Southwest Airlines Troubles

8/7/2019 Southwest Airlines Troubles

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Southwest AirlinesSouthwest AirlinesMD SHAHBAZ KHAN & ROSHAN KUMAR

Skyline Business School



Table of ContentsTable of Contents

� Tyler

� Facts & Flight Method

� Porters 5 Forces

� Looking Into The Future

� Nicole

� Mission Statement & Timeline

� Industry Life Cycle

� Financial Stability

� Emily

� In The Beginning

� Value Chain

� RBV ± � Resources & capabilities

� Competitive advantage

� VRIO

� K eigha

� Leadership & SW cities

� P.E.S.T.E.L



In The Beginning«

³As company legend goes,

the very first route map

was drawn on a cocktail napkin

during a meeting betweenHerb Kelleher and Rollin King.´

http://www.southwest.com/programs_services/adopt/about_southwest.html



http://www.southwest.com/about_swa/customer_service_commitment/customer_service_commitment.pdf



Timeline«Timeline« June 18, 1971

Began airline service

Flights to Houston, Dallas, and San Antonio

1977

SW stock listed on NYSE as "LUV"

1982

Appointed Herbert D. Kelleher

President, CEO, & Chairman of the Board

1984

#1 in customer satisfaction (4th year in a row)

1990

announce billion dollar revenue mark

Officially declared a "Major" airline! May 2003

Top ranked domestic passenger airliner

2006

Southwest¶s 34th consecutive year of

profitability

http://www.southwest.com/about_swa/airborne.html



Facts / Milestones«Facts / Milestones« Low-fare, high frequency

Point-to-point carrier

Largest domestic U.S. carrier

4

th

largest major airline in AmericaMore than 34,000 Employees

Fly more than 64 mil. passengers a year

58 destination cities (59 airports)

More than 3,200 flights a day

Top competitors:

AMR Corp.

Continental Airlines

JetBlue

http://www.swabiz.com/about_swa/press/factsheet.html#Leadership



Flight MethodFlight Method

"point to point" (city to city)

NOT hub-and-spoke model Domestic flights only

Quantity focused

Flies only Boeing-737 aircrafts

No assigned seats

No mealsOnly snacks: peanuts

No electronic entertainment

No fees to change same-fare

ticketshttp://ostpxweb.ost.dot.gov/aviation/airlinebusinessmodel.htm

Few amenities / no ³frills´«



Leadership / Structure:Leadership / Structure:

Herbert D. K elleher Executive Chairman of the Board

Gary K elly

Vice Chairman of the Board

and

Chief Executive Officer

Colleen BarrettPresident, Secretary,

and Director

http://gallery.swamedia.com/photos/value=open/type=jpg



Map: SW Cities / DestinationsMap: SW Cities / Destinations



ECONOMIC

When economic conditions are unfavorable:

- Airliners very susceptible / vulnerable

- Discount airlines see profits

- People look for cheaper travel options

POLITICAL

- Deregulation in 1978

- 1st big political win for airlines

- Post 9/11:

- Gov. helped 2 major airlines

get out of financial trouble



P.E.P.E.SS..TT.E.L.E.L

TECHNOL

OGICAL

Some airlines have

converted to e-tickets,

and have a self

checking machine.

Many people use the

internet to compare

prices to find the best

option for their trip.

SOCIAL

Flying on planes to get

to where you need to be

has been the norm for thelast 30 years and will

continue to be the norm

in to the foreseeable

future.

As more and more

Spanish speakers come to

live and travel in the US

there is more need for

airlines to be bi-lingual.



P.E.S.T.P.E.S.T.EE..LLLEGAL:

Legal issues have hindered

airlines from making a full

³9/11 recovery.´

According to the Air

Transportation Association:

³Airlines constitute about 2/3 of

F AA-controlled flights but pay

more than 90% of the bill. In

return, the airlines are stuck using

a 1950s ground -based, radar -

dependent navigation system with

legacy facilities and processes.´

ENVIRONMENTAL:

Airlines have cut

prices and offered

expensive frequent

flyer programs just to

grab customers away

from other airlines.

The regular airlines

are starting to get away

from the hub system

and switch to the point

to point system that SW

uses.



