Southwest Airlines (LUV) is the largest airline in the United States, based on domestic passengers carried. Southwest Airlines operates more than 3,100 flights a day, as of December 31, 2010, utilizing a fleet of 548 Boeing 737 aircraft. Southwest Airlines currently serves 71 cities in 36 states. It also provides freight services with in the United States, and the company competes with American Airlines (AMR), Delta Airlines (DAL), and U.S. Airways (LCC). In September 2010, Southwest announced plans to acquire AirTran Airways (AAI), which is expected to close in Q2 2011.

Launch of Coverage on Southwest Airlines; $14.05 Price Estimate

We've broken down our analysis of Southwest Airlines into two main business segments:

Fortune has released its list of the world's 50 most respected companies and once again Apple Inc. (AAPL) tops the list.

This is the fourth year in a row that the Cupertino based company has grabbed the top slot. Apple's respect comes mainly due to the company's ability to release new products at an amazingly quick pace, often updating its main product lines at least once a year.

Southwest Airline Co. (LUV) overall option implied volatility of 32 is below its 26-week average of 34 into Q2 earnings per share (EPS) on January 20, suggesting slightly less price movement.

Microsoft Corporation (MSFT) overall option implied volatility of 23 is below its 26-week average of 28 into Q2 EPS on January 27, suggesting decreasing price movement.

Options Update is by Stock Specialist Paul Foster of theflyonthewall.com.

The earnings season ramps up this week. Analysts polled by Thomson Reuters foresee strong reports from such big names as Apple (AAPL), eBay (EBAY), IBM (IBM), General Electric (GE), Google (GOOG), Schlumberger (SLB) and Southwest Airlines (LUV). And fast on the heels of last week's big earnings beat from JPMorgan Chase (JPM), there will be plenty more results from the financial sector to peruse this week.

Among the financials expected to post double-digit earnings growth this week are Capital One Financial (COF), Morgan Stanley (MS), SLM Corp. (SLM) and U.S. Bancorp (USB), but the week's biggest earnings winner may be Wells Fargo (WFC).

The earnings crunch is back on this week. Third quarter reports are due from tech, financial and pharmaceutical companies, from airlines and from many others. Here's a day-by-day rundown of the coming week's earnings highlights, with a closer look at Apple (AAPL), Harley-Davidson (HOG), Boeing (BA) and Southwest Airlines (LUV).

Getting things started on Monday, analysts surveyed by Thomson Reuters expect Citigroup (C), Halliburton (HAL) and IBM (IBM) to post year-over-year earnings growth. But Monday's highlight no doubt will be Apple's (AAPL) quarterly results.

Analyst Upgrades

• KeyBanc upgraded Las Vegas Sands (LVS) to hold from underweight based on Singapore performance and a potential revaluation of the yuan.
• ThinkEquity upgraded Seattle Genetics (SGEN) to buy from hold based on the positive SGN-35 HL data. The firm raised its price target to $16 from $12.
• Merriman upgraded Applied Signal (APSG) to buy from neutral with a $28 to $31 valuation range, citing greater confidence in earnings estimates and the company's recent contract wins.
• Siliconware Precision (SPIL) was upgraded to neutral from underperform at Macquarie.
• Pulte Group (PHM) was upgraded to neutral from sell at Goldman.
• Greenbrier (GBX) was upgraded to outperform from market perform at Morgan Keegan.

The earnings crunch rolls on this coming week, and the analysts surveyed by Thomson Reuters are looking for strong quarterly results from the likes of Avon (AVP), Coinstar (CSTR), Corning (GLW), DuPont (DD), MetLife (MET), Norfolk Southern (NSC), Northrop Grumman (NOC), Royal Dutch Shell (RDS.A) and many others. In fact, Broadcom (BRCM), Chevron (CVX) and Southwest Airlines (LUV) are expected to have doubled their second-quarter earnings per share compared to a year ago.

The three months that ended in June saw Southwest Airlines celebrate the 39th anniversary of its founding, and it also declared a quarterly dividend. Analysts expect the Dallas-based no-frills carrier to report that second-quarter earnings came to 27 cents a share, a 70.4% rise from a year earlier. Revenue for the period is expected to have grown 20.4% to $3.2 billion. So far, analysts predict similar earnings and revenue numbers for the third quarter. But earnings results were better than expected in the past four quarters, beating consensus estimates by as much as 47%.

Another day, another airline fee and this time it's for carry-on luggage! Is there no limit to these fees? Spirit Airlines, out of Fort Lauderdale, Florida, is going to start charging a fee on August 1, 2010. The only group that is not chagrined are probably the nudists that travel light when vacationing.

Given all the fees the airlines are tacking on they might as well evolve into banks. Actually I think this is another instance where business has learned a bad lesson from government agencies. The government may require legislative action to raise taxes but bureaucrats the world over seem to be able to add new fees at will.

