Southwest Airlines

Methodology

Southwest's earnings are highly cyclical with economic conditions, fuel costs, and competitive capacity, requiring careful normalization to mid-cycle profitability levels. The unique business model with no baggage fees creates different margin dynamics than legacy carriers. Avoid using peak or trough earnings; instead assess sustainable profitability across economic cycles.

Methodology

PEG analysis is challenging for Southwest given earnings volatility and periods of negative growth during downturns or operational challenges. During recovery periods, growth rates can be unsustainably high, creating misleadingly low ratios. The metric works best for comparing to airline peers while adjusting for cycle positioning and operational execution.

Methodology

Southwest historically paid modest dividends during profitable periods but suspended them during the pandemic, highlighting the cyclical nature of airline cash flows. Dividend sustainability depends on operational performance and economic conditions. When paying, the dividend adds some value though capital appreciation potential dominates in this cyclical industry.