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Southwest Is Flying High; Sony Isn't Exactly Ahead of the Game

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

November 14, 2000|JAMES PELTZ and MICHAEL HILTZIK

Southwest Airlines (LUV)

Jim: Buy

Mike: Buy

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Mike: Here's an airline that's unique in many ways, Jim, but mostly because it makes money, and tons of it.

Jim: True, and that's one reason Southwest Airlines is the exception to the rule that one generally should shy away from airline stocks.

Mike: What's behind that rule?

Jim: There are so many factors that are beyond the control of airline executives, it's hard for them to manage consistent growth. I'm talking, for example, about interest rates--a big deal for airlines because they borrow up to their eyeballs to buy jetliners. The price of jet fuel is another such factor. Then there are the unions that negotiate most airline workers' contracts.

Mike: But Southwest has handled all of those issues with aplomb, as its stock shows.

Jim: No question. It's hard to avoid using superlatives with this company, but its record speaks for itself. Since it was started about 29 years ago, it has turned a profit every year. No other carrier can say that. And it's a credit to Southwest's legendary founder and chairman, Herb Kelleher.

Mike: Right, Kelleher is a guy who runs on a very unusual combination of fuels himself, namely Wild Turkey bourbon and Philip Morris cigarettes.

Jim: Kelleher just might be the most colorful executive in corporate America. And it's not just his personal habits, it's also the amazing esprit de corps and humor he has instilled at Southwest, whose employees adore him even though they're mostly unionized.

Mike: Southwest is a steady moneymaker in no small part because it runs a bare-bones operation. Look at the experience of flying Southwest: As you and I both know because we've spent more hours flying than we care to remember, it certainly doesn't have the best food or the most luxurious cabins.

Jim: It doesn't even have assigned seating.

Mike: No, but what it does have is predictability. You know that when you fly Southwest, you have to bring your lunch and you might get the center seat, but you'll probably also get to your destination on time.

Jim: Southwest excels for several reasons. It operates only one kind of plane, the Boeing 737, so it saves gobs of cash not having to train its people to fly different types of jetliners. It also has tremendous employee morale, as I said; in fact it's almost a cult at Southwest. I mean, check out its stock symbol: LUV.

Mike: The funniest comedy club I ever attended was a late-night Southwest flight out of San Jose, when the flight attendants gave their "fasten-your-seat-belt" spiel. I would have been rolling in the aisle except, of course, I had my seat belt on.

Jim: That's one of their trademarks, that the attendants can have fun with those stilted flight rules they have to announce.

Mike: In fact, one of the prerequisites of getting a job at Southwest is having a sense of humor. Whereas having a sense of humor is a prerequisite for being a passenger on some other airlines. Why, I remember one flight on Northwest . . .

Jim: Leave it for your memoirs, Mike. Southwest also benefits from staying away from the most congested airports, so its planes can more easily leave and arrive on time. Also, it flies mostly short-haul routes, so it can offer frequent service. That, combined with the short turnaround time its planes spend at airport gates, keeps Southwest's jets in the air most of the time, giving the airline top utilization of its assets. The benefits end up on its bottom line.

Mike: So the performance of Southwest's stock is comparable to that of other airline stocks this year, right?

Jim: Very funny. Southwest has surged 80% so far this year, while the American Stock Exchange's index of airline stocks is down 4%. Despite Southwest's run-up, I'd still highly recommend this stock, which trades at about 22 times estimated 2001 earnings per share.

Mike: You still think it has a ways to go?

Jim: Look at it this way: The hike in jet fuel prices this year has dented the profits, and stock prices, of most major airlines. But you'd never know jet fuel prices had risen by looking at Southwest's earnings or its stock.

Mike: We should note, however, that there is one big cloud on Southwest's horizon. The problem, not to be crass about it, is what happens if Kelleher falls out of an airplane?

Jim: Right, Kelleher is now 69 and he is being treated for prostate cancer, though all signs are that he's still quite healthy. But it troubles many that he hasn't yet named a successor. And no matter who it is, can they keep Southwest on its profitable track?

But does that make you want to avoid the stock?

Mike: No. It might make for some bumpy skies ahead, but this company is fundamentally strong. This is an airline that all but turns away passengers, because there's such demand for its service.

But I do recommend bringing a box lunch.

Sony (SNE)

Jim: Don't buy

Mike: Don't buy

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