Will Success Spoil Southwest Air?

NEW YORK (TheStreet) -- Southwest Airlines (LUV) was founded during the era of hot pants, and was aimed at getting around the government regulation that then kept airline ticket prices high.

Back when I was at Rice University, in the 1970s, Southwest flew a triangle from Dallas' Love Field to San Antonio to Houston's Hobby Airport. You didn't need a reservation. Planes left every hour, and stayed on the ground for just 10 minutes. A flight cost less than a bus ticket.

That triangle still defines Texas (many counties outside it saw their population peak a century ago), but Southwest has long moved beyond it.

Today many of those former hot pant-clad flight attendants are living in retirement communities. Southwest flies to almost all major markets, and recently announced it would add its first "international" flights -- to the Caribbean -- from Atlanta, starting in July.

Southwest has been fighting restrictions on flying out of Love Field since its founding, and those restrictions are only now being lifted, meaning the airline can fly to 12 additional destinations starting in November. Additional destinations will turn Love into something more like a traditional hub, leaving some to speculate that Southwest is losing what made it special.

It's not.

What made it special, what makes it special, comes down to one word: consistency. You may not get rich on Southwest stock. Its heyday as an investment came in the 1990s while other airlines were floundering. But if you buy it and hold it, your patience will be rewarded. It's a stock to invest in, not to speculate on.

Southwest no longer has the big labor cost advantages it once did, but it has plans to keep the Boeing (BA) 737 as its sole plane well into the next decade. The airline says this keeps costs down, because it has to carry spare parts and train mechanics and flight crews for only for one type of plane.

Southwest has 583 Boeing 737s now, with an average age of 11.2 years. The airline also has orders and options to replace nearly all of them with more 737s.

Southwest has lately lost its place as Wall Street's favorite airline to Delta Air Lines (DAL), which after immense consolidation, labor strife, and a bankruptcy has gotten its act together. Delta's international network gives it a profitability advantage over Southwest, and over the last year its stock price has more than doubled. Southwest investors have done well, but their gains have been only 82%.

Southwest's LUV ticker symbol can be seen as an homage to Dallas' Love Field, where it all started. Other airlines had moved to DFW Airport when the company was being formed, and for years it had the field -- with its location near the city center -- to itself.

Some think that what made Southwest special was its low prices, but that's not the story. What made Southwest special was its route system and cost structure.

Rather than flying everything into a single hub, where planes sat for hours as passengers moved between them, Southwest flies back and forth between cities and keeps planes on the ground as little as possible.

Southwest also sells seats only from its own Web site, keeping sales costs as low as possible. It has union contracts, and its labor costs are now competitive, perhaps even higher than those of other airlines. Its prices are similar to those airlines as well. But although its margins are small, it's consistently profitable.

There is no "romance of the air" on Southwest. All the passengers know they're on a bus. But the crew keeps its sense of humor about things. The atmosphere is generally light.

Competitors have copied Southwest in some ways. Delta's new safety video includes humorous elements. But flying on Southwest is a little like shopping at Costco (COST): You know the store is making money, but you also know neither you nor employees are being deliberately ripped-off. There is comfort in that.

The stock will rise and fall with the investment winds, but mainly it will rise. And that's what you want out of your investments.

At the time of publication the author owned shares of Costco.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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