The Motley Fool’s readers have spoken, and I have heeded your cries. After months of pointing out CEO gaffes and faux pas, I’ve decided to make it a weekly tradition to also point out corporate leaders who are putting the interests of shareholders and the public first and are generally deserving of praise from investors. For reference, here’s my previous selection.
This week, we’ll head into unchartered territory and I’ll show you why Southwest Airlines Co. (NYSE:LUV) CEO Gary Kelly is truly an incredible and innovative force in the airline industry.
Kudos to you, Mr. Kelly
When comparing the pros and cons of the airline industry, there are two primary reasons airline companies are worth buying: They have a safer track record than automobiles and are the only time-feasible way to get across the country. On the flipside, there are about 1 million reasons airlines should have permanent caution tape surrounding them from an investors’ perspective.
Airlines have no choice but to go along for the ride with the economy, meaning that even with hedges, rising fuel prices and weak travel demand can drastically affect their bottom line. Furthermore, the need to be more fuel and space efficient requires the constant upgrading/purchasing of planes, which is, in itself, very costly. Since 1990 we’ve seen more than 100 airline bankruptcies, including every major carrier since 2002. US Airways Group Inc (NYSE:LCC) , for instance, may be the talk of the town now that it’s merging with AMR, but keep in mind, as well, that it declared bankruptcy twice last decade and still sports $2.4 billion in net debt.
In short, the airline industry is the antithesis of efficient, yet Southwest Airlines Co. (NYSE:LUV) has managed to shine under CEO Gary Kelly’s leadership.
Source: Altair, commons.wikimedia.org
Southwest Airlines Co. (NYSE:LUV) has turned in an annual profit in 40 (yes, 40!) consecutive years. This means during the high-interest Reagan administration, the Gulf War, the Internet bubble, the terrorist attacks on the Twin Towers, and the Great Recession, it still stayed profitable!
Southwest Airlines Co. (NYSE:LUV)’s comparative advantage over its peers can be broken down into a number of key components; the first of which is its focus on filling in where its competitors fail.
Southwest Airlines Co. (NYSE:LUV) is now the nation’s largest domestic airline because it focused on underutilized routes that were near, but not necessarily in, major metropolitan areas. Directing its routes to suburbs of metropolitan areas allowed it to undercut national carriers on price, while also keeping its planes in the air longer. If you’ve ever flown into LAX versus Burbank’s airport in Southern California, you know exactly what I’m talking about here. By contrast, national carrier Delta Air Lines, Inc. (NYSE:DAL) has eight domestic hubs it runs out of, and trying to so much as change a route from even one of these hubs because of costs could create a firestorm among regular passengers.
