In a post called As Warren Buffett Dumps Retailers And Loads Up On Airlines I took a fleeting look at the improving economics leading to much improved ROIC of listed airlines as a possible reason why Buffett would have bought stock in an industry that he has traditionally shunned throughout his investing career.
It has been well documented that low oil prices have helped.
American (NAS: AAL), Delta (NYSE: DAL), United (NYSE: UAL) and Southwest Airlines (NYSE: LUV) were Buffett’s choices but out of the four Southwest (NYSE: LUV) saw the greatest improvement in fundamentals in my opinion.
From the most recent 10 year data available from Morningstar.com it is clear that 2012 was the year that fundamentals really began to improve for Southwest (NYSE: LUV):
Southwest Airlines Financials
It’s the same with ROIC:
What Tech Did SouthWest Introduce And Did It Improve Earnings?
In May 2011 Southwest (NYSE: LUV) merged with AirTran.
Unlike Southwest AirTran flew internationally and had a superior reservations system that it’s acquirer who did not fly internationally.
The merger prompted Southwest to fly internationally which meant it needed to upgrade it’s own reservations system to handle the new business.
By 2014 Southwest launched it’s international service to seven destinations in five countries and in the same year announced record profits and a 42nd consecutive year of annual profits.
Southwest also returned $1.1 billion to shareholders via stock buybacks and dividends and continued to acquire new tech in the form of much more fuel efficient aircraft whilst retiring old stock.
By 2015 Southwest recorded record net income, operating income, profit sharing, higher ROIC whilst taking advantage of lower fuel costs and by this stage the investments in technology had allowed Southwest to expand internationally and fly more passengers at a lower cost than in previous years.
In it’s most recent annual report Southwest recorded yet more record profits with the voice of an extremely positive sounding CEO (Gary C. Kelly).
The Future of Tech At Southwest Airlines
In a Dallas News Business article (via Bloomberg) Chief Operating Officer Mike Van Der Ven stated that:
We’re looking for minutes… how do I save a minute here, a minute there? In 2017, we are more deliberate in our continuous improvement efforts.”
In the pipeline these improvement efforts include $300 million in new tech to such items as the airport ramp.
They will also spend $500 million on a new reservation system which is the biggest tech upgrade in the airline’s history and it expects to see the benefits of such changes by 2020.
It’s old system is 30 years old and will allow it to compete with it’s domestic rivals by tightening time for connecting passengers, more easily change prices and schedules and accept foreign currency.
Tablets will be distributed to mechanics and others who will receive real-time alerts to address issues within the first five minutes of an aircraft’s turn.
Information between baggage personnel with become digitised replacing the currents system of printouts.
$100 million in increased earnings by 2020.
Did tech help to improve the profitability of Southwest?
Now the management team are looking to make incremental changes to the way the business operates for an even smoother operational and customer experience.
Disclosure: I do not own stock in Southwest at the time of writing.