A Financial Analysis Of Southwest Airlines Co

A Financial Analysis of Southwest Airlines Co.

Student Name

Institution

Company Overview

Southwest Airlines Company operates Southwest Airlines which is a major passenger airline that

provides scheduled air transportation in the United States and near-international markets. The

company has been operation for the 44

year with a profit earning of over $2.2 billion. It was

established in 1971 before commencing service on 18

of June, 1971 after acquiring three

Boeing 737 aircraft that served the three cities namely Dallas, San Antonio and Houston in

Texas. The company has witness numerous growth in the industry where by in December, 2016

it was operating a total of 723 Boeing 737 aircraft and served over 100 destinations in 40 states,

the District of Columbia, the Commonwealth of Puerto Rico, and eight near-international

countries namely: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica,

Belize and Cuba respectively. The airline expanded its territory by including three destinations to

Cuba in 2016 and also expanded its local travels to Varadero and Santa Clara from Fort

Lauderdale-Hollywood International Airport and service to Havana from both Fort Lauderdale

and Tampa International Airport. The Company also expanded its domestic footprint during

2016, with the commencement of service at Long Beach Airport, the Company’s fifth service

point in the L.A. Basin and tenth airport in California as shown by Charles & Gareth, (2010).

Southwest Airline Company has been on the limelight in the US airline industry for over three

decades since its incorporation into the airline industry. The airlines tactics of using low-cost,

commuter friendly and its point-to-point operational strategy has enabled it are establish a

perfect rapport with its customers in the US Airline industry. These tactics have played a crucial

role in the success that has sustained them for over 40 years in the market. It has generally

recorded growth from year to year making it realize more proceeds in its tenure of operation.

The steady growth of Southwest airline is visible with its capability of acquiring market shares

from the other big legacy airlines in US. The entry of more airline companies in the industry has

forced some of the companies to streamline their operation and operate on low-cost-strategies in

order to survive in the industry. This has resulted to price wars among rivals where they have

been forced to make alterations on the firms’ cost structure for the sake of remaining

competitive. The future of Southwest success depends on how it will maintain its cost

advantage and also establish greener pastures. Another concern for the airline is the rising fuel

costs where the Pandora Group advices it to implement proper measures that will ensure fuel

efficiency like acquiring new Boeing 737-700s. The company also has relatively more cash

reserves with fewer debts in their financial books, this could facilitate the company’s process of

acquiring their own Boeing 737-700s and quit from the current renting act.

Industry

The airline industry has historically been an extremely volatile industry subject to numerous

challenges. Among other things, it has been cyclical, energy intensive, labor intensive, capital

intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive. The

airline industry has also been particularly susceptible to detrimental events such as acts of

terrorism (for example, 9/11), poor weather, and natural disasters. In addition, in recent years the

industry has been significantly affected by an uncertain economy, high and volatile fuel prices,

and government sequestration and shutdown. These factors have contributed to unpredictable

demand for air travel and related cost and pricing challenges. Reflecting the numerous industry

challenges, from 2001 through 2012 total financial losses for the U.S. airline industry exceeded

$50 billion. As a result, many U.S. airlines have ceased operations or reorganized through

bankruptcy. Although the U.S. economy has experienced a moderate recovery since emerging

from a recession in 2009 and the U.S. airline industry has showed measurable improvement

during 2013, slow economic growth and lingering economic uncertainty have led to continued

industry restraint with respect to overall capacity (number of available seats). Although some

U.S. air carriers, including southwest, experienced modest year-over-year increases in capacity

during 2013, overall domestic airline industry capacity in 2013 remained below prerecession

levels. Leaner flight schedules over the past several years, along with industry consolidation,

have contributed to improvements in industry load factors in terms of revenue against

expenditure

SWOT Analysis

The airline is listed under the major airlines in US due to its revenue realization on annual basis

despite being grouped as a regional airline that is derived from its operational policy. Some of

the Southwest competitors in the market include the legacy airlines namely: Delta Air Line Inc.

