October 11, 2017

LUV – Market expectations are for Uniform ROA to stabilize at current highs, and management’s confidence about their capacity and replacement plans implies this may be warranted


  • Southwest Airlines Co. (LUV:USA) currently trades near historical highs relative to UAFRS-based (Uniform) Assets, with a 1.8x Uniform P/B, implying bullish expectations for the firm. Given management’s confidence about their capacity and replacement plans, this may be warranted
  • Specifically, management is confident about their updated capacity forecast, and plan for modest capacity growth in the fourth quarter of 2017. Additionally, they are confident that replacing a Classic with an 800 will benefit operating income, and that higher-gauge aircraft have a lower cost per seat. As such, expectations for Uniform Margins to stabilize at current highs may be warranted, and equity is likely fairly valued

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