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Individual Company Report: Southwest Airlines

Individual Company Report: Southwest Airlines

James Studley April 24, 2014 Medaille College Samantha Purpora Advanced Business Writing ENG-361E

Individual Company Report: Southwest Airlines

Table of Contents

Abstract ........................................................................................................................................................ 3

Company History .......................................................................................................................................... 4

Company Profile ........................................................................................................................................... 6

Financial Analysis ......................................................................................................................................... 7

Management Structure .............................................................................................................................. 11

Employee Relations Policies ...................................................................................................................... 12

State of the Industry & Competitive Analysis ........................................................................................... 13

Conclusion .................................................................................................................................................. 15

References .................................................................................................................................................. 16

Individual Company Report: Southwest Airlines Abstract

The following pages will contain information related to Southwest Airlines company history, company profile, financial analysis & stock history, management structure, employee relations policies as well as information in regards to the state of the industry and a competitive analysis. Upon finishing this report readers should have a better understanding of the above topics and gain insight into how Southwest airlines operates as an industry leader, their culture and an analysis of their financial performance. So please fasten your seatbelts, ensure that youre tray tables are in their upright position and welcome aboard.

Individual Company Report: Southwest Airlines Company History

Southwest Airlines was founded in 1966 when a group of Texas investors came together and contributed $560,000 worth of capital to fund the company. Southwest initially served three cities within the state of Texas: Dallas, Houston and San Antonio. The airline was a no frills organization that featured conveniences targeting mostly business fliers. Southwest Airlines business model directly challenged the government protected industry during their startup that had traditionally been dominated by a few large incumbent airlines.

Southwest Airlines has become the largest domestic airline in the United States by number of passengers carried. More than 100 million passengers fly Southwest airlines annually to one of the 96 destinations that Southwest currently flies within the country. Southwest airlines has become popular thanks to its extremely low fares that aim to compete with automobile travel more so than competitive air travel. Southwests passengers are willing to forgo in-flight meals, baggage transfers and other traditional frills in return for lower cost flights. Another reason that Southwest is so successful is that they strictly fly one model airplane, the Boeing 737. Flying a single model airplane allows the company to simplify maintenance and training, increase employee productivity and allows them to turn around flights in just 15 minutes (which happens to be 1/3 the industry average.)

Southwest Airlines serves more customers domestically than any other airline with a unique combination of low fares, no fees, friendly customer service delivered by outstanding employees, safe and reliable operations, and an extraordinary corporate culture that is often

Individual Company Report: Southwest Airlines studied by other organizations. Very few companies can match the customer excitement and loyalty that Southwest Airlines experiences. Southwest Airlines is the largest, low-fare air carrier in the world and is among the safest in the airline industry, no passenger has ever died on a Southwest flight. Southwest was started with one simple notion (About Southwest Southwest Airlines, 2013): If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline. Following this notion, Southwest has become the industry leader boasting fastest plane turnarounds, best on-time records and the lowest employee headcount per number of flights in the airline industry.

Individual Company Report: Southwest Airlines Company Profile

Southwest Airlines is a North American low-cost air carrier that is headquartered in Dallas, Texas. Southwest Airlines inspired the low-cost airline movement around the world and is ranked amongst the largest airlines in the world. Southwest Airlines is consistently profitable, adhering closely to its low-cost tradition and while differentiating itself through superior customer service and free baggage checks. Southwest Airlines employs more than 45,000 employees and services more than 100 million customers on a yearly basis. Southwest Airlines operates the largest fleet of Boeing aircraft in the world which serves 96 destinations in over 41 states, the District of Columbia, the Commonwealth of Puerto Rico and recently five nearinternational countries thanks to its acquisition of AirTran Airways. Southwest currently operates over 3500 services each day within the United States.

