Southwest AirlineStrategic Management Case Study
Yoshives Belizaire Zhongling Cao Shawn Parker Dave Saucier
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Overview
Company Overview History Mission & Vision Objectives & Strategies Current Issue
New Mission and VisionExternal Assessment
Industry analysisOpportunities and threats EFE Matrix
CPM Matrix
Internal AssessmentStrengths and weaknessesFinancial Condition IFE Matrix
Strategy FormulationSWOT Matrix – (make the frame)
Space Matrix
IE Matrix
Grand Strategy Matrix
Matrix Analysis
QSPM Matrix
Strategic Plan for the FutureObjectivesStrategies
Implementation Issues EPS/EBIT
Evaluation
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
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Southwest Timeline
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From 1966 to 19714
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Dallas
San Antonio
Houston
Southwest Airlines was incorporated in Texas and commenced Customer Service on June 18, 1971, with four Boeing 737 aircraft serving three Texas cities - Houston, Dallas, and San Antonio.
Today5
Southwest Airlines is now America's largest low-fare carrier, serving more Customers domestically than any other airline. Southwest Airlines operates more than 3,000 flights a day. In 2011, Southwest led the industry with more than 1,100 pieces of electric ground support equipment, which conserves fuel and reduces emissions. May 2, Southwest acquired Orlando-based AirTran Airways and expects to complete the integration of the two airlines by 2015.
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Stock Performance6
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Global Industry Growth
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2009 2010 2011
-10
-5
0
5
10
15
20
25
Net Profit
U.S. Industry Growth
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
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Industry Fuel Costs and Net Profits 9
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Existing Vision Statement
Our vision is to expand our locations both domestic and overseas by being the largest and most profitable airline company, to achieve both short- and long-haul carriers efficiently and with low cost. Also to be an airline carrier that has the most productive workforce, to guarantee the best flight possible for each and every passenger.© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker,
Dave Saucier, UMFK
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Existing Mission StatementThe 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.TO OUR EMPLOYEESWe are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.TO OUR COMMUNITIESOur goal is to be the hometown airline of every community we serve, and because those communities sustain and nurture us with their support and loyalty, it is vital that we, as individuals and in groups, embrace each community with the Southwest Spirit of involvement, service, and caring to make those communities better places to live and work.TO OUR PLANETWe strive to be a good environmental steward across our system in all of our hometowns, and one component of our stewardship is efficiency, which, by its very nature, translates to eliminating waste and conserving resources. Using cost-effective and environmentally beneficial operating procedures (including facilities and equipment) allows us to reduce the amount of materials we use and, when combined with our ability to reuse and recycle material, preserves these environmental resources.TO OUR STAKEHOLDERSSouthwest Airlines’ vision for a sustainable future is one where there will be a balance in our business model between Employees and community, the environment, and our financial viability. In order to protect our world for future generations and uphold our commitments to our Employees, Customers, and other Stakeholders, we will strive to lead our industry in innovative efficiency that conserves natural resources, maintains a creative and innovative workforce, and gives back to the communities in which we live and work.
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
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Existing Business Strategy12
Low cost structure, which is designed to allow it to profitably charge low fares
Free checked bags Loyal employees
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New Vision Statement
Become the number one airline in the world
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New Mission Statement
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
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Here at Southwest Airlines our mission as a company is to provide affordable direct flights (1). We want to also accommodate our customers with the best all around flight service from the moment they arrive at the airport to the time they arrive at their destination (2). At Southwest our service and philosophy is to fly safe with high frequency, low-cost flights that allow for timely arrival with limited travel from the airport(6).Constantly looking for new ways to satisfy our customers by staying atop technological advances and services (4). Not only do we look after our customers but also the planet by limiting waste and recycling used materials (8). We provide equal employment opportunities and a stable working environment with room for advancement (9).Continuing to grow as a company and developing to be the top airline and meet the demand of consumers is key (3). We believe that air travel should be provided at an affordable rate in order to satisfy our customers (5). Providing the lowest fairs and the highest quality service is our guarantee to customers (7).
