Colin WarnerPerformance Analyst

Emily ReesSpecial Events Coordinator

Southwest Airlines Co.: LUV

October 5th, 2017

Kate LinnPrivate Equity Analyst

Jack ThompsonLatin American Economist

Table of Contents

Competitors

Fundamental Analysis

SWOT Analysis

Investment Thesis

Company Strategy

Technical Analysis

Markets

Company Overview & History

Key Executives

Summary

Recommendation

Recent News

Investment Thesis

Investment Thesis

The airline industry is undervalued; Southwest Airlines is more undervalued than its competitors. We believe that the labor cost headwinds will be outweighed by

the oil cost tailwinds. The company is safe during times of recession and attractive during times of growth, which is why we think that Southwest would

make a great investment.

Company Overview & History

● In its 47th year of service● Dallas-based ● Exemplary Customer Service ● more than 55,000 Employees and more than 115 million

Customers annually● Southwest became the nation’s largest domestic air

carrier in 2003 and maintains that ranking based on the U.S. Department of Transportation

● Southwest operates more than 4,000 departures a day ● 99 destinations in the United States and 9 additional

countries● Philosophy of treating customers honestly and fairly● Reliably low and uniquely flexible fares● Only major U.S. airline to offer (2) bags fly free to everyone● Operates the largest fleet in the world of Boeing ● Since 2010, Southwest has returned more than $7.1

billion to Shareholders through share repurchases and dividends

Company Overview

Company History

➔ 1966: Founded by Rollin King and Herbert Kelleher

➔ 1971: Began scheduled flights, from Dallas Love Field to local destinations

➔ 1975: Went public on the American Stock Exchange

➔ 1978: Airline Deregulation Act

➔ 1979: First flights outside Texas

➔ 1990: Revenues exceed 1 billion for the first time

➔ 1995: First airline to use web scheduling

➔ 2011: Acquired AirTran

Key Executives

Governance

Tom NealonPresident

Prior experience: Group Executive VP, JC Penney, VP

& CIO at Frito Lay

Gary C KellyChairman of the Board and

CEO30 Year Southwest Veteran

Mike Van de VenCOO,Senior VP, Global

OperationsJoined SouthWest in 1993

Recent News

September 24, 2017 → New ad campaign revealed

September 28, 2017 → Southwest cuts revenue guidance in wake of hurricanes

October 1, 2017 → The “Southwest effect” on flights to Hawaii

October 2, 2017 → JP Morgan recommends Southwest as the “safest bet” in the airline industry

Recent News

Company Strategy

Robust Route Network:● Carry the most passengers in the U.S.● Most daily departures in the world● Serve more than half of the top 50 U.S. metro areas● Significant growth opportunities, including near-international

Compelling Brand Appeal:● Best People in the airline industry● Outstanding Customer Service and Hospitality● Low fares with Transfarency● Industry-leading frequent flyer program

Superior Financial Position:● 44 consecutive years of profitability● Competitive cost advantage● Commitment to return value to Shareholders

Company Strategy

Markets

Market Presence

● Largest domestic market share○ Based on sales

● Ranked highest in customer satisfaction among major airlines○ JD Power and Associates survey of 11, 005 passengers

● Specialize in domestic market○ Helps keep costs low

Key Cost Factors

● Oil Prices○ OPEC Production○ US Oil Reserves○ Capital Spending

Increase○ Demand Factors

● Wages○ Unemployment○ Unionized○ Automation

Market Cycles

● Current market○ Low unemployment○ Monetary tightening○ Very long recovery

● Strong during growth○ Higher discretionary income

● Safe during recessions○ Low cost strategy○ Target market

Gro

wth

%

Green: DeltaOrange: American

Technical Analysis

Technicals

Competitors

Competitors

Delta:

● Business travelers

● Recent Fare hikes

● Largest by enterprise value and ASM

● Looking to offset weakening U.S. demand &

effects of low-cost competition by expanding

int’l (35% revs)

● H&S in ATL, Cincy, NYC

American Airlines:

● Fleet is 15 years old, working on deal with

Boeing to replace entire fleet

● Extremely vulnerable to fuel prices

● Second largest airline in the world

Jetblue:

