1. Southwest Airlines Economics

2. History

Founded in 1966

Southwest has over 436 new jets that have destinations to about every city in the United States

the largest domestic airline in the world

airline has increased their wages and has taken additional responsibilities

3. Overview

flourishes to be the airline with the most operating costs

been able to remain profitable enough with all the revenue that comes in over the past 35 years

many terrorist attacks and economy issues, Southwest Airlines have been sensitive to decreases in consumer demands.

However, as a result of its fuel hedges, Southwest is lessvulnerable to oil pricesthan other airlines, whose profits can diminish when oil prices rise

4. OverviewFinancial Performance for 5 years 5. Economic Real GDP

REAL GDP is a term used to describe a domestic product in constant dollars

Real GDP can then measure individual purchasing by taking the Real GDP and dividing it by the population of an area

The graph below shows the Real GDP of Southwest Airlines compared to other Airline companies(Art Diamond Blog, 2008).

6. Economics Forecast- Real GDP

The chart below gives an exact replica of how much the US Airlines and other airlines, Southwest included, has suffered since the terror attack and has overcome these obstacles in2005:

• (Japan Aircraft Development Corporation, 2006, p. 4).

Another chart shown below shows the relationship between the Traffic growth and the Economic growth or Real GDP. Yield represents the fast decline of airfare since 1985.

• • • • (Japan Aircraft Development Corporation, 2006, p. 11).

7. Economic - Unemployment

Unemployment rate is low

According to Ed Stewart, Director of Public Relations, employs over 30,000 individuals

receives over 100,000 job applications a year

lowest turnover rate

pay good salaries but also has outstanding benefits

• • company offers their employees several perks, such ask free airfare, competitive salary, insurance benefits and a 401k

8. Economics Forecast - Unemployment

Increase in the fulltime employment for Southwest Airlines to be 5.2% an increase between 2006 and 2007.(Hoovers, 2009) and (MarketWatch, 2008).

While other Airlines were closing their doors and laying off their employees Southwest Airlines is opening up operations in other states to help decrease these states unemployment rates

2006 2007 2006 2007 Fulltime equivalent EmployeesFulltime equivalent Employees Fulltime equivalent Employees Fulltime equivalent Employees 32,664 34,378 32,664 34,378 9. Economics Inflation Rate

The graph is from 2003 to 2007 indicates that Southwest Airlines is not suffering from inflation but has increased their revenue passenger miles.

Inflation Southwest Airline revenue passengers carried

20072006200520042003

Total88,713,47283,814,82377,693,87570,902,77365,673,945

10. Economics Forecast- Inflation Rate

These numbers show an increase in revenue passengers carried between 2006 and 2007 to be 5.8%.

2006 2007 2006 2007 Revenue passenger carriedRevenue passenger carried Revenue passenger carriedRevenue passenger carried 83,814,823 88,713,472 83,814,823 88,713,472 11. Economics Interest Rates

The Federal Reserve has reduced its goal interest rate to between 0% and 0.25%, down from 1% which was already the lowest target rate in a half century(Yahoo News, 2008).

The Southwests use of interest rate hedges is to reduce the instability of net interest income by better matching the reprising of its assets and liabilities(Wright, 2007).

12. Economics Forecast Interest Rates 13. Economics Oil and Gas Prices

Southwest Airlines not affected by the rise and fall of oil and fuel prices too much because they began to take a closer look at the price of jet fuel when it increased over a decade ago

14. Economics Forecast Oil and Gas 15. Economics - Producer Price Index (PPI)

Producer Price Index (PPI) measure price change from the perspective of the seller and looks at three areas of production are industry, commodity, and stages of processing.

Producer Price Index (PPI) states after the September 11 th , 2001 terrorist attacks, airline travel decreased dramatically across the Nation. When travelers began to fly again, airlines experienced a reduction in fares by 5.9% during 2001.

The fuel Producer Price Index (PPI) shows how the fuel prices triple from 1990s to 2007.

16. Economics Forecast- PPI

• • (U.S. Department of Transportation, 2001) (U.S. Department of Transprotation, 2002)

Price Index (Dec-1992=100) Oct-00 Oct-01 Scheduled air transportation - passenger 173.7 186.4 Scheduled air transportation - passenger percent change from same month previous year 19.87 7.33 All air transportation (including nonscheduled) 151.2 159.8 All air transportation (including nonscheduled) percent change from same month previous year 13.60 5.69 Scheduled air transportation - cargo 97.9 102.9 Scheduled air transportation - cargo percent change from same month previous year 1.29 5.11 Price Index (Dec-1992=100) Aug-01 Aug-02 Scheduled air transportation - passenger 184.5 182.0 Scheduled air transportation - passenger percent change from same month previous year 9.39 -1.37 All air transportation (including nonscheduled) 159.0 158.9 All air transportation (including nonscheduled) percent change from same month previous year 7.51 -0.06 Scheduled air transportation - cargo 100.9 109.3 Scheduled air transportation - cargo percent change from same month previous year 3.63 8.35 17. Impact of Past and Current Fiscal Policies

2003, Southwest Airlines fuel expenses were lower (0.012 per ASM) compared to other airlines

2005, fuel cost was 85 per cent and the fuel has been hedged at $26 per barrel.

