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Southwest Airlines
Update on Corporate Reputations

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By Jhutchinson
May 8, 2002

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Some of you may recall that I posted this stuff (that being a technical term) back after the 9-11 attacks...but briefly, I track reputations of a hundred forty companies (ugh) using media analysis, and follow the major US airlines. More on that in a sec...

Here's something we recently discovered as to the importance of Corporate Reputation, and why it might matter to investors (and, why it would show Southwest's strengths in the last several months):

When customers have a choice . . .76% of US consumers would switch brands based on a company's image; 55% said they always take into account a company's ethics and values when buying products or services; a Wall Street Journal survey found that ethics and values were the most important corporate attributes in assessing the value of a company.

Applying that to LUV I find their image remains positive and strong in the media (which has the most significant impact on image with consumers) and the fundamental values of the company are in step with the average person (sorry if that sounded like hi-falutin', pro-LUV b.s. - it isn't meant that way, but I do believe the ethics and values of LUV as a company mirror mainstream American's) - and certainly, following the 9-11 attacks and the subsequent drop in the Air travel sector, the fast response by Southwest in 'talking' to travelers, the return to tasteful yet witty ads provided a serious boost to the company's image and was one reason that Southwest was the first airline to return to a pre-Sept. 11 stock price (Northwest was right behind them).

So to return to the issue of corporate reputation, how are the airlines faring? (I'll explain numbers momentarily)

Since 1-1-2002 - Overall measurements of Corporate Reputation of US Airlines
AMR -116
CAL - 22
DAL - 89
NWAC 0 (this means neutral, neither positive or negative image)
LUV + 27
UAL -114
U - 9

Since 9-1-2001 - Overall measurements of Corporate Reputation of US Airlines
AMR -881
CAL - 63
DAL -257
NWAC -117
LUV +150
UAL -651
U -330

Pretty impressive pattern - Southwest is the only airline to have maintained a positive image with the media in the last eight months.

Numbers explained: The 'scores' above are what we call MQ scores (or MediaQuotient scores) - They are the product of a rating system that quantifies positive and negative news coverage appearing online at major media sites, such as the WSJ, NYTimes, CNN.com, MSNBC.com, BBC News Online, Bloomberg.com, and Business Week Online (among others). They do not reflect activity on Internet message boards and chat rooms. Stories are quantified based on elements like tone of the story, placement (like front page), original content and added impact elements (audio files, links to past stories)).

An additional (and smart) way to consider the numbers is this: they reflect the spread between positive and negative coverage in the most influential media on the internet (we use the net because it's essentially real-time impact).

Here's a look at the numbers from 1/1-5/7 - this shows total positive total negative for the time period (so of all stories about Continental appearing on major news sites online, those stories had a net 52 score of positive elements and a net 74 score of negative elements)

AMR +78 -194
CAL +52 - 74
DAL +63 -152
NWAC +45 - 45 (still kissing their sisters)
LUV +34 - 7 (very low negative)
UAL +242 -356
U +78 -194

What it all means: UAL has dominated media attention, mostly negative. When LUV is the topic/focus of a media story - it is usually positive (bodes well for image). For every good word about Northwest, there's a bad one.

Then, looking at the numbers from 9/1-5/7 shows an even larger disparity (or tilt) in heavily negative coverage:

AMR +256 -1137 (yeah, thousand)
CAL +248 - 311
DAL +200 - 457
NWAC +122 - 239
LUV +191 - 41
UAL +462 -1113
U +105 - 435

Now, consider comparing stock prices against their reputation measurements (and I'll grant that the sector is weak, has remained weak - but I'm making a larger argument on Southwest's resilience in the face of that weakness, so please bear with me):

Airline  Yesterday Close   9/10/01 Close  % +/-
AMR         $ 20.19          $ 29.70      - 33%
CAL         $ 23.45          $ 39.64      - 41%
DAL         $ 26.88          $ 37.25      - 28%
NWAC        $ 17.39          $ 19.62      - 11%
LUV         $ 17.99          $ 17.12       + 5%
UAL         $ 12.10          $ 30.82      - 61%
U           $ 5.01           $ 11.62      - 57%

And here we have something possibly tangible - Only Southwest has maintained a positive image in the media; only Southwest has maintained it's pre 9-11 stock price (although, note that other stocks had recovered substantially, like AMR, which moved from 14 to 29, but has since given that back, while Southwest moved from 11 to 21, and has given some, but not all back).

I don't pretend that this is a defining way to pick stocks or anything like that - but I do find it to be one way to manage information about stocks - those companies garnering losing positions in the corporate reputation arena run the risk of losing public trust; and as noted previously, people do make buying decisions based on a company's image.

Bottom line - I find my investment in Southwest remains sound from this (and only this) perspective; obviously I pay attention to the 'numbers'; but I thought this intriguing enough to share with all of you in a slightly different light.

I hope it was worth your time.

Hutch


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