External Audit
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Industry Market Analysis16
Source from BTS© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker,
Dave Saucier, UMFK
Scheduled Passengers Carried
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Opportunity18
11 out of 12 U.S. airline charge second checked bag. Deregulation on global sky policies in international countries
(Canada). Business and leisure travel is beginning to increase due to
the recovering US Economy. 9 out 12 U.S. airline offers business/first class. Traveler traffic is expected to grow by 3.5% through 2019 as
the United States recovers from the recession. Delta partner with 22 other airlines. Over 58 million U.S. citizen travel to overseas in 2011. Boeings’ new plane models could burn 70% less fuel than
conventional planes and travel farther. Research shows that economy passengers are willing to
spend up to $21 on onboard services (including food and entertainment)
Threats19
Increased competition in low cost market, no longer a niche market for Southwest as there is now JetBlue, Spirit, Frontier, Public Airways and Allegiant Travel.
Introduction of ultra low cost carriers like Spirit and Frontier. The operating costs of airlines are constantly increasing, roughly
5% since 2010. High unemployment of 8.9% is preventing people from choosing
air travel. Joint ventures can negatively affect brand name for example
customer service. Transportation Security Administration (TSA) will assess an
Aviation Security Infrastructure Fee ("ASIF") on each airline. The company's ASIF liability is $3.5 million annually.
In June 2010, the Department of Transportation (DOT) proposed a new rule that would expand the Passenger Protection Rule and increase fines and penalties for airlines.
Ever-increasing costs of jet fuel [up 300% since 2000] at historical highs and continuing to rise.
Technological and capital intensive industry could prove increasing cost of planes.
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Southwest DeltaUnited Airlines
Critical Success factors
Weights Rating
Weighted Score
RatingWeighted
Score
RatingWeighted Score
0.0 to 1.0 1 to 4 1 to 4 1 to 4
Advertising 0.05 3 0.15 4 0.2 3 0.15
Organization 0.09 2 0.18 3 0.27 3 0.27
Structure 0.09 3 0.27 2 0.18 3 0.27
Customer Service 0.1 4 0.4 3 0.3 2 0.2
Global Expansion 0.06 1 0.06 3 0.18 3 0.18
Financial Position 0.08 3 0.24 2 0.16 3 0.24
Employee Deduction 0.06 3 0.18 3 0.18 3 0.18Management Experience 0.05 2 0.1 4 0.2 3 0.15
Customer Loyalty 0.09 3 0.27 3 0.27 4 0.36
Market Share 0.06 3 0.18 4 0.24 2 0.12
Product Quality 0.1 2 0.2 2 0.2 4 0.4
E-commerce 0.07 3 0.21 3 0.21 3 0.21Price Competitiveness 0.1 2 0.2 3 0.3 4 0.4
Totals 1 3.14 2.89 3.13
Competitive Profile Matrix (CPM)
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
External Factor Evaluation Matrix (EFE)
Key External Factors Weights RatingWeighted
ScoreOpportunities 0.0 to 1.0 1 to 4
11 out 12 us airlines charge for Second checked bag 0.05 1 0.05
Deregulation on global sky policies in international countries (Canada). 0.07 2 0.14
Business and leisure travel is beginning to increase due to the recovering US Economy. 0.06 2 0.129 out of 12 U.S. Airlines offers business/first class. 0.08 1 0.08
Traveler traffic is expected to grow by 3.5% through 2019 as the United States recovers from the recession. 0.03 3 0.09Delta Partnered with 22 other airlines 0.04 2 0.08Over 58 million US citizens travel to overseas in 2011 0.06 1 0.06
Boeings’ new plane models could burn 70% less fuel than conventional planes and travel farther. 0.05 1 0.05Research shows that that economy passengers are willing to spend up to $21 on onboard services( including food and entertainment 0.06 1 0.06
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Key External Factors Weights RatingWeighted
ScoreThreats 0.0 to 1.0 1 to 4
Increased competition in low cost market, no longer a niche market for Southwest as there is now JetBlue, Spirit, Frontier, Public Airways and Allegiant Travel. 0.08 2 0.16Introduction of ultra low cost carriers like Spirit and Frontier. 0.05 2 0.1
The operating costs of airlines are constantly increasing, roughly 5% since 2010. 0.04 3 0.12
High unemployment of 8.9% is preventing people from choosing air travel. 0.06 3 0.18
Joint ventures can negatively affect brand name for example customer service. 0.04 3 0.12
Transportation Security Administration (TSA) will assess an Aviation Security Infrastructure Fee ("ASIF") on each airline. The company's ASIF liability is $3.5 million annually. 0.05 2 0.1