AMR Corp.; UAL Corp. (United Airlines) and Continental Airlines Inc. The rivalry does not put

into consideration the fact that they have ‘different operational strategies’

Internal Rivalry

The American airline is an industry that has little differentiation on it products as it only offers

the transportation service to its passengers. This aspect makes the industry to be placed as weak

considering the current global market condition. In the last decade the industry’s top ten ranked

airline service providers have faced numerous challenges with four of them namely Delta

Airlines Inc, Northwest Airlines Corp., United Airlines and ATA Airlines being rated as

bankruptcy at some stage. In the year 2005, the US Airways Group Inc surfaced from bankruptcy

after some time. Southwest Airline made it by becoming the only airline to report profits towards

the end of 2004 at time when the economic crisis had affected the industry at its worst (Charles

W L Hill & Gareth R Jones, 22). This deterioration of the major global airlines on their financial

statements was as a result of many factors that included high prices of oil that let to price wars.

The industry was facing the restricted differentiation on product which let to increase in the price

sensitivity towards the passengers that eventually resulted to the industry opting for price

competition as the only weapon of rivalry among them. The outcome of price competition is

seen as it has totally eroded proceeds that were initially earned on large scale and the outcome is

a reduction on the price-cost margin of the majority major carriers in the US.

The US airline industry is among the vastly secured industries as Southwest is ranked with the

other top ten airlines in America. For many years the industry has been perceived as a centralized

one due to the low earnings registered by the operators in the past one decade. Apart from the

case of Jet-blue airline who ventured into the industry at the beginning of 2000 and have since

successes in competing with the other already established airlines, others who tried have failed

after being declared bankruptcy. Some of the airlines that have not been lucky include Trans-

meridian Airlines, Mesaba Airlines and Aloha Airlines, Southeast Airlines, Great Plaines

Airlines, and Midway Airlines are among those who were forced to halt their services. The entry

into this sector is viewed as restricted due to the barriers that hinder any entry. Some of the

hindrances comprise of high costs, massive financial losses reported by those operating in the

industry, lower demands by the passengers and threat of terrorism attacks (Citigroup Analyst

Report: Light, 2012). However, key shareholders in the industry are working on policies that

will create access to the capital market in order to allow other airlines to enter the market

successfully as indicated by Gary A Porter; Curtis L Norton, p 7-12. They are also working on a

way of eliminating the post-entry competition barrier that has been faced by the previous

entrants.

Strength

The Southwest Airline Company has established itself as one of the airline leader in the market

through offering relatively lower cost in the market since its inception in 1971. It is viewed as an

initiator of low cost in the transport sector. Passengers view the Southwest airline company as

the largest airline in the world based on its pricing and services offered to its customers. It has an

established personnel team and management that is diversified across the board; an aspect that

makes it efficient in handling crisis within the stipulated timeframe. Through the credit offer

program to its customers, the company has been able to increase its base through trips as

compared to the miles covered. This strength was enhanced favorable travelling price packages

and discounts to its customers plus other services that comprised of ticketless travelling and

freight delivery services. Management has invested heavily on purchase of Boeing airplanes that

enables the company to minimize on costs incurred on repairing whereas it receives bulk

discount upon making the purchase. The airline operates both short and long trips an aspect that

has made the airline to be the third largest fleet on passenger in the industry for the last decade

across the globe whereby its customers are mainly lured by the simple fare structure adopted by

the airline. The fare-structure also allows customers to make changes on their reservations

without being charged additional costs as inconvenience fee to the airline company. In general

the company has been able to maintain a healthy internal linkage among its natives, which has

increased its local demand in the US market resulted in revenue growth at 8% in 2014 that was

ranked the highest gain among the US airline companies. The company is known to be the only

carrier in the industry offering gate-to-gate connectivity through its Inflight WiFi and

entertainment program on all its 737-700 and 737-800 fleet of aircrafts in the industry. The

airline passengers are able to make use their small portable electronic devices while on board to

their destinations.

Weaknesses

Southwest airline just like other companies faces several weaknesses that it ought to work around

to cover them up. The airline has not segmented its flights into classes, an aspect that would

eventually yield more revenue. Segmentation will create more seating options through classes

like first class, business flights and common class. It will also provide more space for freight and

cargo services respectively. The airline is much reliant on Boeing Company (Boeing 737) as the

only airplane producer thus has limited options in the diversified industry. The company is

dependence on the revenue generated by passengers thus making it a weakness as in the case of

fluctuations on passenger travels the company is adversely affected. The airline has invested

mainly in domestic flights that are limited to 58+ cities with a few acceptations of flights to the

neighboring countries only, thus the airline misses out on generating revenue on international

flights to global destinations.

