the more popular flights are cutting down.

watch out for these airlines as they fall to the ground!!

hedging can't last forever. Higher oil prices will. They have been unscathed in the airline carnage. Expect that to end in the fall.

Loss of revenue due to economics in the US will lead to lower value.

I did a presentation on Southwest airlines for a class, and I found information that makes me believe they will underperform the S&P 500 within the next two to four years.

In the past, Southwest has posted profits while their competitors have been suffering. Their success comes from hedging oil prices. By the year 2010, our case study reveals that they won't be able to hedge 100%. Rising fuel prices have been a heavy burden on the competitors, and Southwest's hedging strategy provided them a large advantage that made them profitable. When the company is unable to use this strategy, their stock will decrease in value.

My second concern with Southwest is that they have new market entrants to worry about. New and growing companies are using the same low cost structure that Southwest implements. One of these new companies is JetBlue airways. They have newer planes, and more amenities for customers such as individual televisions for each passenger and more leg room. I think that new competitors will be a threat to southwest and this will contribute to the stock underperforming the S&P 500 in the next two to four years.

inverse of oil prices

airline

FAA Regulatory scrutiny between now and June 30 will 1) impact flights (reduce revenue), 2) delay maintenance outsourcing contracts (increase costs), 3) cause LUV to invest in new processes and technology (increase costs), 4) cause LUV to accelerate new aircraft acquisitions (retire 735s and 733s & acquire 737s) (increase costs) and 5) tarnish LUV's brand image. Price of JetA is increasing and LUV's oil hedges continue to drop as a % of total fuel costs (although still best in the industry)

Oil prices are obviously skyrocketing. Airlines already have slim profit margins and can only afford to pass costs to consumers to match oil prices. Not only that, but consumers are now spending their income on cheaper methods of travel if they even go anywhere because their spending record dollars on milk and eggs.

I would not invest in South West Airlines. South West Airlines last stock price on February 25, 2008 was $12.97 and its 52 week range is between $11.02 and $ 16.96. The last stock price is below the dates from 2002 to 2004; which were $13.09 in 2002, $16.14 in 2003, and $16.28 in 2004. The price–earnings ratio is down from the 2004 number which was 40.7 to 15.44 of 2008. Also, the market–to–book value ratio is down from 2.31 in 2004 to 1.37 in 2008. These numbers relate to the market cap which is currently $9.54B which is down from $12.779B in 2004. This means the company is not valued as high as it once was. This may be from them not increasing their dividend payout ratio.

There are some explanations for the low stock prices which reflect how the company has not been managing finances well. I have noticed they used borrowed money to purchase stock in the recent year. Also, the accounts payable is way up which gives them less leverage to borrow more and takes away from equity stockholders have in the company. From 2003 to 2004 the company increased the debt ratio and debt–to-equity ratio which also means the company owes more to debt rather than a stockholder which means stockholders do not have as much stake in the company. Also, from 2003 to 2004 South West’s profitability, efficiency, return on equity, and return on assets all decreased. This is a bad sign because it means the company is not returning investments back to its owners. This means they are not generating enough revenue for what is invested. I believe they have to many liabilities from 2003 to 2004 the company had less working capital, the current ratio decreased, the quick ratio was just able to cover current liabilities, with the quick ratio they wouldn’t have been able to cover current liabilities, and the times interest earned gave them less coverage. These reasons are why South West Airlines has the current deflating stock situation. A company has to improve these ratios not decrease these ratios.

Outside its recent inspection ordeals, the airline provider was number one in the market agaist all its competition.Its still a potential gainer i the long wrong.

Travel will be hurt more by the price of oil.

High fuel prices, maintainance problems spell a pullback.

The recent allegations will lead to severe financial straints of the company. These financial burdens are not limited soley to the fines that will be levied, but also with the increased inspection costs and the inability to carry minor repairs over to future financial quarters. The increase in airfares that will follow will minimize their niche market. We also have not mentioned the fact that class-action lawsuits are always lurking when gross negligence and public endangerment has already been proven and documented.