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Southwest Airlines Background Southwest is a major low cost airline in the United States, based in Dallas, Texas.

They are the biggest airline in the United States based on passengers carried. Southwest has a low cost structure that is contributed to by the use of a single aircraft type (Boeing 737s), high utilization, and point to point route structure. They fly more one way flights than any other airline which offers a convenience to their customers. The majority of Southwest customers fly in this way for the added benefit of no connections. Southwest also flies to smaller airports within the cities it serves. This allows cheaper hub costs and more convenience for customers in the way of less congested air traffic. They also do not offer many of the amenities of other carriers in an effort to reduce costs and pass theses saving on their customers. In 2006 they were able to increase revenue due to the Wright amendment being repealed. This law restricted flights to Dallas Love Field with certain stringent rules such as that no connecting flights could fly through them. They challenge this law, and enabled them to have a jump of 11 million in revenue and they also were now able to increase the number of routes that they went to. Due to them being low cost, they were able to resist a 50% jump in jet fuel costs in 2006, with economic revenues actually going up 40%. This is because of the manner that they have hedged their fuel costs. Even in 2006 they had put out fuel derivative contracts up to 2012. Setting the price they would be buying jet fuel well in advance. This allowed southwest to them structure their company structure and strategy around these costs. Fuel is a major cost for all airlines and knowing what you are going to pay for it for the foreseeable future gives a distinct advantage in forecasting costs and returns. In 2006 southwest also started a codeshare agreement with ATA airlines. This allowed them to sell ATA seats and vice versa. This was mutually beneficial as they were now able to service more routes and customer needs. Southwest feels that the factors that matter most in this competitive market are Fares, customer service, costs, frequency

Revenue
12000 10000 8000 6000 4000 2000 0 1 2 3 4 5 Revenue

The revenues for Southwest steadily went up from 2006 to 2008. This was buoyed mainly by the fuel hedging that they had done. Also being a low cost airline meant that Southwest was able to withstand the economic downturns experienced by other airlines. In 2008 they acquired ATA airlines their former codeshare partner. They did this primarily to get access to ATA landing slots at New Yorks La Guardia airport.

Net Income
700 600 500 400 300 200 100 0 1 2 3 4 5 Net income

The net earnings however for Southwest fell sharply in 2008. This was mainly due to fluctuations in the market coupled by the acquisition of ATA. ATA was forced into bankruptcy and thus when they bought it they had to absorb some of these losses in order to gain the hubs. Due to the recession, their net profits continued to go down, though they managed to remain profitable. They introduced new services at this point to try and lure more customers.

Capacity utilization: Passenger Load Factor = passenger miles / seat miles available 0.79300 0.76000 0.71200 0.72600 0.73100 Revenue per available seat mile = Revenue Passenger Mile / Available Seat Mile 0.79286 0.75975 0.71164 0.72583 0.73051

Efficiency: Passenger Mile per gallon = passenger miles flown / gallons used 54.31407 52.16087 48.62956 48.55707 48.75621

Seat miles per gallon = seat miles available / gallons used 0.06850 0.06863 0.06835 0.06691 0.06671

Cost per passenger mile = operational (passenger division) costs / passenger miles flown Seat miles flown per plane = seat miles flown / number of passenger planes

Basic units: Passenger miles flown = these should be found from the financial statements 78049319970 74485727627 73479264220 72301479680 67722376984 Seat miles available = 98437092 98001550 103271343 99635967 92663023

Revenue passenger mile = 78046967 74456710 73491687 72318812 67691289

Number of passenger planes = 548 Generic ratios Solvency: Debt/Asset ratio = interest bearing debt (long and short term) / total assets 0.44811 0.42056 0.44811 0.41068 0.33091 537 537 520 481

Interest coverage = interest paid / operating income 3.45385 Credit rating BBB BBB BBB+ AA 1.40860 3.45385 6.64706 7.29688

Profitability: EBIT-ratio = EBIT / Sales 0.02522 0.01585 0.06604 0.10729 0.08695

ROE = Net Income / Equity 0.03594 0.01811 0.03594 0.09293 0.07738

ROI = EBIT / (Equity + Interest bearing debt) 0.03290 0.01866 0.08614 0.11767 0.09855

Liquidity: Debtors/Creditors 0.94547 1.25486 0.94547 0.91835 0.90094

Operational Cashflow / Sales 0.95927 0.97469 0.95927 0.91979 0.89720

Cost structure: % of fuel costs = fuel / operational costs 0.35114 0.30174 0.35114 0.27960 0.26227

% staff costs = staff costs / operational costs 0.31587 0.34377 0.31587 0.35424 0.37439