Opportunities

Southwest airline has much potential on both the national and global market that has not been

tapped and the airline has an opportunity to expand its flights to the international platform in

order to generate more revenue. The industry has many prospects that have not been developed

yet, both on the passenger and cargo area respectively. To be able to achieve their business

targets, the airline under the CEO Gary Kelly has ensured that all technological operations are

implemented within the airport that comprise of the installation of a Sabre reservation database

system, a production control system, the use of Panasonic tablets and Optimization engine in the

airline industry. This has seen employment of more technological apparatus in maintaining their

crews, ensuring efficient operations in the shortest time possible in both the back office and the

finance department. The airline is updating their customer database to capture as deep

information as possible. A business can’t grow without retaining their existing customers and

opening wings to new environments for new customers. Acquisition of the company’s new

database reduces overdependence on credit cards and airlines vouchers as well as enabling good

understanding of the customers especially by being able to predict their travel trends, have

information on the customer’s needs and capturing their target market. The southwestern airlines

should expand to newer markets in Canada and Mexico but maintain efficient monitoring at the

central place for easier management. This can be achieved as they already have an efficiently

functioning website. The Southwestern airlines should extend its services to cities with powerful

aircraft companies to show their presence and acquire more customers. Also, there is need for

the company to purchase newer efficient planes that have current technological components to

enhance tracking. These planes will also save running costs as they consume little fuel as

compared to the Boeing.

Threats

Southwest Airline Company is operating in a fragile and competitive industry that has witnessed

tremendous advancements in the recent years in terms of technological developments and

economic challenges across the globe. Most of the airlines have installed online booking

systems, an application that has created competition in the industry as customers are able to book

their flights at their convenience and to any available airline company. The installation of other

forms of transport like modern railway and increase in the number of airlines has led to a

reduction in the total number of passengers travelling by flights. This in turn affects a company

that has a 95% reliance of passengers travel. The economic fluctuations across the globe has also

impacted on the global prices of fuel where by companies have opted to counter it by using stern

financial outlays on fuel like fuel-hedging in order to minimize the costs. In everyday life, the

company faces stiff competition in terms of lower ticket pricing from close rivals like JetBlue

and increased complexity brought about by insecurity issues since the September 11 bombing of

the twin towers in Washington D.C. Terrorism activities across the world has impacted

negatively on air travel and the airline companies have been forced to invest heavily on security.

In ensuring the company remains top of its competitors, technology has been used to automate

most of its business operations and ensure open communication channels. This has improved

customer service response and efficient execution of duties in the airline. This is extra cost to the

company and there is need for it to invest in other ventures that will generate more income.

Financial analysis

Southwest airlines co. condensed consolidated balance sheet

The balance sheet shows the performance of the company for the last five years spanning from

2012 to 2016 respectively. The total current assets of the airline have witness a rise within the

period from $4,008,000 in 2012 to $4,998,000 in 2016. This is an indication that the company is

focusing on investing more into its current asset in with anticipation of more yield in the long

run. The total assets of the airline have also increased tremendously since 2012 at $18,596,000 to

$23,286,000 as at December, 2016. The company is focusing on pumping more investment into

the airline through purchasing of more passenger aircrafts and investing in technological

advancements at the airport in order to lure more customers into the company. This is a long

term strategy that aims at creating loyal customers who are being served by the airline.

The total liability of the company has been on a decline since the year 2012 at $16,254,000 to

$14,845,000 in 2016. This is an indication that the firm is minimizing the use of external

borrowing and making use of retained earnings from the previous year realizations. The retain

earnings retention rate has increased from $5,768,000 in 2012 to $11,418,000 as at Dec, 2016 as

shown by Investors.southwest.com, (2017). The total liability and equity has been on the rise

since 2012 to 2016, which is as a result of heavy investment into the airline in order to establish a

competitive entity that will generate more income in the future. The company aims at yielding

more returns from its investment in the long term project starting in the year 2022 onwards.

