Colin WarnerPerformance Analyst
Emily ReesSpecial Events Coordinator
Southwest Airlines Co.: LUV
October 5th, 2017
Kate LinnPrivate Equity Analyst
Jack ThompsonLatin American Economist
Table of Contents
Competitors
Fundamental Analysis
SWOT Analysis
Investment Thesis
Company Strategy
Technical Analysis
Markets
Company Overview & History
Key Executives
Summary
Recommendation
Recent News
Investment Thesis
Investment Thesis
The airline industry is undervalued; Southwest Airlines is more undervalued than its competitors. We believe that the labor cost headwinds will be outweighed by
the oil cost tailwinds. The company is safe during times of recession and attractive during times of growth, which is why we think that Southwest would
make a great investment.
Company Overview & History
● In its 47th year of service● Dallas-based ● Exemplary Customer Service ● more than 55,000 Employees and more than 115 million
Customers annually● Southwest became the nation’s largest domestic air
carrier in 2003 and maintains that ranking based on the U.S. Department of Transportation
● Southwest operates more than 4,000 departures a day ● 99 destinations in the United States and 9 additional
countries● Philosophy of treating customers honestly and fairly● Reliably low and uniquely flexible fares● Only major U.S. airline to offer (2) bags fly free to everyone● Operates the largest fleet in the world of Boeing ● Since 2010, Southwest has returned more than $7.1
billion to Shareholders through share repurchases and dividends
Company Overview
Company History
➔ 1966: Founded by Rollin King and Herbert Kelleher
➔ 1971: Began scheduled flights, from Dallas Love Field to local destinations
➔ 1975: Went public on the American Stock Exchange
➔ 1978: Airline Deregulation Act
➔ 1979: First flights outside Texas
➔ 1990: Revenues exceed 1 billion for the first time
➔ 1995: First airline to use web scheduling
➔ 2011: Acquired AirTran
Key Executives
Governance
Tom NealonPresident
Prior experience: Group Executive VP, JC Penney, VP
& CIO at Frito Lay
Gary C KellyChairman of the Board and
CEO30 Year Southwest Veteran
Mike Van de VenCOO,Senior VP, Global
OperationsJoined SouthWest in 1993
Recent News
September 24, 2017 → New ad campaign revealed
September 28, 2017 → Southwest cuts revenue guidance in wake of hurricanes
October 1, 2017 → The “Southwest effect” on flights to Hawaii
October 2, 2017 → JP Morgan recommends Southwest as the “safest bet” in the airline industry
Recent News
Company Strategy
Robust Route Network:● Carry the most passengers in the U.S.● Most daily departures in the world● Serve more than half of the top 50 U.S. metro areas● Significant growth opportunities, including near-international
Compelling Brand Appeal:● Best People in the airline industry● Outstanding Customer Service and Hospitality● Low fares with Transfarency● Industry-leading frequent flyer program
Superior Financial Position:● 44 consecutive years of profitability● Competitive cost advantage● Commitment to return value to Shareholders
Company Strategy
Markets
Market Presence
● Largest domestic market share○ Based on sales
● Ranked highest in customer satisfaction among major airlines○ JD Power and Associates survey of 11, 005 passengers
● Specialize in domestic market○ Helps keep costs low
Key Cost Factors
● Oil Prices○ OPEC Production○ US Oil Reserves○ Capital Spending
Increase○ Demand Factors
● Wages○ Unemployment○ Unionized○ Automation
Market Cycles
● Current market○ Low unemployment○ Monetary tightening○ Very long recovery
● Strong during growth○ Higher discretionary income
● Safe during recessions○ Low cost strategy○ Target market
