Southwest Airlines Co. (NYSE: LUV) is a major airline operator in the United States. The cyclical company exhibited very strong fundamental growth from 2011 to 2016, sending shares higher. While correlation to the market is limited, many of Southwest's most noteworthy fluctuations have been shared by other major airline peers. These companies are subject to many of the same financial drivers, so LUV's price moves can be attributed to both results and industry momentum.

Price History

LUV shares were $17.14 on a dividend-adjusted basis in July 2006, and they slowly fell to $11.40 by the end of 2007. Southwest stock rose along with the market as it reached a cyclical peak in 2008, climbing as high as $16.20. LUV tumbled below $6 in March 2009 during the market crash, a 63.6% discount to the preceding peak. The stock quickly recovered with the market, shooting up to $14 by May 2010. Shares slid again in 2011, trading roughly in the $8 to $9 range through 2012 before a period of massive appreciation. LUV bounced up to $19.40 by the end of 2013 and $42.70 at the close of 2014. Periods of high volatility followed this growth, as shares sunk to $32.50 in July 2015 and bounced back to $49.40 in December. LUV again slumped below $36 in February 2016 before rallying to $47.25 in April. As of July 2016, LUV shares traded at $37.68, a 120% return over the decade.

Operating History

The airline industry is highly cyclical, and participants tend to have narrow profit margins. While the cost structure includes many fixed expenses, fuel is generally the largest single expense item, so fluctuating oil prices can heavily affect profitability if exposure is not hedged.

Southwest's 10-year average revenue growth rate was 10.1% at the end of 2015. Sales dropped 6.1% amid recession conditions in 2009, but every other year saw expansion. The most rapid growth occurred in 2011, when revenue increased 29.4% year-over-year. 2011 also saw a massive increase to crude oil prices, which were passed on to airline customers, inflating ticket prices and revenues. Southwest's net income grew more quickly than sales over the 10-year span, notching 14.8% average growth. Net income has been highly volatile, falling 72.4% in 2008, 44.4% in 2009 and 61.2% in 2011 but growing 363% in 2010 and 136% in 2012. 2015 marked the fourth consecutive year of profit growth between 50 and 100%. Southwest was profitable in each year of the past decade.

Southwest is a dividend-paying stock. From 2006 through 2011, annual dividends per share were only 1 cent, with a payout ratio that never exceeded 14%. The company began returning much more capital to shareholders in 2013, raising the dividend to 13 cents. That figure more than doubled to 28 cents by 2015, which likely catalyzed an additional set of income investors.

The meteoric rise of LUV coincided with massive earnings per share growth. Airline stocks typically have low valuation multiples, so large fundamental improvements often make them look exceptionally attractive. Despite appreciating 260% in five years, the stock's forward price-to-earnings ratio is still low at 9.25, and the five-year PEG ratio is below 1. This relative lack of speculation helps create a more direct relationship between financial results and stock price.

Correlations

Airline stocks are highly cyclical, so investors can expect some correlation to the stock market. Southwest's beta is 1.25, indicating more volatility than the market, though its correlation statistics indicate some divergence from the benchmarks. The 10-year correlation coefficient between LUV and the S&P 500 was 0.533 as of July 2016, and the corresponding figure relative to the iShares Transportation Average fund (NYSEARCA: IYT) was 0.659. The five- and one-year variations of this statistic were similar. These indicate limited correlation, though LUV's 10-year price chart is very similar to peers such as Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL) and American Airlines Group Inc. (NYSE: AAL). These stocks all experienced similar gains from 2013 through mid-2015, endured a steep drop in mid-2015, recovered late in the year and tumbled again early in 2016.