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SWA Case Study

Professor Williams

Group 2 Bernard, Colon, Earl,

Walker

Southwest Airlines: LUV Conquers All

From the start Southwest faced difficult challenges. Three planes and three cities was a drop in

the bucket, to the competition already established n the larger metropolitan areas. Forecasters

said they would end up belly up. Today they are public company traded on the NYSE with

current shares trading at $42.82. In 2015 Southwest was named by Forbes as the best airline

for career minded people.

Since 1971 Southwest Airlines has turned heads with their unique strategies. Starting with a

mission statement of “The mission of Southwest Airlines is dedication to the highest quality of

Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company

Spirit. For forty-four years Southwest has delivered. Truly a company that has exceeded all

expectations and become a jet setter in the Airline industry.

Southwest mission statement clearly defines the goal to” Connect people to what’s important

in their lives through friendly, reliable, low cost air travel”. The people continue to meet and

exceed them. Given the nickname and later the stock ticker of LUV, employees show the love

by offering the best in customer service, friendliness and social responsibility. Southwest.com

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states the following regarding the LUV campaign instilled in the employees. Southwest has

been in LUV with our Customers from the very beginning. Therefore, it's fitting that we began

service to San Antonio and Houston from Love Field in Dallas on June 18, 1971. As our Company

and Customers grew, our LUV grew too! With the prettiest Flight Attendants serving "Love

Bites" on our planes, and determined Employees issuing tickets from our "Love Machines," we

changed the face of the airline industry throughout the 1970s. Then in 1977, our stock was

listed on the New York Stock Exchange under the ticker symbol "LUV." Over the ensuing years,

our LUV has spread from coast to coast and border to border thanks to our hardworking

Employees and their LUV for Customer Service.

Southwest has a list of over 28 values they put into practice every day, Highlights include

“Desire to be the best, treat others with respect, Demonstrate proactive customer service,

Safety and Reliability” and maybe the most important one of all “Have Fun”. These values are a

major influence in the way Southwest conducts business and have kept them at the top of their

game.

Southwest Airlines four major strategies has helped them reach their goals and place them in a

highly competitive position. The low-cost, future minded, employee driven strategy has given

them a differentiated advantage.

Starting with a simple no frills service, flying only Boeing products and the practice of not

serving meals has kept operation cost to a minimum while still meeting the customer’s needs.

These strategies ensured that they were able to handle the aftermath of 9/11 when airline

travel decreased dramatically. Again this strategy carried them through the recession that saw

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many of their competitors struggling to survive. They did not have to make drastic decisions to

survive the heavy blows dealt from the aftermath of the attack and the financial crisis seen

around the world. Pay-cuts were the worst part of the recessions and aftermath. Again

employee loyalty came through as employees choose to work for less money rather than find

employment elsewhere. The tactics of having highly motivated employees ensure that

employees enjoy their jobs. Motivated employees make better Southwest number one in

customer service. Happy people do happy things and this shows in the great lengths they are

willing to go to make a single customer happy.

Having a differentiation strategy of a frequent flyer program and not charging for luggage

unless overweight or excessive amounts. The rewards program is unique in the option that any

flight any day can be purchased with Rapid Rewards. Recently a partnership with Chase Bank

N.A. to offer credit cards that earn points has increased business and satisfied customer’s

needs. Unlike competitors, who have complex rules for using their rewards system,

Southwest’s clear and concise simple rewards are a major source of differentiation keeping

them on top.

External Analysis

Introductions

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Although young in the market at 44 yrs of age, Southwest Airlines, based in Dallas Texas, has

become one of the most respected no frills air travel. Always the Odd-ball, using the bucking

the "norm" perception that has helped them stand out in the market. The end of the year 2015

will conclude the Air-Tran merger. With the exploitation of the domestic strength it holds in the

US market, they look to take on the international market. Using Houston's Hobby, its 6th largest

base based on number of seats deployed. They will offer flights to Cancun, Mexico City, Puerto

Vallarta, Los Cabos and San Jose, Costa Rica and Belize City, Belize.

