Southwest's stock has lost altitude
Growth hits headwinds, despite airline's enviable profit record,
08:43 AM CDT on Tuesday, May 4, 2004
By ERIC TORBENSON / The Dallas Morning News
A roaring stock performance fed Southwest Airlines Co.'s cheery corporate culture for more than two decades, but now that momentum has stalled.
That's despite Southwest's consistent profitability, sterling balance sheet and an enviable position as the largest discount airline. Although its peers have collectively lost more than $22 billion in the last three years, Southwest has earned nearly $1.2 billion in the same period.
Collectively, Southwest's 31,000 employees represent its largest shareholder group. Many of them are millionaires several times over, thanks to the stock. One projection suggests their collective net worth rises or falls by $200 million for each dollar the shares move.
These days, the stock is moving, but not in the right direction. Having split 13 times since 1978, shares in the Dallas-based carrier are down 27 percent from a recent high in October. And although no one is suggesting the "magic" of Southwest's culture is fading, there are signs of employee unrest, including an increasingly public spat with its flight attendants.
"It's pretty frustrating," said Robert Wooster, an aircraft mechanic whose co-workers check the share price every day. "We're dumbfounded some days. We post a nice profit, and the stock goes down."
Nearly all large airlines find themselves with declining shares because oil prices are out of sight and the industry's nascent revenue recovery has sputtered.
But Southwest isn't like any other airline. Its shares were among the top performers in any industry during the 1990s. The industry took a huge hit after the September 2001 terrorist attacks, but Southwest has kept growing and remained profitable.
Yet the shares trade lower than just before Sept. 11, when they traded at $16.94. (On Monday, LUV stock closed at $14.42, up 14 cents.) By contrast, Fort Worth-based American Airlines Inc. saw shares of parent company AMR Corp. rise about 700 percent last year – not through posting record earnings but by avoiding bankruptcy.
"It's definitely an issue," said Alan Sbarra, a consultant with Unisys R2A Transportation Management Consultants, who recently spent time visiting with the airline at its Dallas Love Field headquarters.
Forms of payment
Although base pay rates for the carrier's employee groups may not be as high as at competing airlines, Southwest employees are the industry's best paid when benefits such as profit-sharing are included. The profit-sharing, which many workers opt to convert to Southwest shares, comes in lieu of a defined pension benefit. Last year, it amounted to $126 million.
Enthusiasm for options and shares may be waning. Southwest's mechanics won 2,400 options each at the very end of their contract talks. The options were priced near $13 a share. "It's not that much right now," Mr. Wooster said.
At the flight attendant talks, stock options are generally being discussed, but the Transport Workers Union wants significant base pay increases to help raise the standard of living for 7,000 flight attendants, said Thom McDaniel, president of the local.
"You can't pay your bills with stock options," he said. Though the union has faith in Southwest, he added, options should be a bonus on top of regular pay raises.
Talks between the union and airline are stalled as Southwest chairman Herb Kelleher takes over negotiating duties from chief executive Jim Parker, who stepped aside from the role because he thought the talks had become too personal.
That kind of hiccup rarely comes from Southwest, and to see it played out in public is even more unusual, said Robert W. Mann, an airline consultant based in Port Washington, N.Y. A broader investor concern is Southwest's labor costs, which are rising at an alarming clip, said analyst Jamie Baker of J.P. Morgan Chase, in a recent research note.
Southwest chief financial officer Gary Kelly has said the carrier believes it can control its costs, which will be close to flat this year compared to 2003, even with a new flight attendant contract. The airline declined to discuss its stock prices, but officials have quietly been puzzled as to Wall Street's seeming indifference to its shares.
Much of investors' attention has been focused on JetBlue Airways Corp., which has shattered many of the preconceptions about how to run a low-cost, low-fare airline.
Southwest has been contemplating whether to copy two of JetBlue's key tactics: in-flight entertainment for each seat and the use of a second, smaller type of aircraft to open up more markets.
Southwest executives don't seem particularly eager to change their ways, but Wall Street seems ready for it. Were the airline to announce "any modifications to its tried-and-true business plan, we would expect to take a distinctly more favorable view," Mr. Baker wrote.
What's often lost in the low-cost hubbub is Southwest has far more planes and a broader national reach.
Airline's view
The carrier's story remains:
• Southwest is expanding quickly again, after slowed post-9-11 growth. Southwest will soon be growing at about 10 percent or more a year, which should boost earnings. It's launching service in Philadelphia this weekend.
• Its balance sheet is impeccable. With comparatively little debt and $1.8 billion in cash, Southwest doesn't look anything like its highly leveraged brethren such as American.
• It's the best at hedging for jet fuel prices. While the rest of the industry faces record high oil prices, Southwest has 80 percent of its jet fuel pre-purchased at discounts.
Some analysts predict Wall Street is just about to get wind of Southwest's renewed growth.
"They're going to get very close to a normalized type of pre-9-11 profit," said Ray Neidl of Blaylock & Partners in New York. "When they start performing like they should, you'll see the shares head back up, barring a complete meltdown in the market."
E-mail etorbenson@dallasnews.com
