There has been a lot happening in the airline industry in recent days. And while Southwest (LUV) hasn’t made the front pages, it’s still got a good story to tell.
The industry has been experiencing a nice tailwind of low fuel prices for the past few weeks, after having them rise for much of the second quarter.
They’re still lower than they were a year ago, but the sharp drop late in 2014 meant margins were going to be stronger across the board in the airline sector since fuel costs are the top expense for carriers.
And that’s why LUV was trading at its 52-week highs in the first quarter. Since then the stock, like most of its peers, has been trending down.
Most analysts figured that once oil prices bottomed, there wasn’t going to be much to keep investors interested in airline stocks as the economy stumbled along. But that hasn’t been the case.
Just this week, it was reported that airlines are making a killing on “non-fare revenue,” which includes all the fees that go along with discount tickets — baggage, seat preference, meals, priority check-in, etc.
Although LUV doesn’t charge for baggage, even its non-fare revenue was up 16%. Low-cost carriers saw a 33% percent increase on average.
Rival Delta (DAL) reported earnings this week and it’s worth noting how this international, full-service airline fared. While it beat earnings expectations, higher fuel prices trimmed margins and a reviving dollar hurt overseas operations. It also saw a decline in regional and local travel.
But DAL projects lower fuel prices and a growing demand for travel in the second half of the year.
This information is instructive because some of DAL’s problems don’t effect LUV. For example, LUV is primarily a domestic carrier, so currency issues don’t bother its revenue at this point. It has picked up some routes in Central America, the Caribbean and South America, but they’re not a big part of the picture yet.
And LUV has grown in passenger capacity significantly in the past year. Its load factor (what percentage of paid seats are filled on each flight) is now one of the highest in the industry.
Also, LUV is tightening its grip on Love Field in Dallas. Right now it holds all the gates but two, which are owned by Virgin America (VA). Delta is trying to maintain a foothold there and has access to only two gates for five daily flights through this summer. LUV should prevail in that battle.
And managing that hub will be increasingly important as the carrier increases flights domestically and internationally.
What’s more, the Iran treaty should mean lower oil prices as Iranian oil comes back into the world markets. This will help operating margins in coming quarters. And the company has already hedged all its fuel needs for the rest of the year, so there won’t be any upside surprises.
LUV stock is off almost 20% year to date, but it’s still up 23% in the past year. So even from where it is now, it’s still on a winning trend. The trick here is to stick with LUV for the long term and have faith management will get through the rough patches and back into clean air.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