Even with the recent successes Southwest Airlines still faces numerous obstacles to stay on the

top of the game. The need to maintain low cost fares while continuing the culture of LUV

continue to plague those in charge.

Strengths

1. Financial stability-

Recording its fifth consecutive quarter of record profits during the 2nd quarter of 2014,

Southwest Airlines was the first airline to be given "investment grade status". Alaska Air Group

is the only other airline to receive this grade. Maintaining profitable during the financial crisis of

2008. Maintaining a strong balance sheet, the end of 2nd quarter of 2014 they held a leverage

of 37% and cash in hand of 4 billion USD. The beginning of 2014 Southwest generated 1.6 billion

of free cash flow. In June of 2014 a reduction of debt and capital leases were at 1.5 billion.

Southwest has meet and exceed economies of scale a tough goal for this industry.

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2. Iconic Branding

Deemed the top travel brand and fifth overall brand by The Business Journals in the American

Brand Excellence Awards it is one of the most recognized brand in the US. Advertising in high

profile sporting events and social media is it consistently exploiting its heritage. A important

differentiation in a commodities industry, not going along with the crowd and forgoing revenue

is perhaps albeit and not easily accountable.

3. Strong domestic demand

The US market is in strong demand with an 8% passenger unit revenue growth for the 2nd

quarter of 2014. This is another record SWA holds the largest gain by an airline. Data from

CAPA and OAG suggests that Southwest is the second largest airline in the domestic market

when measured by seat deployment. Delta holds 22% while Southwest holds 20% .Southwest

was the largest domestic carrier by total passenger with 101.3 million passengers noted for

2009. The US DOT reported that SWA as of June 2009 was the largest air carrier in the US,

measured by the number of originating passengers boarded. This offers a comfortable

competitive advantage. With the AirTran merger and the merger of American and US Airways

Southwest was able to move forward in key markets located in Washington National and New

York LaGuardia. Resulting in a strong position in eight of the top 10 US cities in 2014.

4. Employee Moral

Employee philosophy includes eleven primary attitudes:

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Employees are number one. The way you treat your employees is the way they will treat

your customers.

Think small to grow big.

Manage in the good times for the hard times.

Irreverence is okay.

It’s okay to be yourself.

Have fun at work.

Take the competition seriously, but not yourself.

It’s difficult to change someone attitude, so hire for attitude and train for skill.

Think of the company as a service organization that happens to be in the airline

business.

Do whatever it takes

Always practice the Golden Rule, internally and externally.

This philosophy and the LUV attitudes of the staff are a considerable assets in the busy world of

today. A little personal service is going a long way.

Weaknesses

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1. Lack of revenue opportunities

Rejecting the standard yet again and not "unbundling" as the competitors have done in

recent years. Ancillary revenue remains the greatest opportunity to increase medium and

long term revenue.

2. Limited flights available

Southwest has few flights offered in the morning and until 2015 offered no service to

international destinations

3. Contract obligations with Boeing

They are currently dependent on a single maker of aircraft, preventing them from

purchasing from other suppliers that may offer larger less expensive aircraft.

Opportunities

1. Population growth

The rise in the elderly and Hispanic population are potential markets that Southwest is

currently in the process of exploiting by the expansion into the international flight, beginning

with flight to Mexico and South America in 2015

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2. Increased air travel

Despite the regulations and complaints of the newly established TSA air travel is predicted

to increase rapidly in the next ten years.

4. New technology

Newly developed technology is making air-travel safer and more pleasurable by offering Wi-

Fi, streaming movies and up to date weather reports being broadcast on board. Being able to

offer these and maintain a low-cost fare will continue to make SWA number one.