Individual Company Report: Southwest Airlines Financial Analysis

Illustrated below are some comparative ratio information between Southwest and their industry rivals. Even though Southwest seems to be below average on most of the ratios, they are only outperformed by two airlines in the industry, and not by much. The following statistics were used (Bloomberg, 2013) for financial analysis: Southwest financial comparison 2010-2012
Average increase/Decr Industry ease TOTAL Average Ratios comparison * 1.32 4.46 -3.14 TOTAL 7.60 5.02 16.62

Financial Statement Earnings Per Share USD PROFITABILITY Net Margin % Return on Assets % Return on Equity %

Dec-10 0.57

Dec-11 0.23 RATIOS Dec-10 Dec-11 4.00 1.14 2.97 1.06 7.84 2.71

Dec-12 0.52 Dec-12 2.46 0.99 6.07

10.37 9.01 28.46

-2.77 14.03 -11.84

LIQUIDITY/FINANCIAL HEALTH Current Ratio Debt/Equity Receivables Turnover Inventory Turnover Fixed Assets Turnover Asset Turnover

Dec-10 1.29 1.48 66.51 49.81 1.14 0.81

Dec-11 0.96 1.89 63.39 39.05 1.38 0.93

Dec-12 0.91 1.93 54.16 49.81 1.37 0.93

TOTAL 3.16 5.30 184.06 138.67 3.89 2.67

3.40 8.10 90.63 91.63 4.94 2.51

-0.24 -2.80 93.43 47.04 -1.05 0.16

* If green means above the average; If yellow means average; If red, means below average

Southwests current ratio in 2012 was .48 compared to the previous year of .96. This indicates that Southwest may be having hard time trying to pay their bills on time. The expected number to meet when measuring a company's performance is 1. However, Southwest continues to show a decrease in this figure.

Individual Company Report: Southwest Airlines Southwest Debt to Equity ratio in 2012 was 1.93, which is higher than the two previous years. This may indicate that Southwest is financing with debt to further invest in profitable growth/expansion. However having a high Debt to Equity ratio is not a bad thing. This number tends to vary based on the industry a company operates in. In addition, Southwest has used their financing to increase their earnings which can be seen with their slight increase in the 2012 profit margin. In 2012 Southwest Inventory ratio was 36.43, meaning that Southwest sold and replaced their inventory 36.43 times. Southwest Inventory Turnover is continuing to decrease which, can be seen from 2010 to 2012.

INDUSTRY TOTAL RATIOS AND AVERAGES

Company Alaska Air Group Allegiant Travel Co. Copa Holdings GOL Linhas Delta Continental Hawaiian holdings Jet Blue LATAM Airlines Skywest Airlines Total Average Southwest Fixed Earnings Per Net Margin Return on Return on Receivables Inventory Assets Asset Share USD % Assets % Equity % Current Ratio Debt/Equity Turnover Turnover Turnover Turnover 11.15 19.00 15.72 71.22 3.39 2.74 101.68 107.04 3.87 2.49 9.95 24.89 31.76 58.40 5.41 0.78 219.49 96.96 8.28 3.83 19.81 48.50 31.39 71.55 3.50 2.17 49.39 58.56 2.89 1.95 -7.59 -25.57 -20.58 -124.50 3.01 7.46 63.75 78.72 6.19 2.36 2.90 7.05 5.63 103.85 1.87 14.69 68.39 138.54 5.08 2.37 1.16 1.40 1.13 -15.68 2.70 36.90 72.13 86.09 6.15 2.74 3.06 10.97 13.25 69.18 3.00 4.58 67.68 84.94 8.62 3.66 0.99 7.05 4.55 18.14 3.08 4.64 141.06 104.54 2.74 1.93 0.97 6.23 4.52 23.68 1.16 3.53 40.30 124.91 2.13 1.46 2.17 4.18 2.77 8.73 6.90 3.48 82.39 36.00 3.46 2.30 4.46 10.37 9.01 28.46 3.40 8.10 90.63 91.63 4.94 2.51 1.32 7.60 5.02 16.62 3.16 5.30 184.06 138.67 3.89 2.67

The Return on Equity for 2012 increased considerably from 2.71 in 2011 to 6.07. This is a strong indication of Southwests ability to generate more profits with shareholders equity. In addition, investors are more willing to invest in a company if they see a favorable return on equity. Southwest Profit Margin in 2010 was 4%, then in 2011 dropped to 1%. However, in 2012 it increased by 1%. This indicates that Southwest Airlines in 2010 had a good handle on cost

Individual Company Report: Southwest Airlines compared to previous years; however, the following year decreased by 3%, and increased by 1% in 2012. This indicated that they lost control of spending but is show signs of bouncing back.

