I have never believed that investing in U.S.-based passenger airlines was a good idea. They have proven to be poorly run, carry too much debt, are too susceptible to economic cycles and oil prices, and are perpetually stuck being a product that people tolerate as opposed to love. People fly only because they have to, unless they love Southwest Airlines Co (NYSE: LUV ).
Airlines were always a disaster of a business. The one exception to this rule was Southwest Air.
Arguably, Alaska Air Group, Inc. (NYSE: ALK ) might also fit the bill, as far as U.S. airlines are concerned. The thing about LUV stock was that it was so well-managed at every level that it always made a profit, even after 9/11, never had too much debt, never had to worry about making interest payments, always had solid cash flow, more cash than debt and expanded prudently. It built a brand not based on travel, but on freedom.
What Makes Southwest Air Appealing?
With other airlines consolidating, and complaints rising, Southwest Air never seems to be featured on the news dragging people off of planes. People seem to like flying Southwest Air. I know I do. Americans are still traveling a fair amount, and we aren't in a recession. So things seem to bode well for the airlines economically.
However, things may get more expensive for airlines in the next 20 years. According to a report issued by Boeing Co (NYSE: BA ), new pilots, technicians and cabin crew are going to be in high demand, as the current crop retires over the next two decades. When labor demand rises, so do costs, especially since these are jobs that require very high levels of skill.
The report said the airlines are on track to hire 5,800 new pilots this year, the most since 1990. Several smaller airlines have had to cancel flights this year because of a pilot shortage, and Republic Airways Holdings had to file for bankruptcy partially because of a lack of pilots. The Asia-Pacific region will need more than a quarter of a million new pilots over the next twenty years.
This is incredible. It's essential that Southwest Air keep pace, but given the overall happiness of the workforce at LUV, that shouldn't be too difficult.
That is, if most PR is to be believed. The Transport Workers Union claims that working conditions are "intolerable and cancerous" for groundworkers and that every day, the airline allegedly writes up three employees and fires one. All things considered, to me, that seems rather low in a labor force of 27,000. That's 0.01% per day.
Bottom Line on LUV Stock
Meanwhile, labor costs have risen as Southwest Air made new deals with employees. The company kept its track record of avoiding labor actions intact by making these new union deals, but it may increase expenses by about 5-6%. Operating Revenue Per Seat Mile should increase 1-2%. Consensus earnings-per-share estimates are for $1.20 on $5.73 billion in revenue.
LUV stock currently has $3.4 billion of cash offset by $2.82 billion in debt. It generated over $2.2 billion in free cash flow over the trailing-twelve months. So no matter how the quarter turns out, financials remain stellar. That's very likely going to remain the case for some time to come, so if you want to buy an airline stock, Southwest Air is really the only one to consider besides ALK. However, you may want to wait for the price to decline a bit.
LUV stock is trading near all-time highs. If you overlay a chart of its EV-to-EBITDA ratio with its stock chart, when it gets too far above the industry median, it tends to fall.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years' experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.