Threats

1. Reduced air travel

The ever changing political and financial markets can have a huge impact on the cost of fuel

which in turn can reduce travel in any form especially air travel. A decline in leisure travel due

to terrorism and a depressed economy. The development of high speed rails can reduce the

number of short flight commutes. Along with the probability of rising airfares is likely due to the

inability to implement more cost cutting measures.

2. Increased Competition.

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Competing on the basis of customer service, low cost, frequency and convenience of booking

travel along with frequent flyer benefits is a tough gig. Competitors are taking notice and

strategically positioning themselves to maintain their current standings. With many competitors

having assets such as large fleets and branding this can be a difficult hurdle for Southwest in the

coming years

3. Shortcoming on Shareholder expectations

Failing to meet expectations will decrease the value of the company’s stock causing the

company difficulty to raise capital needed in both short term endeavors as well as long term

financing such as the purchase or expansion of the number of aircraft.

Conclusion

Overall, Southwest has strengths in its firm operating strategy, strong fleet operation and

dominant market position in North America. Their brand image was well noted by the domestic

market, and now by the acquisition of AirTran Holdings, Southwest has a good opportunity to

expend its market internationally, which has seen to be one of its main weakness in the past. Its

conservation growth strategy can be seen as the double side edge, which has delayed its

globalization, but meanwhile prevent it’s involvement with the unfamiliar competitive market.

Mixture of both conservative and fast growth strategies could be the best way of its future

development.

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Southwest Airlines Internal Analysis

As we take a look at the foundation of Southwest Airlines, we will assess their internal

resources, capabilities and core competencies, discerning their strengths and weaknesses.

Southwest has a continuous mission and vision dedicated to their employees, community, our

planet and stakeholders, with the intent of achieving high quality customer service involving

warmth, friendliness, individual pride and company spirit. Southwest has continued to maintain

an annual profit for 42 consecutive years, highlighting 2014 as an exceptional year of

achievements. Moreover, as Southwest continues to be the best in its industry, dissecting what

is good and deficient can provide a forecast of future success.

ORGANIZATIONAL RESOURCES

STRENGTHS

Financial, physical and intangible assets for Southwest remain strong for liquidity with

an increase of 4% fiscal year 2014 to LY. According to Southwest Airlines’ Balance Sheet

and Cash Flow Reports, “As of January. 21, 2015, the company had approximately $3.1

billion in cash and short-term investments, and a fully available unsecured revolving

credit line of $1billion.”

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As for human resources, it is considered this to be one of Southwest’ greatest strengths. They

consider “the people” to be one of their greatest assets. Southwest has branded themselves

with a reputation for creating innovative programs to generate an increase in productivity and

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create ideas to cut cost for a continual affordable airfare for the customer. They have also

formulated a collaboration of experience, knowledge, judgment and skills into their legendary

“Southwest Way”, which teaches the art of the “warrior spirit”, “the servant’s heart”, and a

“fun-LUVing attitude”. The Implementation of these fundamental behaviors can be considered

a competitive advantage. Southwest’ dedication to their employees also consist of:

Benefits for part-time and full-time employees such as:

1. 401K retirement savings plan

2. Profit sharing plans

3. Medical and prescription

4. Vision

5. Dental

6. Adoption assistance

7. Pre-tax benefits

8. Mental Health Employee assistance Program

9. Life insurance

10. Accidental death and dismemberment

11. Long-term disability

12. Dependent life insurance

13. Healthcare Spending account

Having these benefits available to all employees is definitely an advantage for a great retention

rate within their company.

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Training is essential to ensure the greatest experience from a customer perspective and

it gives employees the confidence to perform their job to the highest ability. According

to Southwest overview they provide their employees with “internal training programs

but also encourage employees to attend external training programs to further specialize

in their respective fields.”

Engagement and recognition are an essential part of appreciating the “beLUVed”

employees of Southwest. This program consist of:

14. 40th Anniversary Celebration

15. Employee Survey

16. Employee Recognition Programs

17. Volunteers of LUV

18. President’s Award

19. Winning Spirit Award

20. Operation Kick Tail

21. Star of the Month

22. Heroes of the Heart

23. Hockey Day

All of these programs are implemented on a monthly and annual consistent basis to show how

important the “people” of Southwest are.

