If you've ever flown Southwest Airlines (NYSE:LUV) -- and who hasn't? -- then you know the moment you step into its waiting area that its operation is different from every other airline's. As I examine the reasons why Southwest remains the champion airline stock, the theme of "employee" will keep coming up. The company's success is due to other factors as well, and it's worth parsing them because we always want to be on the lookout for companies that walk similar paths of disruptive innovation -- for great stock ideas might be the result.
Southwest's route strategy always appealed to me. I'm the kind of guy who, when shopping doesn't just push his cart to the nearest checkout line. Those lines are long. No, what I do is mosey all the way down the checkout line that is furthest away, off the beaten path; there's never much of a line there. Southwest realized that people would be willing to fly into a metro area's less-traveled airport if it meant saving money on the flight. At the time, no other airline would even conceive of such a thing. They lacked imagination, and it's the sign of brilliant management when they find a way to make something work that nobody else has ever really considered. Use one type of aircraft, fly into a secondary airport, make it cost-efficient, and you have a business.
The real key, however, to Southwest's success is the "E" word I mentioned earlier. The company's founder, Herb Kelleher, understood right from the beginning that if he could make his employees feel like partners in the business, he would gain an advantage on competitors like AMR's (NYSE:AMR) American Airlines, UAL's (NASDAQ:UAUA) United subsidiary, and US Airways (NYSE:LCC). The value of this approach, which is still a radical concept even today, cannot be underestimated.
Management and labor are generally antagonistic, and we've seen the result many times -- strikes by pilots, flight attendants, and mechanics. Despite 79% of Southwest employees being unionized, you don't hear about strikes at Southwest, do you? That's because of Southwest's corporate culture of putting its employees first.
How does this culture translate into a successful business? It's common sense. A happy employee, who feels they are a partner in the company, is more likely to perform above and beyond expectations. That translates into a better experience for fliers -- it's no coincidence the American Customer Satisfaction Index (ACSI) consistently recognizes Southwest Airlines as leading the industry in customer satisfaction.
Customer satisfaction creates brand loyalty. It encourages positive word-of-mouth which causes more people to fly Southwest, potentially making the airline a preferred choice even when given equivalent options. So begins a virtuous spiral.
That brings us to the bottom line. The company has posted an annual profit for 36 consecutive years. This is in stark contrast to the big boys, all of whom have mostly either gone bankrupt, filed for bankruptcy and later emerged from it, or have been on the brink of it.
Although the past few years has not been kind to Southwest stock -- it's off 32% since its 2008 highs vs. 5% for the S&P 500 in the same time period -- much of that drop has been the result of our unprecedented economic crisis pounding the overall airline industry. But I think it's instructive to note that since 1980, an investment in Southwest has yielded a 63-bagger, so there is a track record of success. And while the stock has had its share of significant dips, the ride has been far less turbulent over the past 10 years than its competitors'.
I like Southwest at today's price just north of $11. The economy will eventually recover, and so will the travel industry. Southwest's brand remains solid. The company has only $1.3 billion in net debt, compared with $3.5 billion for Continental Airlines (NYSE:CAL), and a whopping $12.2 billion for Delta Airlines (NYSE:DAL). Southwest isn't going anywhere. In the meantime, its low-fare structure gives it an advantage over the other airlines -- now more than ever.
Given Southwest's staying power, I'm inclined to wait patiently in my seat, waiting for the cute flight attendants to wink at me -- which they do.
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