I wrote a comment a long time ago on an investing blog about Southwest Airlines. I was praising them because of certain business practices. Well, somehow one of you sneaky astute readers got a hold of it to drill me on it because of the breaking news about their failed inspections. The truth is, I STILL like Southwest as company despite this terrible break down.

Southwest Airlines (NYSE:LUV) is an airline which immediately makes red flags go up like its Chinese new year. Admittedly their stock is well off of its high, but then again what isn’t right now. So lets go over the good, the bad and the elephant in the room.

The Good:
Southwest does things that allow it to be be one of the best values in low cost airline travel. They don’t have all the frills of other airlines but they offer decent leg room, clean areas, and the basic compliments. What do they do differently? Here is my list:

1) One type of plane
They operate all Boeing 737s. Why is this a big deal? It means that they only need parts for one kind of plane, they only need to hire mechanics that know one kind of plane, and they can easily exchange planes for any given flight. They hire pilots that are proficient flying 737s. The list goes on and on. This is huge, and one of the main failures of the larger domestic airlines.

2) Flying into and out of Denver
This small move that they made a year and a half ago allowed them to directly compete with Frontier…and in many cases win. Denver is logistically out of the way of any other major cities….but it is right smack in the middle of the US. It also is one of the largest and newest airports in the entire United States.

3) Low fare sales
They lead ALL airlines in low fair sales. This builds frequent flying as well as loyalty.

4) Fuel Price Hedging
They were one of the first airlines to realize years ago that oil prices (And thus jet fuel) would go up substantially so they starting hedging accordingly. They have years of price protection ahead.

5) General innovation
They are constantly on the lookout on ways to increase efficiency without sacrificing quality. This is ABSOLUTELY necessary for any airline hoping to succeed.

The Bad:

1) Failed Inspections. They had to ground 42 jets today in the wake of last weeks 10 million dollar fine over failed inspections.

2) Bad publicity over the “clothing” incident has lingered and now there is bad publicity over their “obesity” rule.

3) #1 is so bad we don’t need a number 3

The Elephant in the Room
Even after all this trouble with inspections and grounded jets blows over…the airline industry as a whole is still a terrible buy. Oil prices are going to continue to rise, and consumer spending is dropping like a rock. One of the first things to go when people are cutting back is travel costs. There will always be high volumes of business travelors but the fallout from the lack of economic growth will affect the airline industry even more.

Have we seen the bottom?
I don’t believe so.

Should I sell?
No, they WILL recover. If you are still holding, I believe long term they will recover well.

Should I buy?
Now thats a tricky question because their stock is so low currently on the heals of the recent problems, but at this point I cant recommend buying. I do think they will reach the bottom sometime in the next 5 months.

Overall as a company I see them recovering, but I think it will be a while before this audit is resolved. Couple that with reduced consumer spending and it is going to be a rough going for a while. On the other side when the economy starts to recover, whenever that is, I believe Southwest will recover VERY well.

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