WEAKNESSES

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In human relations in regards to customer service:

24. Southwest currently has limited space to carry freight and cargo.

25. They do not offer international flights.

26. Their longer trip destinations do not offer better rewards than their short ones.

27. They currently do not provide segmented seat options.

In human relations in regards to their employees:

28. They currently have a reduction in line supervisors which can lead to employees that do

not practice company principles.

ORGANIZATIONAL CAPABILITIES

STRENGTHS

Organizational Processes and routines for Southwest has intelligent strategy that allows

them to provide their customers with non-stop flight and minimizes connections, delays,

and total trip time (Mary Coulter 250).

Their planes have identical designs, making them easy to operate and maintain.

Southwest has provided planes with fuel savings, performance-enhancing engines.

Customers are not assigned seats, instead, they are assigned by boarding groups.

Southwest chooses to schedule flights out of local or downtown airports, making it

convenient to travel close to home.

Southwest has utilized the use of technology to efficiently process customers, allowing

them to bypass waiting in lines at ticket and gate counters.

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The decision for Southwest to upgrade to new devices used to navigate ground crews,

adding another level of safety.

WEAKNESSES

Southwest planes can only carry small amounts of cargo and freight.

Booking flights are only available through Southwest airlines.

CORE COMPETENCIES

STRENGTHS

Distinctive Capabilities for Southwest includes:

Advance purchases of fuel buyout options to smooth out fluctuations in fuel costs.

Commitment to delivering low airfare to their customers through cost leadership.

Southwest employees has a reputation for being the friendliest.

Strict policy on customer satisfaction. They have a motto which states, “Do whatever

you can to keep the plane flying”, motivating employees to go above and beyond.

Quick turn-around trip of 25 minutes vs 40-60 the competitions average.

Southwest airlines’ “culture”, being committed to the health and well-being of their

employees

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Strategic Analysis

Strengths

1. Financial resources

2. Focused on short routes

3. Bags fly free

Weaknesses

1. Heavy dependence on passenger revenues

2. Growth strategy (also considered a strength)

3. Online and Phone reservations only

4. Lack of Business/First Class services

5. Limited cargo space

Southwest Airlines 2014 income was approximately $1.4 billion. In the 4th quarter, Southwest

reported earnings of $404 million, which equaled to 59 cents a share. AirTran Airways boosted

Southwest’s earnings by $500 million due to the company flying its last flight in December

Opportunities

1. Wright Amendment repeal

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During Oct-2014, Southwest Airlines began offering direct flights to some of its strongest

markets without connecting flights.

Southwest operating service include Baltimore, Denver, Las Vegas, Orlando and Chicago

Midway. Other new service includes flights to Atlanta, Fort Lauderdale, Los Angeles, Nashville,

LaGuardia, San Diego, Orange County, Tampa and Washington National.

Given its position in all of these markets the new direct flights from Love Field should reel up

quickly and make a positive revenue contribution.

2. New international operations

Southwest introduced its own-branded international service during 2014. AirTran acquisition

and updating their reservations system, have helped Southwest to offer service to Aruba,

Cancun, Los Cabos, Nassau, Montego Bay and San Juan.

In addition to the international service, Southwest has pierced most of the domestic US (85

domestic destinations as of 21-Sep-2014). Its ability to offer its large passenger base access to

near international leisure destinations is considered to be progress.

3. Potential partnerships with foreign international airlines

Southwest Airlines commonly operate only domestic services.

787 and A350 airline operators will open up new Europe-US routes - despite some resistance

Threats

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1. ULCCs

Southwest is no longer the low fare leader as Spirit Airlines, Frontier Airlines and Allegiant Air

began offering low fares to stimulate air travel. Southwest should maintain certain fare levels to

control costs.

