It’s been a weird few years for the airlines, including Southwest Airlines Co (NYSE:LUV). Following forced consolidations of some of the majors, and the advent of newer low-cost carriers, along with a booming travel industry, airline stocks did really well. LUV stock and other airlines managed to find the sweet spot for maximum revenue amidst lower oil prices.
Then LUV, other airlines and hotel companies started seriously devaluing their loyalty points while simultaneously hyping all the miles you could earn or buy. Elite status has become increasingly worthless right along with miles and points. Add in baggage fees, and the last few years have resulted in banner times for the airlines.
There was, however, a backlash that had to take hold for LUV stock and others. Now it has arrived. LUV has been suffering the slings and arrows of success, and its epic run of labor peace is being threatened.
The good news is that this may push LUV stock into buy territory for the first time in a long time.
You Are Now Free to LUV
This past week, the pilot’s union voted 20-0 for “no confidence” in CEO Gary Kelly, despite leading LUV stock to three consecutive years of record earnings. This came on top of flight attendants, baggage handlers and mechanics all calling for Kelly to be ousted.
If you believe the union, the claim is that LUV should not have spent $700 million on stock buybacks, but to upgrade the reservation system, repair operational deficiencies and narrow the productivity gap. But this is really about Southwest management dragging out contract negotiations for four years. That’s great for LUV stock shareholders, up to a point, and that point has probably been reached. While federal law says that airline employees cannot strike, other measures can be taken, but they have limited effect.
At a certain point, corporate culture will erode. It probably has already, and that is not good for one of the most highly rated corporate cultures in the country, and one that has impacted customer service for decades. Southwest is built on how well its employees service its passengers, more so than any other airline. However, unhappy LUV employees lead to unhappy passengers and that leads to poor performance.
I think we are seeing a loss of confidence in the LUV stock price. If you look at a two year chart of LUV stock, you’ll see a lot of ups and downs. We are in a down cycle now, and buying in the low-$30’s for a 40%-60% swing up has been a good strategy.
Bottom Line on Southwest Stock
With $1.9 billion in free cash flow in the TTM, along with $2.45 billion in TTM net income, LUV is flying high. It has $3.4 billion in cash and low oil prices remain a tailwind.
The board of directors unanimously stood behind Kelly, as it should. However, spending $700 million on share buybacks rather than pleasing its hard-working employees seems a bit penny-wise and pound-foolish.
Southwest Airlines and its shareholders do not need $2 billion in total share buybacks. They need employees that feel like partners. That’s the long-term win for LUV stock in return.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
