mcintire investment institute at the university of virginia
DESCRIPTION
McIntire Investment Institute At the University of Virginia. Southwest Airlines (NYSE:LUV) - Long. Mark Fang and Jonathan Wulkan| 9/5/12. LUV is a low cost airline. Founded in 1967. Headquartered in Dallas, TX. 39 Straight years of profitability. Extreme focus on low operating costs. 4. - PowerPoint PPT PresentationTRANSCRIPT
M c I n t i r e I n v e s t m e n t I n s t i t u t e 1
MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA
Mark Fang and Jonathan Wulkan| 9/5/12
Southwest Airlines (NYSE:LUV) - Long
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LUV IS A LOW COST AIRLINE
• Founded in 1967
• Headquartered in Dallas, TX
• 39 Straight years of profitability
• Extreme focus on low operating costs4
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Share Price: 9.07 52-Week Range: 7.15-10.05
Market Capitalization: 6.72bn Average Volume (3 Month): 9.3m
P/E: 20.83 Current Assets: 4.7b
EPS: 0.43 Total Liabilities: 11.7b
EV: 6.66b EBITDAR: 950m
STOCK SUMMARY
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LUV IS A COMPELLING LONG
• Good Market Position
• Positive Brand Image
• Unique Business Model
• Strong Financials
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LUV HAS A STRONG MARKET POSITION
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WHAT IS IMPORTANT IN THE AIRLINE INDUSTRY?
• Revenue Passenger Miles
• Total Passengers Carried
• Available Seats
• Fleet Size
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REVENUE PASSENGER MILES
Delta16%
Southwest15%
American13%
United11%US Airways
8%
Continental5%
JetBlue5%
Alaska4%
AirTran Corporation
3%
Skywest2%
Other17%
RPM
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REVENUE PASSENGER MILES
RPM ASM
8.2
10.5
Southwest RPM vs. ASM (in billion)
Southwest RPM vs. ASM (in billion)
78.09%
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REVENUE PASSENGER MILES
http://www.airlinefinancials.com/airline_data_comparisons.html
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TOTAL PAX CARRIED
Southwest19%
Delta14%
United11%
American10%US Airways
8%
Express Jet4%
JetBlue4%
Skywest4%
American Eagle
3%
Alaska3%
Airtran2%
Other19%
Share
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FLEET SIZE
Delta
United
Sout
hwes
t
America
n
Airfra
nce K
LM
China S
outh
ern A
irline
s0
100200300400500600700800
722 701 698617 586
420
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FLEET SIZE
Delta United Southwest American Airfrance KLM China Southern Airlines
0
2
4
6
8
10
12
14
16
18
Average Age
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AVAILABLE SEATS
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• Dedication to the highest quality of Customer Service delivered with a sense of warms, friendliness, individual pride and Company Spirit.
LUV
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CHEAP AND RELIABLE
2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Flight Delay Rate
Delay Rate Southwest(%) Delay Rate Industry Avg. (%)
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LUV
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VAR
• Visited Chicago O’Hare (United/American Hub) and Midway (Southwest Hub)
• Asked customers of all three airlines:How satisfied are you with the airline you are travelling on?How likely are you to switch from that airline to another?
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VAR RESULTS
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LUV UAL AAL0%
10%
20%
30%
40%
50%
60%
70%
80%
Satisfied?
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VAR RESULTS
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LUV UAL AAL0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Likely to Switch / Impartial : Business Travellers
SwitchImpartial
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UNIQUE BUSINESS MODEL
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• Southwest is a low-cost carrier, so how does it keep its prices lower than the competition while maintaining greater profitability?
One Aircraft Fleet
Fuel Hedging
RNP and P2P
Customized Service
Secondary Airports
Lower Op Cost
Route Optimization
70% of fuel needs
Lowest average fuel prices
Shorter Routes
More Destinations
Maximizes customer value
Shortens aircraft turnover time
MDW
DAL
BWI
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ONE AIRCRAFT FLEET
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FUEL HEDGING
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RNP AND ROUTE MODELS
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STRONG FINANCIAL POSITION
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VALUATION
United Delta Southwest US Airways JetBlue AverageP/E Trailing 15.760 7.900 20.600 4.230 11.530 12.004 RatioP/E Forward 3.770 3.230 8.760 3.230 7.310 5.260 RatioDebt/Equity 22.666 N/A 1.653 17.072 2.874 11.066 RatioEV 10.870 16.890 6.660 3.700 3.070 8.238 BillionEV/EBITDAR 5.500 6.500 7.000 5.500 7.000 6.300 RatioMarket/Book 0.564 0.433 0.997 0.468 0.453 0.583 RatioOPM 5.785% 1.377% 9.940% 10.759% 10.180% 7.608% PercentageAcid Test Ratio 0.834 0.549 0.929 0.960 1.030 0.860 Ratio
Liabilities 37.059 45.855 11.729 8.724 5.291 21.732 BillionOwner's Equity 1.635 -1.135 7.097 0.511 1.841 1.990 BillionCurrent Assets 11.708 8.457 5.120 3.864 1.625 6.155 BillionInventory 0.611 0.393 0.432 0.258 0.000 0.339 BillionCurrent Liabilities 13.312 14.693 5.047 3.756 1.578 7.677 BillionMarket Cap 6.130 7.310 6.640 1.730 1.390 4.640 BillionOrganic Rev Growth 4.10 9.84 13.32 3.68 13.64 8.99 Percentage
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VALUATION
United Delta Southwest US Airways JetBlue AverageP/E Trailing 15.760 7.900 20.600 4.230 11.530 12.004 RatioP/E Forward 3.770 3.230 8.760 3.230 7.310 5.260 RatioDebt/Equity 22.666 N/A 1.653 17.072 2.874 11.066 RatioEV 10.870 16.890 6.660 3.700 3.070 8.238 BillionEV/EBITDAR 5.500 6.500 7.000 5.500 7.000 6.300 RatioMarket/Book 0.564 0.433 0.997 0.468 0.453 0.583 RatioOPM 5.785% 1.377% 9.940% 10.759% 10.180% 7.608% PercentageAcid Test Ratio 0.834 0.549 0.929 0.960 1.030 0.860 Ratio
Liabilities 37.059 45.855 11.729 8.724 5.291 21.732 BillionOwner's Equity 1.635 -1.135 7.097 0.511 1.841 1.990 BillionCurrent Assets 11.708 8.457 5.120 3.864 1.625 6.155 BillionInventory 0.611 0.393 0.432 0.258 0.000 0.339 BillionCurrent Liabilities 13.312 14.693 5.047 3.756 1.578 7.677 BillionMarket Cap 6.130 7.310 6.640 1.730 1.390 4.640 BillionOrganic Rev Growth 4.10 9.84 13.32 3.68 13.64 8.99 Percentage
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SOUTHWEST 5YR ORGANIC REVENUE GROWTH
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Southwest United Delta US Airways
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VALUATION
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Southwest United Delta US Airways
Relative Valuation: (EV/EBITDAR)/5yr Rev Growth
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CATALYST-HOW IT PLAYS OUT
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• Fuel prices continue rising, placing a squeeze on all airlines’ operating profits
• LUV’s margins take a hit, but LUV maintains profitability
• Other airlines forced to raise prices• Passengers defect to LUV
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RECOMMENDATION
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• Initiate Long Position Immediately @ 3.5%
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QUESTIONS?
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