If the worst word in the airline business is "safety," the second worst is "cancel."
Southwest Airlines (NYSE: LUV ) suffered equal doses of both on Tuesday when the carrier's internal investigation -- launched after the Federal Aviation Administration fined the airline $10.2 million over concerns about the airworthiness of its fleet -- found an "ambiguity" related to "required testing" of some of its planes. Management immediately took 38 aircraft out of service and canceled 4% of Wednesday's scheduled flights.
Investors, predictably, sold on the news. Shares of Southwest fell more than 7% in yesterday's trading. But can you blame the worrywarts? I can't. Oil is teetering toward $110 a barrel. Consumer spending is down. And analysts are fleeing from major carriers faster than Hillary Clinton is running from former vice presidential nominee Geraldine Ferraro.
JPMorgan Chase downgraded several airlines to "underweight" yesterday. Among them: Alaska Air (NYSE: ALK ) , Northwest Airlines (NYSE: NWA ) , U.S. Airways (NYSE: LCC ) , and "worst stock" candidate and United Airlines parent UAL (Nasdaq: UAUA ) .
So why do I still hold shares of Southwest? Allow me to quote from page 21 of the discounter's 10-K annual report:
As of mid-January 2008, the Company is nearly 75% protected with fuel derivative instruments for its first quarter 2008 jet fuel requirements, at an average crude oil equivalent price of $51 per barrel ... In addition, the Company had fuel derivative contracts in place for over 70% of its expected fuel consumption for the remainder of 2008 at approximately $51 per barrel; over 55% in 2009 at approximately $51 per barrel; nearly 30% in 2010 at approximately $63 per barrel; over 15% in 2011 at $64 per barrel; and over 15% in 2012 at $63 per barrel. [Emphasis added.]
In other words, Southwest's cost advantage, which has long allowed the airline to maintain profits in an industry largely defined by its lack of them, isn't likely to evaporate. With or without the maintenance trouble.