Southwest Airlines Co. (LUV): Welcome To The S&P 500 (.INX), Delta Air Lines, Inc. (DAL)

With the sale of S&P 500 (INDEXSP:.INX) component BMC Software to Bain Capital LLC, a new spot is opening up in the index — and Delta Air Lines, Inc. (NYSE:DAL) has been given the slot. Let’s see why Delta Air Lines, Inc. (NYSE:DAL) was added, and what this development could mean for the airline’s shares.

Why Delta?

The S&P 500 (INDEXSP:.INX) is designed to incorporate companies from all across the market, from paper producers to Internet retailers. When the S&P decided to add another airline, Delta Air Lines, Inc. (NYSE:DAL) became the index’s only legacy carrier.

The S&P 500 (INDEXSP:.INX) looks for companies that both fulfill its goal of broad based diversification, and are financially sound enough not to collapse on a regular basis.

Delta Air Lines, Inc. (NYSE:DAL) has made major strides toward improving its financial picture since it emerged from bankruptcy in 2005, reducing its net debt from $17 billion in 2009 down to a forecasted $10 billion by the end of 2013. Not only has this move reduced Delta’s interest expense, but it has also helped to boost the airline’s credit rating, making Delta less risky in the eyes of investors.

The only other airline in the S&P 500 (INDEXSP:.INX) is Southwest Airlines Co. (NYSE:LUV), which operates in a different style than legacy carriers like Delta. Southwest Airlines Co. (NYSE:LUV) operates an all-Boeing 737 fleet to save on maintenance costs, and flies primarily domestic routes. Through good management and some smart bets on oil prices that helped the airline through tough economic times, Southwest Airlines Co. (NYSE:LUV) is widely considered among the most stable members of the industry.

When the S&P 500 (INDEXSP:.INX) decided to add another airline, a legacy carrier would help to broaden its airline mix — and Delta represents the most financially sound airline among the legacy carriers. Delta Air Lines, Inc. (NYSE:DAL) is also by far the largest airline by market capitalization among legacy carriers. Since the S&P 500 (INDEXSP:.INX) tends to favor larger companies, this position would have given Delta Air Lines, Inc. (NYSE:DAL) an advantage in the index’s eyes.

Effects on shares

Shares of U.S.-based airlines have suffered lately as a reaction to the uncertainty of the US Airways–AMR merger. On the backs of this and rising oil prices, Delta shares sank back below the $20 level on Sept. 6. However, the news that Delta would join the S&P 500 drove Delta shares up slightly in after-hours trading.