In June 2010, the Department of Transportation (DOT) proposed a new rule that would expand the Passenger Protection Rule and increase fines and penalties for airlines. 0.03 3 0.09Ever-increasing costs of jet fuel [up 300% since 2000] at historical highs and continuing to rise. 0.07 4 0.28
Technological and capital intensive industry could prove increasing cost of planes. 0.06 2 0.12
Totals 0.98 2
External Factor Evaluation Matrix (EFE)
Internal Audit23
Organization Chart24
Southwest Net Income Growth
25
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Net Margin26
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Operating Revenues27
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Financial Information – Income Statement
(in millions, except per share amount)
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Financial Information – Balance Sheet
(in millions)
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Financial Information – Balance Sheet
(in millions, except per share amount)
Financial Information – Net Worth Analysis
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© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Net Worth Analysis (in millions)
Stockholders' Equity $6,877
Net Income x 5 890
(Share Price/EPS) x Net Income 6,594
Number of Shares Outstanding x Share Price 6,876
Method Average $5,309
Ratio Analysis32
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Southwest Delta United AirlinesLiquidity Ratios
Current Ratio 0.78 0.61 0.85Quick Ratio 0.40 0.58 0.80
Leverage RatiosDebt-to-Total Assets Ratio 0.62 1.03 0.78Debt-to-equity Ratio 1.63 -32.16 -7.50Long-term debt-to-equity Ratio 0.97 -23.06 -3.86Times-Interest-earned Ratio 3.57 2.19 1.49
Activity RatiosFixed Assets Turnover 1.28 1.74 2.63Total Assets Turnover 0.87 0.81 1.16Accounts Receivable Turnover 52.37 22.47 27.73Average Collection Period 6.84 15.55 12.71
Profitability RatiosGross Profit margins 58.86% 67.40% 61.00%Operating Profit Margin 4.43% 5.62% 4.19%Net Profit Margin 1.14% 2.43% 1.33%Return on Total Assets 0.99% 1.96% 1.54%Return on Stockholders equity 2.59% -61.17% -14.76%Earning per share 0.20 0.99 0.23Price-earnings Ratio 37.04 7.93 37.04
Growth Rations (yearly)Sales 29.36% 10.58% 6.96%Net Income -61.22% 44.01% -29.57%Earnings per share -62.90% 43.66% 108.20%Dividends per share 7.69% -
Strength33
Only Airline with 1st and 2nd bags flying free within the U.S. Is considered the largest airline carrying 104 million passengers in
2011 compared to its’ main competitor United Airlines at 96 million. Has been in the airline industry for 40 plus years. Strong brand image, Named tenth most admired Company in the world
in FORTUNE magazine's survey of corporate reputations Company is known for its great staff, loyal employees, and low
turnover rate having laid off three people in the last 25 years; hiring them back almost immediately.
Southwest.com was the second-largest travel site. The "look-to-book" ratio is twice that Travelocity and higher than any traditional retailer.
Southwest has high capacity usage due to its’ low turnaround time leading the industry at approximately 20 minutes attributed by point-to-point service versus hub-and-spoke.
Southwest is one of the 7 safest U.S. airlines Largest domestic carrier with 698 aircraft owning roughly 71% or 499
of those aircraft outright and the remaining 29% (199) aircraft being leased.
Strong financial position and cash flow with roughly $3.1B in cash and short-term investments, $800M fully available in lines-of-credit, and debt-to-capital down roughly 3% with the acquisition of AirTran.
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Weakness34
They only fly to six near-international countries and no international countries.
They are heavily dependent on one producer Boeing, and only have two aircraft they use being the Boeing 737 and Boeing-717.
They have the lowest number of morning flights in the industry.
One of the only carriers who do not offer business class or first class.
They do not offer entertainment in their flights like video or audio programs.
Southwest doesn't transfer package to other carrier. Customer has to do it on them own.
Southwest does not flight 13 states in the U.S. Southwest does not provide any meals, only drinks and
peanuts. Realized a -28% change in operating income and a -40%
change in net income from 2010. (1167839B Oper. Income / 550330B Net Income)
Increased indirect labor costs, health care up $6M, workers’ compensation up $20M, vacation pay up $48M; totaling $74M and accounting for 75% of the increase in accrued liabilities.