Southwests Return on Assets for 2012 is 2.26, which a solid return. This shows how well the company is using assets to generate earnings. This ratio is another key figure that investors rely on to determine if they should invest in the company. Southwest displays a return figure that will entice investors. Southwests Earnings per Share of .52 in 2012 is a good indicator that it is still very profitable considering the recent decreasing trends; this is a 30% increase from 2011. Southwests ratios are very close to the average ratios of the Airline industry. These figures also show how competitive Southwest is when compared to the top Airlines in the industry.

Southwests Earnings per Share is below average by 3.14, mostly due to competitors alliances that are able to generate more EPS than the rest of the airlines (Even the top Airlines in the industry such as Delta, Continental and Skywest) however, if Southwests EPS are compared against the top 5 Airlines in the industry, the difference is minimal, For example, (See Table 2) Deltas EPS is 2.9 which beats Southwest by approximately 1.6 EPS; On the other hand Continental which is ranked # 2 in the top 10 Airlines according to (About, 2013.) Southwest EPS beats Continental by 0.16 which is strong indicator that the company has good profitable opportunities in this rough industry. Southwests Net Margin dropped in 2011 putting the company few points under the Industrys average, (-2.77%). By realizing that profits were decreasing Southwest cut costs and addressed this issue in 2012, showing considerable growth during 2012. This trend shows potential for Southwest for the near future. Southwests return on assets percentage is clearly just below average by approximately %4, Southwest, compared to

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Individual Company Report: Southwest Airlines the top airlines in the industry, is ranked second place (0.61% below Delta Airlines, which is ranked first.) This demonstrates how profitable Southwest is relative to their total assets in regards to generating earnings within the industry. Return on equity, defines the percentage of shareholders equity; it measures the companys profitability with the money invested by shareholders. In comparison with the top 3 companies in the industry (Delta, Continental and Skywest) Southwest is not far from the top airlines in the US and Canada, it appears 2011 was a difficult year for southwest, but as shown on the statistical tables above, theyve bounced back nearly propelling their Equity ratio to where it was in 2010 again, which shows its investors the capability that Southwest has to make sure their investments return positive profits. Southwest current ratio is below average by 0.24; however, Southwests current ratio is above its competitors Delta and Continental, which shows the capability that Southwest has to pay their short terms obligations over the top competitors in the industry. Receivables turnover ratio, measures the companys effectiveness of extending credits as well as collecting debts and how effectively the company uses its assets. Southwest, reflects a ratio of 184.06 above the industrys average by 93.43, this ratio shows how effective Southwest is with debt collection and increasing cash. Southwest debt to equity ratio has increased over the past 3 years, by increasing their debt to equity indicates what portion of debt and equity the company uses to finance their assets; Southwest shows few figures below the average on this ratio by 2.80. Inventory turnover determines how many times the inventory has been purchased and sold, which it means a company is replacing their inventory by selling inventory resulting in revenues. Southwests inventory turnover ratio is above the average by 47.04 just above the leader Delta Airlines.

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Individual Company Report: Southwest Airlines Management Structure

Southwest Airlines senior leadership includes its Board of Directors, Company Officers and their Leadership Briefing Group. The organizations senior leaders supports what they call a triple bottom line policy Performance, People, Planet. Southwests Board of Directors currently has ten members, all of which are3 considered independent with the exceptions of: Chairman of the Board, President, and Chief Executive Officer. The chart depicted below shows the current management structure of Southwest Airlines (courtesy Southwestairlines.com).

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Individual Company Report: Southwest Airlines Employee Relations Policies

Southwest Airlines has a positive employer-employee relationship thank to how it views and treats their employees. The organization has a policy: Employees come first, customers come second and stockholders come third. Their rationale is that when employees are treated right they are in turn going to treat customers right which should then create repeat customers which will benefit the stockholders. The mission of Southwest Airlines employee relations policies is to promote effective and respectful relationships with all of their employees, as well as the unions that represent their employees. The following statement made by a Southwest employee is a great example of the policys effectiveness: We are in the customer service business, we just happen to fly airplanes. Southwest Airlines values the relationships that they have with their employees and the labor organizations that represent them. This lasting relationship has contributed to the remarkable success of the airline.

