It wasn't a good year for airline stocks in 2011. In particular, AMR (OTCBB:AAMRQ), parent company for American Airlines, filed for bankruptcy and Southwest Airlines (NYSE:LUV), usually one of the industry's better performers, had a net loss of $140 million in the third quarter ended Sept. 30, 2011. In addition to rising fuel costs taking a toll on the company, excessive flight delays and baggage handling problems hurt Southwest's business. If you exclude the 2008/2009 market swoon, its stock is trading below $9 for the first time since around September 1998. No matter what its earnings look like in the fourth quarter, now is an opportune time to buy its stock. (For additional reading, see Can Earnings Guidance Accurately Predict The Future?)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Customer Service

According to SKYTRAX, which dubs itself "the world's largest airline review site," the only U.S. airline with a four-star rating (there are no five stars in the U.S.) is JetBlue Airways (Nasdaq:JBLU). Southwest, American Airlines, Alaska Air Group (NYSE:ALK), Hawaiian Airlines, US Airways (NYSE:LCC), United Airlines subsidiary of United Continental Holdings (NYSE:UAL) and Delta Air Lines (NYSE:DAL) are one rung below with a three-star rating.

Despite a mediocre result for the airline known for excellent customer service, it still managed to have the fewest customer complaints filed with the Department of Transportation in 2011. In an effort to improve its baggage handling woes, it's working on implementing handheld scanners to reduce mishandled baggage. If this is what stands between a three-star and a four-star rating, I'm pretty sure it will implement them nationwide, as soon as possible.

It can't be happy with the notion that Delta is ranked number two in customer service satisfaction, one spot higher than Southwest. Considering its traffic growth, capacity and load factors all increased year-over-year in 2011, a slight tweaking of its system should generate positive results in 2012 and beyond.

Stock Performance

Southwest's stock lost around 35% in 2011, its worst performance in over a decade. If you invested $10,000 in Southwest at the end of 2001, today that $10,000 is worth about $4,700. That same $10,000 investment in the S&P 500 is worth approximately $11,200. However, according to Southwest's investor relations site, if you invested $10,000 in Southwest on March 17, 1980, (the last available date from its investment calculator), it would be worth about $536,000 today with dividends reinvested. That's a cumulative return of roughly 5,263% with all of the performance delivered between 1980 and 2001. In fact, it hasn't had a stock split since Feb. 16, 2001. So what must it do in order to rise above single digits? (For related reading, see Understanding Stock Splits.)

Financial Performance

The most important thing is stable fuel prices. In the third quarter of 2000, its fuel bill was roughly $195 million or 13.2% of revenue. In 2011, its fuel bill was around $1.59 billion or 36.8% of revenue. The fuel bill's compound annual growth rate is approximately 20.99% over the past 11 years, while its revenues have only grown about 10.21% annually. The stock can't possibly hope to revisit the 20s without bringing the two numbers closer together. I'm doubtful it can do much about rising fuel costs, but if it can maintain salary costs at approximately 30% of revenue, while keeping the fuel increases between 10 and 20% annually, it can generate an operating profit near or above $1 billion. That would translate into its highest operating profit ever, albeit on a much lower margin.

Delta introduced a $20 fare hike on its long routes Jan. 11, 2012, and Southwest followed suit. Last year, airlines attempted price increases 22 times with nine successfully implemented and maintained. It must continue to push the envelope once again in 2012 and this early increase provides hope that airlines will continue to pass along costs that are very real and very punitive to the bottom line. Consumers must share the burden.

The Bottom Line

Going back to 2001, Southwest's enterprise value (EV) was 11.2 times EBITDA. In the trailing twelve months ended Sept. 30, 2011, its enterprise value is 4.8 times EBITDA or roughly 233% cheaper. Business might be less than perfect these days, but at these prices, you have to like your odds. (To learn more, check out A Clear Look At EBITDA.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!