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Key Internal Factors Weights Rating Weighted Score
Internal Strengths 3 or 4
Only Airline with 1st and 2nd bags flying free within the U.S. 0.05 3 0.15
Is considered the largest airline carrying 104 million passengers in 2011 compared to its’ main competitor United Airlines at 96 million. 0.05 4 0.2
Has been in the airline industry for 40 plus years. 0.04 4 0.16
Strong brand image, Named tenth most admired Company in the world in FORTUNE magazine's survey of corporate reputations 0.04 4 0.16Company is known for its great staff, loyal employees, and low turnover rate having laid off three people in the last 25 years; hiring them back almost immediately. 0.05 4 0.2
Southwest.com was the second-largest travel site. The "look-to-book" ratio is twice that Travelocity and higher than any traditional retailer. 0.05 4 0.2Southwest has high capacity usage due to its’ low turnaround time leading the industry at approximately 20 minutes attributed by point-to-point service versus hub-and-spoke. 0.04 4 0.16
Southwest is one of the 7 safest U.S. airlines 0.06 3 0.18Largest domestic carrier with 698 aircraft owning roughly 71% or 499 of those aircraft outright and the remaining 29% (199) aircraft being leased. 0.05 4 0.2
Strong financial position and cash flow with roughly $3.1B in cash and short-term investments, $800M fully available in lines-of-credit, and debt-to-capital down roughly 3% with the acquisition of AirTran. 0.04 3 0.1235
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Internal Factor Evaluation Matrix (IFE)
Key Internal Factors Weights Rating Weighted Score
Internal Weaknesses 1 or 2
They only fly to six near-international countries and no international countries. 0.06 2 0.12
They are heavily dependent on one producer Boeing, and only have two aircraft they use being the Boeing 737 and Boeing-717. 0.05 2 0.1
They have the lowest number of morning flights in the industry. 0.06 1 0.06
One of the only carriers who do not offer business class or first class. 0.06 2 0.12
They do not offer entertainment in their flights like video or audio programs. 0.05 2 0.1
Southwest doesn't transfer package to other carrier. Customer has to do it on them own. 0.06 2 0.12
Southwest does not flight 13 states in the U.S. 0.05 1 0.05
Southwest does not provide any meals, only drinks and peanuts. 0.05 2 0.1
Realized a -28% change in operating income and a -40% change in net income from 2010. (1167 to 839B Oper. Income / 550 to 330B Net Income) 0.04 2 0.08
Increased indirect labor costs, health care up $6M, workers’ compensation up $20M, vacation pay up $48M; totaling $74M and accounting for 75% of the increase in accrued liabilities. 0.05 1 0.05
Totals 1 2.63
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Internal Factor Evaluation Matrix (IFE)
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Strategy Formulation37
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Source of Passenger Revenues
38
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SWOT Matrix
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Strengths Weaknesses
Opportunity
SO Strategies WO Strategy1. Add ability to purchase tickets threw mobile devices (S6, O3)
1. Provide a better variety of food that people can eat on the plane (W8, O9)
2. Start charging second checked bag (S7, S8, O1)2. Offering business/first class (W4, O3)
3. Expand international flight to Canada. (S2, O2)3. Have flights to all 50 states in the US. (W7, O6)
4. Acquire new planes that have wifi, tv access, and audio in there planes. (W2, W5, O8)
Threats
ST Strategies WT Strategy1. Aquire/merge with competitors such as Jetblue and Frontier. (S10, T1, T2)
1. Offer a business/first class to differentiate itself from other ULCC(W4, T2)
2. Purchase airline fuel refinery(S10, T8) 2. Start offering Wi-fi, videos on demand, video games, satellite radio, etc to differentiate itself from its competion, and market the changes. (W5,T2)
3. Market southwest's web site more, with the highest look-to-book ratio, there low cost flights might appealing then competitors sites(S6,T1)
SPACE Matrix40
Financial Position Score Competitive Position ScoreCash flow 4 Market share -1working capital 5 Product quality -1Inventory turnover 7 Customer loyalty -2EPS 3 Technology know-how -1Leverage 3 Product life cycle -2Liquidity 3 Capacity utilization -2
