The Reason Southwest Airlines Will Beat the Market

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations -- and cash big paychecks for it all. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: Southwest Airlines (NYSE: LUV  ) . Is this discount airline's executive team doing all it can to earn you outsized returns?

Foolish facts

Metric

Southwest Airlines

CAPS stars (out of 5) ****
Total ratings 1,700
Percent bulls 86.2%
Percent bears 13.8%
Bullish pitches 254 out of 298
Highest rated peers AMR, Deutsche Lufthansa AG, GOL Linhas Aereas Inteligentes SA

Data current as of Feb. 18.

Last month, a still-anonymous Southwest pilot held his plane for a late passenger rushing to make a flight to see his dying grandson. Rather than criticize an employee for costing the carrier money -- delays always do -- management applauded the pilot's actions.

"You can't hold a plane for every late customer, but I think we would all agree that these were extenuating circumstances and the pilot absolutely made the right decision," Southwest spokeswoman Marilee McInnis told CNN in an interview. "I don't think you could ask for a better example of great service for our customers."

I agree. But what makes this story interesting is that it isn't unusual. A Kansas City baggage service worker named Mina helped marketing consultant Lisa Chapman retrieve her misplaced luggage in time for a family reunion last July. In 2007, Southwest gave free flights to customers unfairly delayed by icy weather in St. Louis.

Now contrast that with a 2008 incident in which United Airlines employees were accused of breaking a guitar. The carrier refused to take responsibility until an insanely catchy music video caught fire on YouTube, unleashing a wave of public criticism. The new United Continental Holdings (NYSE: UAL  ) shows some signs of improving its service record from those days, though its financial disclosures still need work.

At Southwest, exceptional acts of service explain why J.D. Power named the carrier as one of its 2011 "Customer Service Champions." Peers Westjet and JetBlue (Nasdaq: JBLU  ) also made the list, but Fool co-founder David Gardner loves Southwest the most. He cited the airline's service record as a sustainable competitive advantage in recommending the stock to our Motley Fool Stock Advisor members.

Many Fools agree with his thesis. As Foolish investor bikodoggy wrote in pitching the stock earlier this month:

As economy starts to improve, travel will increase. [Southwest] is a diamond that is customer and service driven, unlike other industry players. They will benefit from efficiencies and economic improvements proportionally higher than competition because they have [a] better [management team] and business model.

Management overview

Executive

Years

Cash Compensation

Shares Owned

Gary Kelly, Chief Executive Officer 25 $1,031,750 303,203
Laura Wright, Chief Financial Officer 23 $584,000 60,945
Robert Jordan, EVP of Strategy and Planning 23 $710,000 75,000
Michael Van de Ven, Chief Operating Officer 18 $740,000 110,926
Ron Ricks, EVP of Corporate Services 30* $745,000 127,543

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 17.) 
Years refers to time as employee, not necessarily in current position. 
*Includes time representing Southwest as an attorney with a private law firm.

Southwest stands apart from peers in that it has an executive on staff responsible for "proactive" customer service: Fred Taylor, Jr. In a bio, Taylor describes his job as embodying the "Golden Rule." When the airline suffers disruptions, Taylor's team ensures that customers are informed and reach their destinations as quickly as possible.

I love how Taylor has broad authority to make customers happy. I also love how experienced his bosses are. Three of Southwest's top executives have more than 20 years on the job, while COO Michael Van de Ven is closing in on that mark.

All four know how to manage to the numbers, having worked in finance at various times during their careers. CEO Kelly joined the carrier in 1986 as Controller, and served at CFO before taking over the top job. Jordan held the same title at Hewlett-Packard.

Management analysis versus competitors

Company

Insider Ownership

Gross Margin

ROC*

ROE**

Allegiant Travel (Nasdaq: ALGT  ) 22.29% 28.2% 19.9% 22.8%
Delta Air Lines (NYSE: DAL  ) 0.84 % 23.1% 9.9% 103.9%
JetBlue Airways 0.34% 33% 4.4% 6.1%
Southwest Airlines 0.14% 25.1% 6.6% 7.9%

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 17.)
* Return on capital.
** Return on equity.

Southwest's cost management reveals its financial efficiency. Despite having a lower load factor than Delta or JetBlue, the carrier outperforms its most comparable peer, JetBlue, in terms of returns on capital and equity. Southwest also earns more per dollar than Delta after subtracting direct costs.

In short: Kelly and team have found a system that works. Over the long term, it should lead to progressively higher margins, higher earnings, higher returns on capital, and ultimately richer shareholders.

Do you agree? Disagree? Let us know what you think about Southwest's service record, valuation, and the airline industry as a whole using the comments box below. You can also rate Southwest Airlines in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add Allegiant Travel, Delta Air Lines, JetBlue Airways, or Southwest Airlines to your Fool watchlist.

Southwest Airlines is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Allegiant Travel and is also on Twitter as @TheMotleyFool. Its disclosure policy is managing just fine, thanks.


Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2011, at 8:14 PM, traderdave7 wrote:

    Pilots and employees from other airlines go out of their way every day to assist customers, you just don't hear about it.

    As far as investing, airlines, including LUV, are the last place you should be parking your money.

  • Report this Comment On February 23, 2011, at 10:18 PM, TMFMileHigh wrote:

    @traderdave7,

    >>Pilots and employees from other airlines go out of their way every day to assist customers, you just don't hear about it.

    Precisely my point. At other carriers, it's not embedded in the culture -- from management on down.

    And I say that as the son of a former UAL employee. Love the carrier I grew up with, but Southwest really is a different breed.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

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