The airline is no longer really low-fare or low-cost, they do not offer any of the amenities of the

full service airlines. Southwest need to innovate their strategy in order to compete with the

other airlines.

2. Costs are rising and likely to rise further

Southwest labor negotiations are making it tough to predict its unit cost increases in the

medium to long term. For the moment its unit costs are in line with major airlines, rising 2% in

1H2014 as passenger unit revenues grew a healthy 6% during that time.

Salaries, wages and benefits represented 31% of the airline’s total top-line expenses.

In early 2014 the union representing ramp workers sued Southwest after the airline requested

that employees at Chicago Midway prove they were ill during Jan-2014 after inadequate

staffing and a winter storm caused disruptions at the airport.

Strategic Issues and Recommendations

Southwest strategic issues can be summarized into two categories. Southwest maintain its low

cost advantages in the airline industry. Second, Southwest will need to be able to maintain its

growth through its current operational strategy.

Maintaining Cost

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Most of the discount airlines have attempted to challenge Southwest’s position for low cost. As

CASM increases, Southwest has become vulnerable and at time, appears to be losing its market

advantage. Southwest needs improvement with non-fuel cost management. Many of the other

operational costs will be harder to control with its current market position, Southwest can take

steps to guarantee that it can maintain its low cost advantage.

Strategic Alternatives

The goal of Southwest Airlines is to make air travel available to people who could not afford it.

Their profit-making strategy includes keeping prices at rock bottom prices. The company is

more interested in minimizing prices, instead of capitalizing on profits. Their ultimate goal is

supported by the following lists of strategic objective, followed with alternative capable of

accomplishing the respective objectives.

Strategic Objectives and Alternatives:

Corporate Culture – define and enforce the company’s personality.

Fun-loving

Fight to survive

Strategic Planning – grow with discipline

Plan for future scenarios

Cost Control – lower costs result in lower prices.

Maintain employee needs satisfaction

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Practice all cost saving ideas, procedures, and equipment

Quality Control – do one thing better than anyone else.

Service short-haul, regional routes…for peanuts

Customer Service – Motivated employees will produce satisfied customers.

Accommodate the special needs of customers

Hiring – hire for attitude, train for skill.

Recruit fun-loving employees, then provide them with skills

Training – Encourage employees to think like they own the place, because they do!

Employee ownership encourages hard, cost-effective work

Employee morale – celebrate your mistakes.

Plane pulling contests

Work at a place where wearing pants is optional

Marketing and Advertising – break the rules

Leadership – always think like an entrepreneur.

Learn from the past to foresee the future

The success of Southwest Airlines is determined by hosting the strongest balance sheet and

highest credit rating in the industry. Southwest’s pricing strategy involves the application of

price resistance to perfect a system-wide peak and off-peak pricing system. Their strategy

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involves dividing the short-haul market into executives and pleasure travelers. This results in

cheaper flights in the evening. In the event of full aircraft, the fare-determination strategy does

not call for an increase in the fare. Instead, they increase the number of flights. Their hiring

strategy involves a panel interview, complete with a presentation by the prospective employee.

Diversification is the best way to ensure a steady revenue stream, although Southwest is not

known for servicing, shipping or reservations. The best way for Southwest to diversify is simply

by expanding their market. Saving and investing a portion of retained earnings could also

smooth the peaks and valleys of travel fluctuations. A shakeout strategy must be developed to

overcome intense pricing competition and cyclical effects of the industry. Investors selected to

work for Southwest Airlines must have a proven track record. Professional financiers only quote

the textbook and seldom have any common sense or profit to back their knowledge.

Financial analysis

Southwest Airlines Strengths

Southwest Airlines 2014 income was approximately $1.4 billion. In the 4th quarter, Southwest

reported earnings of $404 million, which equaled to 59 cents a share. AirTran Airways boosted

Southwest’s earnings by $500 million due to the company flying its last flight in December

Southwest Airlines Opportunities

During Oct-2014, Southwest Airlines began offering direct flights to some of its strongest

markets without connecting flights.