4.17 -1.50Stability Position Score Industry Position ScoreTechnological changes -2 Growth potential 5Rate of inflation -3 Profit potential 6Demand variability -4 Financial stability 4Competitive pressure -3 Extent leverage 4Barriers to entry -3 Resource utilization 5Price elasticity of demand -3 Ease of entry into market 3
-3.00 4.50
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SPACE Matrix41
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Market PenetrationMarket Development
Grand Strategy Matrix
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Quadrant II Quadrant I
Quadrant III Quadrant IV
Rapid Market Growth
Strong Competiti
ve Position
WeakCompetiti
ve Position
Slow Market Growth
Matrix Analysis
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Alternative Starategies IE SPACE GRAND BCG COUNT
Forward Integration x x 2
Backward integration x x 2
Horizontal Integration x x 2
Market Penetration x x 2
Product Development x x 2
Market Development x x 2
Related Diversification x 1
Unrelated Diversification x 1
Retrenchment 0
Divestiture 0
Liquidation 0
QSPM44
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Add meal, entertaining system,
and business/first class Add more international
and domestic flights Key factors Weight AS TAS AS TASExternal 1 to 4 1 to 4
Deregulation on global sky policies in international countries (Canada). 0.11 - - 4 0.44
Business and leisure travel is beginning to increase due to the recovering US Economy. 0.09 3 0.27 - -
9 out 12 U.S. airline offers business/first class. 0.08 2 0.16 - -
Traveler traffic is expected to grow by 3.5% through 2019 as the United States recovers from the recession. 0.13 2 0.26 3 0.39
Over 58 million U.S. citizen travel to overseas in 2011. 0.11 1 0.11 4 0.44
Boeings’ new plane models could burn 70% less fuel than conventional planes and travel farther. 0.09 - - 2 0.18
Research shows that economy passengers are willing to spend up to $21 on onboard services (including food and entertainment) 0.11 4 0.44 1 0.11
The operating costs of airlines are constantly increasing, roughly 5% since 2010. 0.06 3 0.18 1 0.06
Joint ventures can negatively affect brand name for example customer service. 0.07 - - 1 0.07
Ever-increasing costs of jet fuel [up 300% since 2000] at historical highs and continuing to rise. 0.05 1 0.05 3 0.15
Technological and capital intensive industry could prove increasing cost of planes. 0.10 3 0.3 2 0.2Total 1
QSPM45
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Internal
Only Airline with 1st and 2nd bags flying free within the U.S. 0.09 - - 3 0.27
Strong brand image, Named tenth most admired Company in the world in FORTUNE magazine's survey of corporate reputations 0.09 2 0.18 3 0.27
Southwest has high capacity usage due to its’ low turnaround time leading the industry at approximately 20 minutes attributed by point-to-point service versus hub-and-spoke. 0.1 - - 2 0.2
Strong financial position and cash flow with roughly $3.1B in cash and short-term investments, $800M fully available in lines-of-credit, and debt-to-capital down roughly 3% with the acquisition of AirTran. 0.12 3 0.36 4 0.48They only fly to six near-international countries and no international countries. 0.07 - - 3 0.21They are heavily dependent on one producer Boeing, and only have two aircraft they use being the Boeing 737 and Boeing-717.
0.07 - - 1 0.07One of the only carriers who do not offer business class or first class. 0.11 4 0.44 - -They do not offer entertainment in their flights like video or audio programs. 0.12 3 0.36 - -Southwest does not fly to 13 states in the U.S. 0.07 - - 4 0.28Southwest does not provide any meals, only drinks and peanuts.
0.1 3 0.3 - -Increased indirect labor costs, health care up $6M, workers’ compensation up $20M, vacation pay up $48M; totaling $74M and accounting for 75% of the increase in accrued liabilities.
0.06 0 01 3.41 3.82
3 Year Goal and Annual Objectives46
Year one, expand into Canada’s 10 largest cities. Expand south into Mexico’s vacation destinations
Year two, start trans- Atlantic flights into Europe, expand into more cities in Mexico and Canada, re-evaluate.
Year three, expand into South America and Asia, Australia.