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Individual Company Report: Southwest Airlines State of the Industry & Competitive Analysis

The airline industry in general (specifically the United States Market portion for Southwest Airlines) is a profitable business where competition thrives. According to the airline data project (2012) here are some interesting statistics from the United States airline market: 100 certified passenger airlines operate over 11 million flight departures per year. U.S. airlines carry over 1/3 of the worlds air traffic. 825 million passengers in 2012. U.S. Airlines reported in aggregate $247 million first quarter operating profit despite a $1.8 billion larger fuel bill in 2012. U. S. Commercial aviation contributes to over 8% of the U.S. Gross Domestic Product.

There are three major competitors within the United States market, Continental United (the largest,) Delta-Northwest (2nd largest) and Southwest-AirTran. Although the industry is performing very well, there are some issues that Southwest, and the industry itself are facing. According to CAPA (2013) they will be facing high costs, rising fares, pilot shortages, increasing industry legislation/regulation, labor management (unions,) consolidation costs and steeply rising fuel costs. Regardless of these hurdles, there are an increasing amount of travel surveys that are indicating that leisure travel will rise again this year, especially in the United States. This momentum, along with passenger acceptance of higher fees should prove the industry will continue to thrive within the near future.

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Individual Company Report: Southwest Airlines Southwest Airlines plans to augment their growth as well through expanding to new domestic markets including: Branson, Charlotte, Flint, Rochester, Portland, and Wichita. They also plan to expand outside of their traditional U.S. market by debuting flights to the Caribbean, Central America, Latin America and Mexican markets by 2015. Regardless of the hurdles ahead, Southwest Airlines has been Americas preferred airline for over 30 years. They are poised to remain profitable and strong for years to come.

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Individual Company Report: Southwest Airlines Conclusion

In conclusion, Southwest Airlines is true to its mission and dedication to quality service for customers. Through incorporating all the right ingredients for success, they have succeeded within their industry and have secured their place in the hearts and minds of the American people along the way. Southwest Airlines has maintained its status as one of the most profitable and successful airlines in existence today by keeping up to date with technology and finding new ways to build value for stakeholders while remaining focused on all the right financial objectives.

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Individual Company Report: Southwest Airlines References

2012 marks beginning of next chapter in US airline industry | CAPA - Centre for Aviation. (n.d.). Retrieved December 5, 2013, from http://centreforaviation.com/analysis/2012-marks-beginningof-next-chapter-in-us-airline-industry-65485 About Southwest - Southwest Airlines. (2013). Retrieved December 5, 2013, from http://www.southwest.com/html/about-southwest/index.html Airline Data Project. (2012). Massachusetts Institute of Technology. Retrieved November 23, 2013, from http://www.marketwatch.com/investing/stock/TJX/profile Bloomberg Business week, Ratios and Financial information, 2013. Retrieved from http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=LUV Business Travel Survey: Airline Profits Within Reach For Third Consecutive Year - Business Travel News. (n.d.). Retrieved December 5, 2013, from http://www.businesstravelnews.com/StrategicSourcing/2012-Business-Travel-Survey--Airline-Profits-Within-Reach-For-Third-ConsecutiveYear/?ida=Airlines&a=btn Lauer, Chris. (2010). Southwest Airlines. Secaucus, NJ, Greenwood Publishing Group. Top 10 Airlines in the US and Canada (Air Travel, 2013. Retrieved 12/08/2013, from (http://airtravel.about.com/od/basedinnorthamerica/tp/top10na.htm) Our History - By Date - By Date - Southwest Airlines Newsroom. (2013). Retrieved December 5, 2013, from http://www.swamedia.com/channels/By-Date/pages/history-by-date Southwest Airlines Co. (2012). 2012 annual report to shareholders. Retrieved from http://southwest.investorroom.com/?int=GFOOTER-ABOUT-INVESTOR

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Individual Company Report: Southwest Airlines

Total Passengers on U.S Airlines and Foreign Airlines U.S. Flights Increased 1.3% in 2012 from 2011 | Bureau of Transportation Statistics. (n.d.). Retrieved December 5, 2013, from http://www.rita.dot.gov/bts/press_releases/bts016_13

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