Porter¶s 5 ForcesPorter¶s 5 Forces

� High cost of entry

� High competition

� Many other forms of transportation

� Many other airlines

� Suppliers

� Food and drink

� Coke products

� Fuel Sources

FocalFocal

FirmFirm

BuyersBuyers

SuppliersSuppliers

EntryEntry

RivalryRivalry

SubstitutesSubstitutes

IndustryIndustry

ThreatThreat



Industry Life CycleIndustry Life Cycle

Customer K nowledge

Increasingly sophisticated

Over 50% ticket price in 25

years

Expenses

Drastic compression of airlineyield premium

Exploring new ways to revenue

Labor and fuel (largest costs)

The first mover effect

Security

Carrier¶s assets, personnel assets

and customers interest

Regulations enforced by

government

Anticipating, managing, paying

Innovation will be key!



Resources & CapabilitiesResources & Capabilities

TANGIBLE:

Financial

Physical

Technological

Organizational

INTANGIBLE:

HumanInnovation

Reputation

http://www.mdcegypt.com/Pages/Management%20Approaches/Strategy,%20Business%20Plan/Develop%20or%20validate%20the%20Strategic%20Plan.asp#ii._Value_Chain

_Analysis_



Value Chain ModelValue Chain Model

www.web.hec.gov.pk/.../0/chp_value_chain.jpg



Resources

and

Capabilities

Valuable? R are?

Costly

to

Imitate?

Exploited

by

Organization?

Financial Yes Yes Yes Yes

Physical Yes Yes Yes Yes

Technological Yes Yes Yes Yes

Organizational Yes No Yes Yes

Human No Yes Yes No

Innovation No Yes Yes Yes

Reputation No No Yes Yes

V.R.I.O.V.R.I.O.



Financial R atiosFinancial R atios

Financial R atio Numerator Denominator

Current Ratio Current Assets Current Liabilities

Quick Ratio Cash + Cash Equivalents +

Accounts Receivable

Current Liabilities

Average collection period

in days

Average Accounts Receivable x

365

Sales

Short Term Liquidity

Long Term Solvency


Debt-to-Total Assets Total Liabilities Total Assets

Debt-to-Equity Total Liabilities Total Shareholder¶s

Equity

Long-Term-Debt-to-

Total-Capital

Total Long-Term Debt Total Shareholder¶s

Equity + Total Long-

Term Debt



Financial R atios Cont.Financial R atios Cont.


Return on Sales Net Income Sales Revenue

Return on Stockholder¶s

Equity

Net Income Average Stockholder¶s Equity

Asset Turnover Sales Average Total Assets AvailablePretax Return on

Operating Assets

Operating Income Average Total Assets Available

Earnings Per Share Net Income ± Dividends on

preferred stock, if any

Average Common Shares

Outstanding

Financial R atios Numerator Denominator

Price-Earnings Market price of common

share

Earnings per Share

Dividend-Yield Dividends per common share Market price of common share

Dividend-Payout Dividends per common share Earnings per share

Dividend & Market Price

Profitability



Financial StabilityFinancial Stability

S hort Term Liquidit y Ratios

Current ratio 0.90

Quick ratio 0.56

Average collection period in days 10.05

Long Term S olvency Ratios

Debt-to-total assets 21%

Debt-to-equity 45%

Long-term-debt-to-total-capital 20%

P rofitabilit y Ratios

Return on sales 5.5%

Return on stockholder's equity 7.7%

Asset turnover 0.65

Pretax return on operating assets 6.9%

Earnings per share (1.28)

Market P rice and Dividend Ratios

Price earnings 163.9

Dividend yield 0.02%

Dividend payout 3.0%

(EVA) Economic Value Added (in millions)

NOPAT 857

Operating Income 725

WACC 8.6%

EVA 53,306

AirTransport IndustryAverage EVA 15,032

Southwest above average by 38,275



In The News«In The News«

³Airlines are constantly in search of new revenue sources.

Travelers have gotten used to paying for food on board. But it'sgoing to be harder to adjust to fees for services that used to be

free.´

~ C hris McGinnis

The Ticket editor (travel newsletter)

http://biz.yahoo.com/hmoney/070430/043007_airline_fees_moneymag.html?.v=4



Future Plan«Future Plan«

GO

GREEN!

FollowFollow--up systemup system

Entire meal servedEntire meal served

Seat classesSeat classes

Differentiate strategiesDifferentiate strategies

Other services (shuttle)Other services (shuttle)

Consider amenity changeConsider amenity change

Expand internationally?Expand internationally?

Penetrate more domesticallyPenetrate more domestically



Documents

Southwest Airlines Troubles