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47
Increase advertising budget by 282 million to market the expansion into Canada and Mexico
Purchase 15 more planes for the extra flights
150M * 15 planes = 2.25 Billion Legal fees for expansion and terminal fees 468 Million Total cost for all three years Approximately 3,000
Million
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Strategy Selection with Year 1 Cost
EPS/EBIT48
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Recession Normal Boom Recession Normal BoomClose Price for Southwest on October 11, 2011 8.52
Common Stock Financing Debt Financing EPS for Disney on October 11,2011 0.20
EBIT 505 710 915 EBIT 505 710 915 Initial Shares Outstanding 807
Interest - - - Interest 150 150 150 Dividends on Preferred Stock 0.018
EBT 505 710 915 EBT 355 560 765 Funds Needed 3,000
Taxes 146 206 265 Taxes 103 162 222 90% of Funds Needed 2,700
EAT 359 504 650 EAT 252 398 543 10% of Funds Needed 300
# Shares 1,159 1,159 1,943 # Shares 807 807 807 Interest Rate 5%
EPS 0.42 0.59 0.45 EPS 0.61 0.86 1.12
Conclusion
Recession Normal Boom Recession Normal Boom The preferred financing option would 100% debt financing, proving the best EPS.
90% Stock – 10% Debt Financing 90% Debt – 10% Stock
EBIT 505 710 915 EBIT 505 710 915
Interest 15 15 15 Interest 135 135 135
EBT 490 695 900 EBT 370 575 780
Taxes 142 202 261 Taxes 107 167 226
EAT 348 493 639 EAT 263 408 554
# Shares 1,124 1,124 1,124 # Share 821 821 821
EPS 0.43 0.61 0.80 EPS 0.60 0.85 1.10
Projected Balance Sheet49
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
SOUTHWEST AIRLINES CO. CONSOLIDATED BALANCE SHEET / PROJECTED
2010 2011 Projected AssumptionsASSETS
Current assets:Cash and cash equivalents $ 1,261 $ 829 1,500Short-term investments
2,277 2,315 2,3843% increase in short term investments
Accounts and other receivables 195 299 314
5% increase in receivables
Inventories of parts and supplies, at cost 243 401 481 20% increase Deferred income taxes 214 263 268 2% increasePrepaid expenses and other current assets 89 238 243 2% increase
Total current assets 4,279 4,345 5,191Property and equipment, at cost:Flight equipment 13,991 15,542 17,542 2B increaseGround property and equipment 2,122 2,423 3,273 850M increaseDeposits on flight equipment purchase contracts 230 456 656
10% of 2B in new planes
16,343 18,421 21,471Less allowance for depreciation and amortization -5,765 -6,294 -7,188
increase of 894 for new planes
10,578 12,127 14,283Goodwill — 970 970Other assets 606 626 645 increase of 3%
$ 15,463 $ 18,068 35,371
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Projected Balance SheetLIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Accounts payable 739 1,057 1,21615% increaseAccrued liabilities 863 996 1,0768% increaseAir traffic liability
1,198 1,836 2,57040% increase for international flights
Current maturities of long-term debt 505 644 86935% increaseTotal current liabilities 3,305 4,533 5,731
Long-term debt less current maturities2,875 3,107 5,957
2850M long term debt portion of new strategy
Deferred income taxes 2,493 2,566 2,6172% increaseDeferred gains from sale and leaseback of aircraft 88 75 75Other noncurrent liabilities 465 910 956Stockholders’ equity: Common stock, $1.00 par value: 2,000,000,000 shares authorized; 807,611,634 shares issued in 2011 and 2010
808 808 808Capital in excess of par value 1,183 1,222 1,222Retained earnings 5,399 5,395 5,685Accumulated other comprehensive loss
(262 (224) -239Average of two prior yearsTreasury stock, at cost: 35,050,991 and 60,177,362 shares in 2011 and 2010 respectively (891 (324) -324Total stockholders’ equity 6,237 6,877 7,152
Total Liabilities and Stockholders' Equity 15,463 18,068 35,371
Projected Income Statement
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Southwest Update52
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Questions53
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK
Reference54
Southwest 2011 Annual Report Book: Lunch: How to quickly propel your
business beyond the competition Southwest.com Southwestonereport.com http://www.eturbonews.com/12003/
evolution-airline-food http://tinet.ita.doc.gov/view/m-2011-O-
001/index.html
© 2013, Yoshives Belizaire, Zhongling Cao, Shawn Parker, Dave Saucier, UMFK