Liquidity Ratios

2016

2015

2014

2013

2012

current ratio

66%

54%

66%

79%

77%

quick ratio

61%

50%

61%

70%

69%

cash ratio

48%

41%

50%

56%

52%

Analysis:

The airline industry is a debt intensive industry due to the significant amounts of debt incurred in

the financing (either leases or purchases) of aircraft necessary for operations. The current and

quick ratios can be dramatically affected as the number of aircraft leases or debt obligations

move into the current liabilities section of the balance sheet. Additionally, as an airline expands

operations and service to new cities, it incurs additional liabilities in the form of gate and ticket

counter leases at the new airport destinations as witnessed by the airline expansion and

acquisition of new modernized aircrafts. The quick ratio of the company has been retain under

1:1, which is considered to be the benchmark value for this ratio. It is preferred as it normally

excludes inventory and other current assets that cannot be readily converted into cash. Cash ratio

indicates the firms’ ability to meet its short term obligation and is calculated by: (cash +

marketable securities) divided by current liabilities. It shows the level of the firm’s cash and

near-cash investments relative to their current liabilities without using accounts receivable.

From the figures above, it is evident the cash and near cash assets are maintained at equilibrium

level in all the financial years above.

Cash flow income statement

From the calculation of the company, it is evident that that the total revenue realized over the

past five years has been on the increase from 2012 at $17, 088, 000 to $20,425,000 in Dec, 2016.

From the income statement, the net profit of the firm has grown immensely from $ 421,000 in

2012 to $ 2,224,000 in the year 2016. The growth is an indicator of profitability as it puts a value

on the amount a company takes in once all costs of production, depreciation, tax, interest and

other expenses have been deducted.

Profitability ratios

2016

2015

2014

2013

2012

gross margin

70%

59%

53%

operating margin

18%

21%

12%

pre-tax margin

17%

18%

10%

profit margin

11%

pre-tax ROE

42%

47%

27%

16%

15%

After Tax ROE

27%

30%

17%

10%

12%

Analysis:

Gross profit and gross profit margin are used to assess whether the profits realized by a firm are

able to cover its operating expenses in that trading cycle. Southwest Airlines has a relatively high

gross profit rate, primarily because of low operating costs. Low operating costs is one of

Southwest Airlines’ company claim to fame over the past 40 years of operation. It is the

company’s slogan to ensure that costs are kept low, also the fares which in turn provides

customers the freedom to fly.

Gross margin profit is used for comparison of the firms’ gross profit and its sales revenue. It also

indicates the earnings by the firm in comparison to the costs required for the production of the

services. In overall, the airline recorded high gross profit ratios across the five years. This is an

indication that the company has a higher efficiency on its core operations and has the ability to

cover its operating expenses, fixed costs, dividends, and depreciation, whereas still providing net

earnings to the company (Investors.southwest.com, 2017).

Operating margin indicates the profitability and efficiency level of the company. It is simply the

percentage of the firm’s sales that covers up the additional operating expense. The operating

margins have improved since 2012 to 2016, the company is currently well equipped to pay for its

fixed costs and interest an aspect that has enabled them to survive the economic slowdown and

still be able to offer low-pricing in the industry. The other profitability ratios include pre-tax

margin which accounts for non-operating expense, pre-tax R.O.E and after tax R.O.E

respectively.

Table 2: Comparison of the growth rate on terms of EPS for the last five years both at the

Southwest airline Company and the industry at large.

Growth

Company

Industry

EPS(MRQ) vs Qtr. 1 Yr. Ago

35.49%

23.61%

EPS(TTM) vs TTM 1 Yr.

Ago

(0.7%)

159.59%

5 Year EPS Growth

72.89%

39.78%

Sales (MRQ) vs Qtr. 1 Yr.

Ago

2.57%

3.03%

Sales (TTM) vs TTM 1 Yr.

Ago

3.18%

2.66%

5 Year Sales Growth

5.46%

8.96%

5 Year Capital Spending

Growth

17.27%

25.32%

Analysis:

The Price-Earnings Ratio of a firm measures how confident the public is in the ability of the

company to increase their revenue in the company. Southwest Airlines has a high ratio of

35.49% comparable to the industry at 23.61%, indicating that the public feels that the net income

of the company is steadily growing at a fast pace. The most popular profitability ratio is

Earnings per Share (EPS). This is one of the easier ratios to use when comparing companies

because many firms include this ratio on their Income Statement. Earnings per share gives a

picture of the current net income in a particular period to the number of outstanding shares of

stock. The rate shows the company is yielding returns from its investments that in turn yield

more profits to the company. The company performed poorly with a (0.7%) E.P.S/TTM whereby

the industry registered 159.59% within the year 2016. However, the company has recorded

growth on its E.P.S within the last five years at the rate of 72.89% which is relatively high

compared to the 39.78% of the industry. Sales of the airline are at a growth rate of 5.46% slightly

below the industry one at 8.96% respectively. The company is targeting at improving on its sales

through various strategies that foresee proper yields from 2020 onwards (James, 2017). The

capital spending growth of the company is recorded at 17.27% compared to 25.32% of the

industry, an indication of future prospects for the company in the volatile industry.