Southwest operating service include Baltimore, Denver, Las Vegas, Orlando and Chicago

Midway. Other new service includes flights to Atlanta, Fort Lauderdale, Los Angeles, Nashville,

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LaGuardia, San Diego, Orange County, Tampa and Washington National.

Given its position in all of these markets the new direct flights from Love Field should reel up

quickly and make a positive revenue contribution.

New international operations

Southwest introduced its own-branded international service during 2014. AirTran acquisition

and updating their reservations system, have helped Southwest to offer service

to Aruba, Cancun, Los Cabos, Nassau, Montego Bay and San Juan.

In addition to the international service, Southwest has pierced most of the domestic US (85

domestic destinations as of 21-Sep-2014). Its ability to offer its large passenger base access to

near international leisure destinations is considered to be progress.

3. Potential partnerships with foreign international airlines

Southwest Airlines commonly operate only domestic services.

787 and A350 airline operators will open up new Europe-US routes - despite some resistance

Southwest Airlines Threats

Southwest is no longer the low fare leader as Spirit Airlines, Frontier Airlines and Allegiant

Air began offering low fares to stimulate air travel. Southwest should maintain certain fare levels

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to control costs.

The airline is no longer really low-fare or low-cost, they do not offer any of the amenities of the

full service airlines. Southwest need to innovate their strategy in order to compete with the

other airlines.

Costs are rising and likely to rise further

Southwest labor negotiations are making it tough to predict its unit cost increases in the

medium to long term. For the moment its unit costs are in line with major airlines, rising 2% in

1H2014 as passenger unit revenues grew a healthy 6% during that time.

Salaries, wages and benefits represented 31% of the airline’s total top-line expenses.

In early 2014 the union representing ramp workers sued Southwest after the airline requested

that employees at Chicago Midway prove they were ill during Jan-2014 after inadequate staffing

and a winter storm caused disruptions at the airport.

Strategic Issues and Recommendations

Southwest strategic issues can be summarized into two categories. Southwest maintain its low

cost advantages in the airline industry. Second, Southwest will need to be able to maintain its

growth through its current operational strategy.

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Maintaining Cost

Most of the discount airlines have attempted to challenge Southwest’s position for low cost. As

CASM increases, Southwest has become vulnerable and at time, appears to be losing its market

advantage. Southwest needs improvement with non-fuel cost management. Many of the other

operational costs will be harder to control with its current market position, Southwest can take

steps to guarantee that it can maintain its low cost advantage.

Strategic Alternatives

The goal of Southwest Airlines is to make air travel available to people who could not afford it.

Their profit-making strategy includes keeping prices at rock bottom prices. The company is more

interested in minimizing prices, instead of capitalizing on profits.

The success of Southwest Airlines is determined by hosting the strongest balance sheet and

highest credit rating in the industry. Southwest’s pricing strategy involves the application of

price resistance to perfect a system-wide peak and off-peak pricing system. Their strategy

involves dividing the short-haul market into executives and pleasure travelers. This results in

cheaper flights in the evening. In the event of full aircraft, the fare-determination strategy does

not call for an increase in the fare. Instead, they increase the number of flights. Their hiring

strategy involves a panel interview, complete with a presentation by the prospective employee.

Diversification is the best way to ensure a steady revenue stream, although Southwest is not

known for servicing, shipping or reservations. The best way for Southwest to diversify is simply

by expanding their market. Saving and investing a portion of retained earnings could also

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smooth the peaks and valleys of travel fluctuations. A shakeout strategy must be developed to

overcome intense pricing competition and cyclical effects of the industry. Investors selected to

work for Southwest Airlines must have a proven track record. Professional financiers only quote

the textbook and seldom have any common sense or profit to back their knowledge.