● 6th largest domestic airline

● Point-to-point travel

● Young fleet of planes

United Airlines:

● Holding company consisting of United Airlines

and Continental Airlines

● Hub-and-spoke system

● Operates internationally

● Biggest airline in the world after merger

LUV vs. competitors

Multiples Analysis vs. Competitors

Company LUV JBLU AAL DAL UAL

Market Cap $35.42B $6.48B $25.07B $37.51B $19.85B

P/E (trail) 18.14x 10x 12.78x 10.31x 9.02x

Beta 1.13 .33 1.34 .94 1.11

DY .73% N.A .79% 1.58% N.A

Op mgn. 18.17% 16.88% 12.68% 14.09% 11.81%

OER 81.59% 83.87% 82.46% 85.95% 88.13%

Profit mgn. 10.99% 9.78% 5.02% 9.3% 6.09%

Short% float 1.59% 3.68% 8.67% 0% 4.39%

*Revenue passenger miles = Revenues * number of revenue-paying passengers

Multiples Analysis vs. Competitors

Company LUV JBLU AAL DAL UAL

Fuel & labor as % of revs

51.14% 41.8% 38.26% 38.26% 44.01%

$Fuel/gallon $1.92 $2.54 $1.42 $2.13 $1.49

Full-time e’s 53,536 ≈20,000 122,300 83,756 48,250

Stage length 760 1089.6 x x 1,473

Load Factor 81% 84.26% 81.7% 84.60% 82.90%

RPMs 124.8B 38.91B 199.01 202.72B 186.18B

PRASM/CASM 1.33 1.05 1.06 1.03 1.05

Yield/Pmile $0.157 $0.138 $.155 $.159 $.150

*Revenue passenger miles = Revenues * number of revenue-paying passengersASM = Number of seats filled*number of miles flown

Fundamental Analysis

Financial Highlights

Financial Highlights

Model

SWOT Analysis

Opportunities:

● Automation Implications● Fracking Implications● Global Affordability ● Approaching new destinations

○ Caribbean

Threats:

● Labor Costs Soaring● Fuel Costs Soaring

○ $.01 change? Add $7mil to yearly bill.

● Contractionary Consequences● Luxury Airliners Lowering Costs

○ Could cause some turbulence

Weaknesses:● Strong Competitors

● Hub Avoidance● Domestic Declines

○ Skype, etc. easing long-distance comm.

● Lack of Luxury

Strengths:● LCC Advantage● RFIDs Keep Checked Bags in Check

○ 4.5 per k

● Hub Avoidance● Convenience

○ Bags fly free

● Oil Hedging● Average Fares

SWOT Analysis

Summary

Summary

- High market share that should increase- Unique business model

- Low cost strategy- Excellent customer service- Reliable/direct travel

- Low risk- Oil price hedging- 44 years of profitability- Little reaction to big events- Little negative press/few scandals

- Value- Well positioned to take advantage of any scenario- Trading below our model and analyst estimates

Recommendation

(1) Sell 656 Shares of PBI at $14.04 for $9210.24(2) Purchase 231 shares of LUV at $58.00

Total Investment of $13,398.00Approximately 8% of the portfolio

Recommendation

Portfolio Allocation

Portfolio Allocation

NEE ANDV TGT CTL BSX CVS DEO BAC PBI Portfolio.

% 18% 14% 14% 11% 11% 9% 9% 7% 7% 100%

Basis $24,216 $19,447 $18,712 $15,469 $14,853 $12,971 $11,965 $10,026 $9,170 $135,602

Sept. r’s -2.63% +3.00% +8.22% -4.16% +3.37% +5.15% -1.96% +.01% +9.03% 2.12%

PTD r’s +17.72% +20.64% -18.92% -22.74% +21.37% +1.99% -1.38% +.01% -7.67% 8.98%

Originally purchased 656 shares at: $14.50Today’s price: $14.00

Original Investment Thesis: 52 week low Expansion of ecommerce and cloud based services Competitive dividend yield

PBI

Thank you for your time. We now welcome all questions and concerns.