Gro
wth
%
Green: DeltaOrange: American
Technical Analysis
Technicals
Competitors
Competitors
Delta:
● Business travelers
● Recent Fare hikes
● Largest by enterprise value and ASM
● Looking to offset weakening U.S. demand &
effects of low-cost competition by expanding
int’l (35% revs)
● H&S in ATL, Cincy, NYC
American Airlines:
● Fleet is 15 years old, working on deal with
Boeing to replace entire fleet
● Extremely vulnerable to fuel prices
● Second largest airline in the world
Jetblue:
● 6th largest domestic airline
● Point-to-point travel
● Young fleet of planes
United Airlines:
● Holding company consisting of United Airlines
and Continental Airlines
● Hub-and-spoke system
● Operates internationally
● Biggest airline in the world after merger
LUV vs. competitors
Multiples Analysis vs. Competitors
Company LUV JBLU AAL DAL UAL
Market Cap $35.42B $6.48B $25.07B $37.51B $19.85B
P/E (trail) 18.14x 10x 12.78x 10.31x 9.02x
Beta 1.13 .33 1.34 .94 1.11
DY .73% N.A .79% 1.58% N.A
Op mgn. 18.17% 16.88% 12.68% 14.09% 11.81%
OER 81.59% 83.87% 82.46% 85.95% 88.13%
Profit mgn. 10.99% 9.78% 5.02% 9.3% 6.09%
Short% float 1.59% 3.68% 8.67% 0% 4.39%
*Revenue passenger miles = Revenues * number of revenue-paying passengers
Multiples Analysis vs. Competitors
Company LUV JBLU AAL DAL UAL
Fuel & labor as % of revs
51.14% 41.8% 38.26% 38.26% 44.01%
$Fuel/gallon $1.92 $2.54 $1.42 $2.13 $1.49
Full-time e’s 53,536 ≈20,000 122,300 83,756 48,250
Stage length 760 1089.6 x x 1,473
Load Factor 81% 84.26% 81.7% 84.60% 82.90%
RPMs 124.8B 38.91B 199.01 202.72B 186.18B
PRASM/CASM 1.33 1.05 1.06 1.03 1.05
Yield/Pmile $0.157 $0.138 $.155 $.159 $.150
*Revenue passenger miles = Revenues * number of revenue-paying passengersASM = Number of seats filled*number of miles flown
Fundamental Analysis
Financial Highlights
Financial Highlights
Model
SWOT Analysis
Opportunities:
● Automation Implications● Fracking Implications● Global Affordability ● Approaching new destinations
○ Caribbean
Threats:
● Labor Costs Soaring● Fuel Costs Soaring
○ $.01 change? Add $7mil to yearly bill.
● Contractionary Consequences● Luxury Airliners Lowering Costs
○ Could cause some turbulence
Weaknesses:● Strong Competitors
● Hub Avoidance● Domestic Declines
○ Skype, etc. easing long-distance comm.
● Lack of Luxury
Strengths:● LCC Advantage● RFIDs Keep Checked Bags in Check
○ 4.5 per k
● Hub Avoidance● Convenience
○ Bags fly free
● Oil Hedging● Average Fares
SWOT Analysis
Summary
Summary
- High market share that should increase- Unique business model
- Low cost strategy- Excellent customer service- Reliable/direct travel
- Low risk- Oil price hedging- 44 years of profitability- Little reaction to big events- Little negative press/few scandals
- Value- Well positioned to take advantage of any scenario- Trading below our model and analyst estimates
Recommendation
(1) Sell 656 Shares of PBI at $14.04 for $9210.24(2) Purchase 231 shares of LUV at $58.00
Total Investment of $13,398.00Approximately 8% of the portfolio
Recommendation
Portfolio Allocation
Portfolio Allocation
NEE ANDV TGT CTL BSX CVS DEO BAC PBI Portfolio.
% 18% 14% 14% 11% 11% 9% 9% 7% 7% 100%
Basis $24,216 $19,447 $18,712 $15,469 $14,853 $12,971 $11,965 $10,026 $9,170 $135,602
Sept. r’s -2.63% +3.00% +8.22% -4.16% +3.37% +5.15% -1.96% +.01% +9.03% 2.12%
PTD r’s +17.72% +20.64% -18.92% -22.74% +21.37% +1.99% -1.38% +.01% -7.67% 8.98%
Originally purchased 656 shares at: $14.50Today’s price: $14.00
Original Investment Thesis: 52 week low Expansion of ecommerce and cloud based services Competitive dividend yield
PBI
Thank you for your time. We now welcome all questions and concerns.