Mention airlines to some investors and they’ll make a face as if they’ve just smelled something bad. The industry’s reputation isn’t great on Wall Street. Air carriers are saddled with expensive union labor, high fuel costs, enormous capital expenditures, strict federal regulations, and razor-thin profit margins.

However, this investor sentiment is an outdated caricature of the truth. Airlines these days are enjoying a renaissance, as economic recovery, falling unemployment and strong consumer confidence prompt more people to buy tickets.

Southwest Airlines (NYSE: LUV) stands out for customer loyalty and brand recognition, with a stock that has outperformed the market over the long haul. The passenger carrier now dominates the airline industry’s low-fare space. But will economic headwinds and rising operating expenses catch up with the company?

Let’s see if Southwest’s stock is on a flight path for growth in 2019… or whether it’s heading for lower altitudes.

What Is Southwest?

With a market cap of $28.6 billion, Southwest Airlines is the largest carrier in the U.S. in terms of originating domestic passengers boarded. Based in Dallas, Texas, Southwest also is the world’s seventh largest airline, as measured by annual revenue. Southwest’s annual revenue in 2018 was $21.9 billion, a 3.8% increase from 2017.

Southwest serves 99 destinations in 40 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as 10 near-international countries.

How Has Southwest Stock Performed?

LUV has generally outperformed both the broader market and its peers over the long haul, but tends to take a hit when oil prices spike higher.

• Over the past 12 months, LUV has lost 4.4% and the S&P 500 has gained 9.7%.
• Over the past two years, LUV has lost 4.8% and the S&P 500 has gained 20.3%.
• Over the past five years, LUV has gained 118%, the S&P 500 has gained 51.9%, and the benchmark S. Global Jets ETF (JETS) has gained 109.9%.

How Has Southwest Performed In 2017/2018?

• In 2017, LUV gained 30.9% and the S&P 500 gained 19.4%.
• In 2018, LUV lost 28.3% and the S&P 500 lost 7.5%.

Who Are Southwest’s Rivals?

American Airlines Group (NSDQ: AAL)

Based in Fort Worth, Texas and sporting a market cap of $14.2 billion, American Airlines serves 350 destinations in 50 countries. AAL is the world’s largest airline (as measured by annual revenue).

Delta Air Lines (NYSE: DAL)

With a market cap of $34.9 billion, Delta serves an extensive domestic and international network that includes 304 destinations in 52 countries. Based in Atlanta, Georgia, Delta is the world’s second largest airline (by revenue)

United Continental Holdings (NSDQ: UAL)

UAL (market cap: $21.2 billion) operates under the United Airlines logo and is the result of a $3.2 billion merger in 2010 between United and Continental Airlines. United flies to 78 domestic destinations and 108 international destinations in 73 countries. UAL is the world’s third-largest airline (by revenue).

These three air carriers are only the most salient among Southwest’s many competitors, although the industry has been shrinking due to consolidation.

Read This Story: Top 3 Best Airline Stocks To Buy Now (2019 Review)

Will Southwest Stock Go Up In 2019 (Should You Buy)?

Southwest controls lucrative, well-traveled routes and enjoys resilient brand loyalty. The airline also has been expanding its international footprint.

This video provides quick insights into how Southwest became the king of budget airlines.

Southwest’s international service includes Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. In emerging markets, a rising middle class is demanding the “Western good life” and embracing tourism. Southwest is benefiting from this trend, especially as U.S. flight restrictions are increasingly removed from Cuba.

Southwest remains a case study in how to operate consistently profitable routes in a punishing industry.

In the years that followed deregulation, the airline industry grew rapidly but took a heavy hit during the Great Recession of 2008-2009, which precipitated a ruthless shakeout and consolidation.

In particular, scores of regional players crashed and burned, filing for bankruptcy and leaving many potentially profitable routes ripe for the plucking. Southwest was among the survivors; the carnage in the industry allowed the carrier to solidify its gains and expand.

What’s more, Southwest’s customer-friendly policy of “bags fly free” has been a massive success. Betting against all major airlines, the company allows its travelers to check in up to two bags for free. This pro-consumer policy is showing results in greater customer satisfaction and loyalty.

Southwest’s workers are loyal as well. After fuel, labor is the most expensive cost for airlines. Carriers have historically grappled with restive labor unions, putting pressure on already thin profit margins. However, Southwest has made peace with its unionized workforce, which should prove a huge plus.

LUV’s 12-month forward price-to-earnings ratio (FPE) is 9.5, a premium to the FPEs of AAL (5.1), DAL (7.4), and UAL (6.5), but a bargain compared to the FPE of the S&P 500 (17.5). Among its peers, Southwest enjoys the greatest growth potential.

Southwest earned a profit in 2018 for the 46th consecutive year, an impressive accomplishment in the brutally competitive airline industry. Air carriers are often awash in losses. For Southwest, the important metric of revenue per available seat mile (RASM) also showed an upward trajectory in 2018, which bodes well for 2019.

Will Southwest Go Down In 2019 (Should You Sell)?

The same macroeconomic headwinds that loom over the global economy could also undermine Southwest. Global growth is slowing; the trade war is hurting business and consumer confidence; oil prices are resuming their march higher; and the U.S. is overdue for a recession.

The airline industry is highly cyclical; we’re now in the late stage of a long recovery. When consumers feel the pinch, one of the first expenditures that they jettison is air travel.

The biggest threat: fuel costs. Crude oil prices are rebounding this year. If they continue their ascent, it will hurt the margins of all air carriers. For the airline industry, the cost of fuel can make the difference between operating in the black, or in the red.

For my take on the volatile direction of oil prices in 2019, read this story: Our Chevron Stock Prediction In 2019 (Buy or Sell?)

Overall Southwest Forecast And Prediction For 2019

My verdict on Southwest? I’m siding with the bulls.

Southwest is opening new and promising hubs in strategic airports and buying fuel-efficient planes. The company’s overall cost-effectiveness should help offset rises in oil prices (provided such rises remain relatively under control, which is likely).

Southwest over the past three years has managed to pull off what several other airlines couldn’t: consistent unit revenue performance and steady profitability. The trend should continue and keep adding to the company’s robust free cash flow. Southwest’s free cash flow in 2018 reached $2.9 billion, up from $1.6 billion in 2017.

Southwest rarely has long-term debt that exceeds its cash and short-term investments, placing it among the most financially solid of all leading airline stocks.

The average analyst expectation is that Southwest will post year-over-year earnings growth of 7.7% next year. Over the next five years, earnings growth is expected to come in at 16.5%, on an annualized basis. It’s an auspicious sign that billionaire super investor Warren Buffett in 2017 bought a huge block of Southwest stock.

Grab a seat on Southwest stock now, before it takes off higher.

John Persinos is the managing editor of Investing Daily.