Southwest Airlines Co. (LUV) has navigated through the regulatory issues of its 2011 acquisition of AirTran and is now seeing the cost savings and synergies that have come from integrating the two airlines, says Chris Welch, Co-Chief Investment Officer and Portfolio Manager for Diamond Hill Capital Management, Inc.
“Southwest has had favorable returns this year, but we think there’s still more room for the stock to rise. It’s about $9.5 billion in market cap. They acquired AirTran, closed that acquisition in 2011, and because of all the regulatory issues involved, it’s taken a while for them to integrate that acquisition. But there’s a lot of cost savings, and there’s a lot of potential synergies between combining their routes and taking AirTran’s large position, particularly in Atlanta, and integrating that with Southwest’s systems,” Welch said.
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Welch sees further potential in Southwest due to the aligning of maintenance costs and the increased capacity discipline that the industry is experiencing, and he believes LUV is likely to generate a strong return.
“AirTran already used Boeing 737s, the same types of planes that Southwest uses, so they have a lot of synergies in their maintenance costs. So with cost cutting and revenue synergies, we think there’s a lot of potential there and don’t think that the stock is getting full valuation credit for what they can do. It’s within an industry that in past decades has long been not the best protector of capital. It’s always had overcapacity in various segments of the industry, but the past decade or so there’s been a renewed capacity discipline among domestic airlines and that continues today,” Welch said.
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