In observation to the history of Southwest Airlines, they have accomplished over 39 years of

profitability. Some of the core attributes contributing to their accomplishment consist of:

legendary customer service, functional strategies and low cost advantage for (operations,

maintenance and training). Highlighting a few of their strategic strengths, Southwest Airlines

strategically focuses primarily on point-to-point travel for more direct trip flights, shortening the

passenger trip length. Also, the decision to use a specific type of aircraft “Boeing 737” for simple

scheduling, operations, maintenance and training. Southwest also benefited from fuel hedging

in which they pay up front for the right to buy fuel at certain, lower prices (Strategic

Management in Action 250).

As of 2014, Southwest hit 42 years of profitability. According to the shareholders 2014 annual

report their net income of $1.1 billion easily surpassed the previous annual record in 2013.

Excluding special items, Southwest’s record earnings surged over 73 percent, compared with

2013. Other strategic initiatives launched since 2010 also helped propel our earnings

performance, including the Rapid Rewards, frequent flyer program, the addition of the Boeing

737-800 model, and the fleet modernization program. To commemorate the historic year,

record results, and transformation, Southwest Airlines unveiled a bold new look for their aircraft

and branding. They believe the completion of their strategy to transform, along with the record

results, positions Southwest exceptionally well for the future (2014 annual report to

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shareholders 1). In review of the financial ratios for Southwest, we can observe liquidity,

leverage, activity and profitability.

Southwest Airlines Annual Balance Sheet Financial Ratios

Fiscal year is Jan - Dec. 2014 2013 2012 2011 2010Cash 1.28B 1.36B 1.11B 829M 1.26BMarketable Securities 1.71B 1.8B 1.86B 2.32B 2.28BReceivables 365M 419M 332M 299M 195MInventory 342M 467M 469M 401M 243MRaw Materials - - - - -Work In Progress - - - - -Finished Goods - - - - -Notes Receivable - - - - -Other Current Assets 709M 418M 702M 764M 517MSouthwest Airlines Total Current Assets 4.4B 4.46B 4.23B 4.35B 4.28BProperty Plant & Equipment 22.51B 20.82B 19.5B 18.42B 16.34BAccumulated Depreciation 8.22B 7.43B 6.73B 6.29B 5.77BSouthwest Airlines Net Property Plant & Equipment 14.29B 13.39B 12.77B 12.13B 10.58BInvestment & Advances - - - - -Other Non-Current Assets - - - - -Deferred Charges - - - - -Intangibles 970M 970M 970M 970M -Deposits & Other Assets 534M 530M 633M 626M 606MSouthwest Airlines Total Assets 20.2B 19.35B 18.6B 18.07B 15.46BNotes Payable - - - - -Accounts Payable 1.2B 1.25B 1.11B 1.06B 739MCurrent Portion Long-Term Debt 258M 629M 271M 644M 505MCurrent Portion Capital Leases - - - - -Accrued Expenses 1.57B 1.23B 1.1B 996M 863MIncome Taxes Payable - - - - -Other Current Liabilities 2.9B 2.57B 2.17B 1.84B 1.2BSouthwest Airlines Total Current Liabilities 5.92B 5.68B 4.65B 4.53B 3.31BMortgages - - - - -Deferred Taxes/Income 3.26B 2.93B 2.95B 2.64B 2.58BConvertible Debt - - - - -

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Long-Term Debt 2.99B 2.63B 2.88B 3.11B 2.88BNon-Current Capital Leases - - - - -Other Long-Term Liabilities 1.26B 771M 1.12B 910M 465MSouthwest Airlines Total Liabilities 13.43B 12.01B 11.6B 11.19B 9.23BMinority Interest - - - - -Preferred Stock - - - - -Common Stock Net 808M 808M 808M 808M 808MCapital Surplus 1.32B 1.23B 1.21B 1.22B 1.18BRetained Earnings 7.42B 6.43B 5.77B 5.4B 5.4BTreasury Stock 2.03B 1.13B 675M 324M 891MOther Liabilities -738M -3M -119M -224M -262MSouthwest Airlines Shareholders Equity 6.78B 7.34B 6.99B 6.88B 6.24B

