Hidden Net Play Flying High

Quick. Name a company besides America Online that
generated more than a billion dollars in online sales last year and
boasts profitability. The “Wal-Mart of the Internet” e-tailer
Amazon.com comes close with an impressive $1.7
billion in 1999 revenues; that is, if you look past its hemorrhaging losses
of $700 million. Online portal giant Yahoo! also
gets an honorable mention showing actual profits, but with just $600
million in sales on a modest $60 million in net income, close only counts
in horseshoes. Instead, the answer can be found by looking to the skies –
try Southwest Airlines .

Southwest Airlines an Internet play?
Well, the deep discount airline may not come packaged in a sexy dot-com
wrapper, but the company’s Web site did manage to collect more than $1
billion in passenger revenues since the turn of the millennium, a 111%
increase from a year ago. Online sales are accounting for nearly 30% of
Southwest’s total passenger revenues and Bear Stearns analyst, Robert A.
LaFleur, sees that figure doubling over the next five years. While rival
airlines end up moving just 5% of total sales over the Web, that tally can
be somewhat misleading since Southwest has a virtual stranglehold on
selling tickets through its own site rather than partnering with upstart
e-travel agents like Travelocity ,
priceline.com , or Expedia .

Regardless, any way you slice it, Southwest’s online initiative isn’t
anything to sneeze at. The company’s CFO predicts that the efficiencies of
selling on the Internet will translate into roughly $80 million in savings
to this year’s bottom line alone. Not bad for a decidedly offline company
who took a chance on an unproven medium back in 1996, well ahead of other
brick-and-mortar rivals, with a rough-around-the-edges Web site sporting a
giant image map of a ticket counter. That straightforward approach in
cyberspace was as successful with an increasingly Web savvy audience as its
no-frills earthy style was in the air. It also boosted enthusiasm from
investors who’ve rewarded Southwest’s stock price with a rich premium
relative to competing airline stocks.

In anticipation of e-commerce’s inaugural holiday season two years ago,
investors ferreted out Federal Express as a hidden Internet play.
Surmising that the express shipping giant was undervalued when compared to
frothy pure play Internet stocks, investors furiously bid shares of its
parent company FDX Corp. (now FedEx Corporation ) up
to its all-time high. With lofty predictions for retail sales on the Web
being trumpeted by upstart research firms, investors saw Net gold for the
tech-savvy carrier catering to instant gratification-conscious consumers.
Whereas the shipping industry is competitive, the airline industry is
downright cutthroat.

Despite peaks and valleys brought on by seasonal travel and fluctuating
fuel prices, Southwest has enjoyed explosive growth that’s outpaced its
rivals and has predictably outperformed most airline stocks traded on the
Big Board. The company already sits squarely at its 52-week high, so don’t
expect a repeat FedEx moonshot performance. But Southwest does still have
plenty of room yet to grow, and if you’re looking for a long-term
buy-and-hold with a dash of dot-com and some solid upside prospects, LUV
warrants a looksee.

Any questions or comments, love letters or hate mail? As always, feel
free to forward them to [email protected].

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