Southwest King of Another Quarter

Southwest Airlines (NYSE: LUV) continues to be the airline that makes money -- and exceeds analyst estimates.

For the latest quarter, per-share earnings tripled to $0.09 and beat estimates by a not-so-trivial four cents. Revenue rose a healthy 12.1%, helped by Easter falling in March. Per-passenger revenue growth had been difficult until the last month of the quarter (March).

Southwest's year-after-year profitable performance is the envy of the airline industry. Yet the company is growing its capacity by 7% this year in a marketplace that even it characterizes as glutted. Go figure. But its 4.6% profit margin hardly says "I'm the cream of the crop" of corporate America.

It is commonly thought that fuel costs are hurting the airlines. Southwest, though, is largely immune from higher prices -- and actually recorded a few hedge-related gains -- because it hedges. It currently has more than 80% of its 2005 fuel cost locked in at the equivalent of $26 a barrel of oil. But even with that operating cost advantage on a line item that (even hedged) was 17.9% of total cost, the company's passenger revenue yield dropped 0.7% for the year-ago quarter.

It's interesting that the company's trumpeting a record 73.7 load factor in March. For comparison, Delta Air Lines' (NYSE: DAL) systemwide load factor for March increased to 80.1%, up 4.6 percentage points. Delta Mainline domestic operations (excluding ASA and Comair) reported a March load factor of 80.9%, up 5.7 points. Though Delta is a financial disaster, investors should worry that a trip through bankruptcy court could revive a formidable competitor.

While comparing Southwest and Delta will certainly fill my email box with lots of flames, let me balance that view (for some) by noting that Motley Fool Stock Advisor recommendation and Wall Street darling JetBlue (Nasdaq: JBLU) has a net debt (cash minus total debt) of $1.1 billion. Southwest, meanwhile, has a net debt of $800 million, and its sales are five times those at JetBlue. Southwest is, when compared with its peers, a balance-sheet wonder.

There are low margins and a plethora of risks in the airline industry -- and still there are companies such as Virgin that want in on the U.S. market. Go figure. Still, Southwest sells for 26 times 2006 estimated earnings. That's a little rich in my book, even for a company that is king of a low-margin business in an industry with too much capacity and so many competitors trying to heal their balance sheets in bankruptcy court.

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned but would welcome a trip to Hawaii. Click here to see The Motley Fool's disclosure policy.