Southwest Airlines Total Liabilities & Shareholders’ Equity

20.2B 19.35B 18.6B 18.07B 15.46B

Financial Ratios & Measures

LIQUIDITY 2014Current assets 4.4 Billion = .743 Current Liabilities 5.92 BillionCurrent ratio indicates that Southwest struggles to meet its’ short term obligations.Current assets minus inventories 4.39 Billion =.75Current Liabilities 5.92 Billion

Acid ratio indicate that Southwest cannot pay their current inventories and should be looked at with extreme caution.LEVERAGE 2014Total debt 13.43 Billion= .66 Total assets 20.2 BillionDebt ratio indicates that 66 percent of Southwest assets are financed by debt. This percentage of debt can be a challenge to manage. Even though Southwest has more assets than debt it can be considered a high risk level company.Total Debt 13.43 Billion= 2Total Equity 6.78Billion

Considering that in 2014 Southwest has a high debt/equity ratio it indicates that they have been aggressively financing their growth debt, which can result in volatile earnings as a result of the additional interest expense.Profits before interest and taxes 355 Million= 2.6

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Total interest charges 139 MillionSouthwest’ (times interest earned) is 2 ½ times higher than its interest expense for the year which indicates that creditors can trust that they are able to pay their interest payments when they come due.ACTIVITYSales 13.111 Million= .38Inventory 342 MillionInventory turnover for Southwest is .38 which means they sold over a third of their inventory.

Southwest Airlines Co. annual net profit (loss): 2008 to 2013

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Source: CAPA - Centre for Aviation and airline reports

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Growth of Southwest Airlines Co. annual net profit (loss): 2009 to 2013

Source: CAPA - Centre for Aviation and airline reports

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United States of America capacity by airline (% of seats): 15-Sep-2014 to 21-Sep-2014

Source: CAPA - Centre for Aviation and OAG

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United States of America top 10 domestic cities by arrivals: 15-Sep-2014 to 21-Sep-2014

Source: CAPA - Centre for Aviation and OAG

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Southwest Airlines global top 10 hubs/bases/stations by seats: 15-Sep-2014 to 21-Sep-2014

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Growth in Southwest Airlines Co. annual operating revenue: 2009 to 2013

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Group 2

Source: CAPA - Centre for Aviation and airline reports

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Group 2

WORKS CITED Organizational Research: Southwest Airlines, Brandin Lea June. 3, 2014

https://www.linkedin.com/pulse/3-traits-high-potential-people-lou-adler

Southwest Airlines SWOT Analysis, McWick, INC 2007-2014

www.businesstune-ups.com/Southwest-Airlines-SWOT-Analysis.html

Southwest Airlines CO 2013

https://www.southwest.com/html/about-southwest/index.html?clk=GFOOTER-ABOUT-ABOUT

http://customwritingtips.com/component/k2/item/13594-external-analysis-of-southwest-airlines.html?tmpl=component&print=1

http://centreforaviation.com/analysis/southwest-airlines-swot-financial-strength-is-mainstay-but-cost- and-culture-challenges-loom-large-187714

https://airbornesurfer.wordpress.com/2012/01/25/southwest-airlines-bringing-the-luv-a-strategic-recommendation-proposal/

http://economics-files.pomona.edu/jlikens/SeniorSeminars/pandora/reports/southwest.pdf

http://www.123helpme.com/southwest-airlines-view.asp?id=167345

http://www.mcafee.cc/Classes/BEM106/Papers/UTexas/351/Southwest.pdf

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Group 2

http://www.arichall.com/academic/papers/mgmt485-southwest-strategy.pdf

www.rapid-business-intelligence-success.com/southwest-airlines-swot-analysis

37