Millennial Flyers Boost Southwest

07/05/2017 2:54 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

The millennial generation the biggest generation yet. They became the largest part of the U.S. workforce in 2015, and they will be inheriting $30 trillion from their boomer parents, says Briton Ryle editor of Wealth Daily.

Millennials are only just starting to have kids and buy homes. Their emergence is the demographic and investment trend of the next 20 years or more. And they like to travel.

In the U.S., Boston Consulting Group says millennials are far more interested in travel than older generations, and by a 23% margin, no less.

We are recommending Southwest Airlines (LUV). Why?  One of the reasons is that in the recent backlash against poor customer service, it’s been one of the only to come out shining.

Pretty much only Southwest and JetBlue (JBLU) aren’t getting ripped apart on social media for the way they overbook flights and treat customers.

In the past five years, since Southwest started offering its Wanna Get Away discount pricing, the company has grown revenues by 20%. That’s impressive by itself, especially considering the company did that while offering fares far lower than the major airlines.

But when you look at the profits the company generated over that half-decade, you’ll really see how well management excelled. Net income grew from $421 million in 2012 to a whopping $2.244 billion last year.

That’s a 433% growth in profit over five years, all while offering fares that undercut the competition.
So, how’d they do that? Simple answer: They cut costs drastically.

Gross profit margins (what’s left of revenues after paying for the cost of your product) increased from around 50% to 70% between 2012 and 2016. And they did it better than anyone else.

Over the same period, United cut costs by about 35%. American cut them by about 20%. And Delta cut expenses by about 30%. But Southwest reduced its costs by a whopping 40%.

Airlines are a huge beneficiary of low oil prices. Roughly half of an airline's costs are fuel-related. But you'll notice that ticket prices have been pretty stable as oil prices have fallen. Those savings go right to the bottom line.

Some of that money Southwest saved got pumped back into advertising. The other airlines were content to rest on their laurels.

Management there was thinking that people don’t have a choice and have to buy whatever tickets they sell. But Southwest proved them wrong by targeting millennials with creative advertising campaigns and slogans. And now it’s getting a lot of millennial business.

Southwest started out as a Texas airline that only flew travelers to three airports within the state. Today, less than 50 years after its first flight, it’s the largest low-cost carrier in the world.

As Southwest continues to expand its coverage and keeps hitting millennials with targeted campaigns, the stock price is going to keep on climbing. I've got 12-month target of $85 on the stock, so there's still plenty of upside.

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