The silver lining to the travel slump last year was that fewer flights made it easier for airlines to hit their deadlines. In 2009, the airline sector had its best year for on-time arrivals since 2003, largely because many routes were cut as passenger traffic fell and companies looked for ways to cut costs. According to the Department of Transportation, airlines hit a 79.5% on-time rate last year (which includes flights that were within 15 minutes of their arrival time).

Hawaiian Airlines had the best record, but it's a small regional, lacking the challenges of the major carriers. Among the big guys, Southwest's (LUV) 83% on-time rate was best, and United's (UAUA) 81% was tops for traditional air carriers. Of course, these airlines and the rest of the sector were helped along by the fact that they pad their schedule, which makes it a hell of a lot easier to show up on time.

Southwest Airlines (LUV - option chain) shares are rising today after the company reported this morning that its November traffic rose 11.7% over the year-ago period. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on LUV.

LUV opened this morning at $9.61. So far today the stock has hit a low of $9.61 and a high of $10.20. As of 11:45, LUV is trading at $9.97 up 46 cents (4.8%). The chart for LUV looks bullish and S&P gives LUV a positive 4 STARS (out of 5) buy ranking.

For years, it's been evident that smaller airlines have had an operating advantage, particularly when they use less expensive airports. They've been able to post better numbers as a result, and in the current travel slump, they've outperformed the larger carriers. Well, they've also picked up a considerable amount of market share.

According to a report by USA Today, low cost carriers now have 30% of the market in the United States. Price-sensitive consumers are turning to cheaper alternatives, even if it means (for fliers with elite status) giving up the perks they've earned through years of customer loyalty.

United Airlines (NASDAQ: UAUA), US Airways (NYSE: LCC) and American Airlines (NYSE: AMR), according to an influential analyst, have run out of options. Jamie Baker of JPMorgan said in a July 20, 2009 report that these companies couldn't do anything to prevent a cash crisis. They only savior available to them would have to be an outside investor. To call the position grim would be optimistic. Unfortunately, it couldn't have come at a worse time.

As Baker was walking the bear into the airline industry, United was starting to celebrate its change in direction. The carrier has improved its on-time rate, according to a USA Today report, and its operations are coming around. Despite the fact that the airline industry has been brutalized by the global recession, the airline has made some progress. Through August, the company's share price doubled, and its ascent has continued in September. So, the company is locked in an ongoing struggle to manage its identity, cope with its past and shape how the world sees it today.

The operational "makeover" has resulted in a reduction of its fleet from 601 jets in 2000 to 386 as of the summer of 2009. In terms of passenger traffic, it's in the #4 spot in the United States – trailing Delta (NYSE: DAL), Southwest (NYSE: LUV) and American. With Q2 revenues off 25.2% year-over-year, however, drastic measures are still necessary.

August brought more misery to the airline industry in the United States. Seven of the country's nine largest carriers saw traffic drop, with only Southwest Airlines (NYSE: LUV) and JetBlue Airways Corp (NASDAQ: JBLU) bucking the trend. The continued upward climb of unemployment, tighter corporate budgets and sluggish demand for leisure travel has resulted in fewer passengers in seats.

JetBue was the only carrier not to report a drop in available seat miles (ASMs), the primary measure of airline productivity. Load factors, however, which indicate how full a plane is, tended to be higher, largely a result of flights that have been cut in an effort to reduce costs.

Late Thursday, Moody's Investors Service announced that it might downgrade its credit ratings for Southwest Airlines Co. (NYSE: LUV). In a statement, the ratings agency said the airline's Baa1 senior unsecured rating is at risk, due to the likelihood of weak demand trends persisting into 2010.

The downgrade warning comes shortly after LUV slashed airfares dramatically to remain competitive, with some one-way flights running as low as $30 during a recent promotion. "Even with the benefits of Southwest's advantageous cost structure, the current yield environment is likely to challenge Southwest to restore credit metrics to levels supportive of the current rating," said Moody's in a statement.

In addition to the fundamental concerns cited by Moody's, LUV is also facing some challenges on the charts. The stock has shed 52.8% during the past 52 weeks, and long-term resistance from its 10-month moving average looms directly overhead. This trendline hasn't been toppled on a monthly closing basis since September 2008.

Analyst upgrades:

• Citigroup upgraded Adtran (NASDAQ: ADTN) to Buy from Hold on expectations the company will benefit from the broadband Stimulus funds.
• Morgan Stanley upgraded Continental Airlines (NYSE: CAL) to Overweight from Equal Weight based on relative valuation and views the company as a "survivor." Additionally, the analyst lowered 2009 industry estimates but believes it is the last cut for the year and is incrementally more positive on the sector.
• Morgan Stanley also upgraded EXFO Electro-Optical (NASDAQ: EXFO) to Overweight from Market Weight based on valuation.
• Tata Motors (NYSE: TTM) was upgraded to Buy from Hold at Deutsche Bank.
• Ascent Solar (NASDAQ: ASTI) was upgraded to Neutral from Underweight at JP Morgan.
• Mechel Steel (NYSE: MTL) was upgraded to Neutral from Underperform at Credit Suisse.