• When the oil prices reached $68 per barrel Southwest Airlines save $196 million in the second quarter in 2005.

• This allowed Southwest Airlines to have a competitive advantage over airlines who did not participate in hedging according to the website (ezinearticle, 2008).

2007, had total sales of $ 9, 862.0 M with a one year growth of 8.5%.

• The companys net income was reported to be $645.0 M which indicates a growth of 29.3% .

• Southwest currently employs 34,378 employees as of December, 2007 this is also a growth of 5.2% according to the website site for (southwest, 2008).

2008, Southwest Airlines held approximately $2.5 billion of cash collateral from fuel hedge counterparties

• oil prices decline in Southwest Airlines fourth quarter

18. Impact of Past and Current Monetary Policies

1977, Amendmentto Federal Reserve Act:

• Past and present monetary policies have two objectives:

• • to support maximum sustainable output

• • employment and to support steady prices(About the Feds., pg. 1).

The current economy is experiencing an expansionary open market purchase,

• tends to lower interest rates to encourage consumers to purchase:

• • homes

• • cars

• • stocks and bonds.

19. Budget Deficits

Southwest Airlines has gone from steady flow of traffic to reducing fleet growth due to rising oil prices

Southwest must find new and richer avenues to reach higher revenues due to high fuel prices and steep costs from engine overhauls

two most recent changes that have effected and reduced the recent quarter

• voluntary buyout program offered to senior employees

• one cent share charge from changes in the income tax law

Southwest did a lotof fuel hedging in the past year and benefited from $189 million in favorable cash settlements

• • (Market Watch, 2009)

20. Strategic Initatives

strategic initiative is to find new ways to better the company, while helping the employees and communities become healthier, fuctional, and team players

• Southwest Airlines vision for a sustainable future is one where there will be a balance in their business model between Employees and Community, the Environment, and our Financial Viability.

• Customers, Employees, and Stakeholders, they will strive to lead their industry in innovative efficiency that conserves natural resources, maintains a creative and innovative workforce, and gives back to the communities in which they live and work.

• Southwest Airlines understands that environmental improvements happen over time and they are committed to do that journey

• • (Southwest Airlines, 2008).

21. Final Recommendations

• to maintain the hedging on the oil and gas pricing to maintain the cost of increases and deflect any spicks in inflation rates that may occur due to unseen circumstances.

• By maintaining, the performance that has maintained the airlines the success of sales and unemployment will stay stable and keep from lowering. A company that keeps their employees and customers successful will maintain success.

• The Producer Price Index will adjust depending on current economy and economy pricing.

• on interest rates is to pay off whatever the company can then use that money which was being spent on those loans to help pay off the rest. Reduce the debt and to help reduce what owed.

22. References ArtDiamondBlog. (2008).Southwest Airlines in Danger. Retrieved on December 17, 2008 fromrtdiamondblog.com/archives/economics/ Hoovers, Inc. (2009).Southwest Airlines Company Overview.Retrieved on December 31, 2008 fromwww.hoovers.com/southwest-airlines/--ID 11377--/free-co-factsheet.xhtml 2008 Japan Aircraft Development Corporation. (2006).Worldwide Market Forecast for Commercial Air Transport 2006- 2025.Retrieved on January 6 th , 2008 fromhttp://www.jadc.or.jp/wmfo6.pdf. Yahoo News. (2008).Feds cut key interest rates to near zero.Retrieved December 17, 2008 from website:http://news.yahoo.coms/ap/20081217/ap feds cut cut key interest rates to near zero . U.S. Department of Transportation. (2001).Producer prices of air transportationservices.Retrieved January 5, 2009, from Bureau of Labor Statistics Web site: http://www.bls.gov/ppi. U.S. Department of Transportation. (2002).Producer prices of air transportation services .Retrieved January 5, 2009, from Bureau of Labor Statistics Web site: http://www.bls.gov/ppi. Williams, J. L. (2007).History and Analysis-Crude Oil Prices.Retrieved on January 7, 2009 fromhttp://www.wtrg.com/prices.htm.