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Despite a Shaky Earnings Report, Southwest Investors Have Plenty to Cheer

By Motley Fool Staff – May 1, 2017 at 11:33AM

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It was a disappointing quarter for the carrier as costs significantly outpaced earnings growth.

In this segment from Market Foolery, Mac Greer is joined by Ron Gross and Jason Moser as the cast discusses the latest developments at Southwest (LUV 0.03%), the popular low-cost airline. Though costs are rising for everything from labor to fuel, that doesn't mean the team is bearish on this well-run Foolish company, which just announced a customer-centric change to its policies.

A full transcript follows the video.

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This video was recorded on April 27, 2017.

Mac Greer: Time to talk my favorite airline, Southwest Airlines. Down on earnings here, Ron. There's an interesting story here now with Buffett, because Berkshire has a $2 billion stake in Southwest, that stake getting a little smaller today.

Ron Gross: Little smaller. My favorite airline as well. I'm a big fan of the company. But it was a disappointing quarter. For those finance people out there, if your revenues grow 1% but your costs grow almost 9%, that's bad. It really is an expense story here. Labor costs were up, they have new contracts in place with pilots and flight attendants, so cost for salaries and wages were up about 13%, cost of fuel was up 8%, and revenues, as I said, were only up 1%. So, we have a little bit of a mismatch in terms of revenue and expenses here. But it is, as we said, a very well-run company. It is a Foolish company, in terms of the way they treat their customers and their employees and their shareholders. Love to see that, love to really participate with companies like that. And they will be fine. Profits took a smack, they were down about 30%, that's not great to see, but I don't view this as a long-term degradation of their business model, or even the industry in general.

Greer: Jason, today, Southwest CEO Gary Kelly said the airline will no longer overbook its planes. That's pretty groundbreaking, isn't it?

Jason Moser: I doff my cap to that decision. I think that's one of the most customer-centric moves they could have made at this point in time. I think the biggest question a lot of people have had over the past few weeks is, why in the world are these airlines overbooking to begin with? And we know it's all about maximizing, fill up that plane, if people cancel or whatever. So, they take a chance there. It is inherently a chance that they're taking every time they overbook. And we've seen how bad that can actually get. To me, like Ron was saying, these are the types of businesses that we really like to be a part of, and they are businesses that, generally speaking, will make decisions that in the short run don't seem necessarily in line with near-term success. You have to let time play out, to let those decisions play out. I think this is one of those decisions where, in the near-term, certainly, it could affect capacity there, it certainly could affect profitability. But this is a business that's obviously thinking far beyond that. It cares about its customers, it cares about its employees, it cares about its status in the world. I applaud the decision.

Gross: From a Buffett perspective, he's taken a bet across the industry, he's not just betting on Southwest. He purchased the big four -- American, Delta, United, and Southwest -- thinking that the terrible 20th century airline debacle is behind us, the industry has consolidated and they can get back to better profitability, and he can do well on the industry as a whole. It's a tough business, these margins are thin, and it remains to be seen if the bet will work. But don't bet against Buffett too much.

Greer: Yeah, because at one point, Buffett called airlines a deathtrap for investors. I think deathtrap, for a lot of us, has a negative connotation.

Moser: [laughs] On the whole.

Greer: I'll tell you what I love about Southwest Airlines, getting back to how customer-centric they are. I fly them a lot when I fly to Houston to see my family. Little things, they do all the little things. When I fly with my two sons, Southwest Airlines puts lids on the drink and puts straws in the drink. And it means you're not worried about spilling. Little stuff like that. And they don't drag you off the plane.

Gross: [laughs] The details. Yeah, just this week my daughter flew and got diverted to Pittsburgh because of weather. The next day, a $100 voucher showed up for $100 worth of tickets next time she flies, and a heartfelt -- literally a heartfelt -- apology. Great company to own and put your money to as a consumer.

Moser: We say it all the time. Those businesses where leaders are so focused on the customer, they are businesses that tend to really do well over long periods of time. It seems really simple. Figure out what your customers want and then give it to them. It's just not always executed very well.

Jason Moser owns shares of Berkshire Hathaway (B shares). Mac Greer has no position in any stocks mentioned. Ron Gross owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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