Table 3: Efficiency comparison of Southwest Airline Company against the industry

Efficiency

Company

Industry

Asset Turnover

0.89

0.81

Inventory Turnover

17.16

130.99

Revenue/Employee

329.02K

415.58K

Net Income/Employee

39.66K

51.80K

Receivable Turnover

29.39

34.38

Analysis

Southwest airline recorded a high turnover of assets in 2016 at 0.89 compared to 0.81 of the

industry, an indication that the firms’ asset have increased over the period. Its inventory turnover

is recorded at 17.16 as the company is able to sale and replace its inventory at this ratio

compared to 130.99 of the general industry. The efficiency of the revenue/employee is at

329.02K compared to 415.58K of the industry, an indication that the company has a high

productivity level and is utilizing all its available resources at the disposal. The receivable

turnover for the company is performing effectively in the market at 29.39 compared to 34.38 of

the prevailing rate in the industry (Analytics, 2017).

Table 4: Dividend comparison in the Industry

Dividend

Company

Industry

Dividend Yield

0.92%

1.39%

Dividend Yield 5 Year Avg.

0.64%

0.75%

Dividend Growth Rate

42.35%

93.26%

Payout Ratio

13.51%

5.52%

Analysis

Dividend Yield is used to measure the returns on stock purchased in the market by a company.

The dividend-yield for Southwest Airlines is extremely low operating below 1%, indicating that

the company is most likely reinvesting their profit in the future expansion of the company. From

this, the investors who wish to receive a large cash return on their investment each year would

not invest in Southwest Airlines as it will take time to start paying high rates of dividends. Its

main focus is on reinvesting the profits in terms of retain earnings. From the table above, it is

evident the company has witnessed growth on its dividend for the past five years at 42.35% and

is anticipating a high growth rate in the next five years in the industry. The payout ratio for the

company is at a low rate of 13.51%, an indication that the company prefers to retain a larger

share of its earning in the company. This is aimed at reinvesting the retained earning with

anticipation of more yields in the long run. The Dividend payout ratio measures the percentage

that a company is able to pay out to its investors in form of dividends. As we can see, Southwest

Airlines has a lower dividend-payout ratio (13.51%), an indication that most of their profit is

being reinvested into the growth of the company

Table 5: Showing the long term debt & capital obligation

Year

2012

2013

2014

2015

2016

Long term

debt &

capital

obligation

3,259,000

2,191,000

2,627,000

2,541,000

2,821,000

Ratio

(long term

debt…/

total

equity)

3,259,000/

6,992,000

= 0.466

2,191,000/7,3

36,000

=0.323

2,627,000/6,77

5,000

=0.388

2,541,000/7,3

36,000

=0.346

2,821,000/8,44

1,000

=0.334

Analysis

As evident from the above table there is a decreasing trend in all of the above ratios from 2012 to

2016 respectively. This is an indicator of a rising stability of Southwest Airlines Company and

the improving ability of the company to meet its long-term obligations successfully without

being in danger of encountering net losses or insolvency.

Table 6: Income & Revenue

Year

2014

2015

2016

Operating revenue

$18,652,000

$19,820,000

$20,425,000

Operating income

$2,225,000

$4,116,000

3,760,000

Net cash from

operating activities

$2,902,000

$3,238,000

$4,293,000

Net cash used in

Investing activities

$1,727,000

$1,913,000

$2,272,000

net cash used in

financing activities

$1,248,000

$1,024,000

$1,924,000

Net income

$1,136,000

$2,181,000

$2,244,000

Analysis

The table above highlights how the company has spent the revenue collected for the last three

years. The operating revenue for the company has witnessed growth since the year 2014 to 2016

improving from $18,652,000 to $20,425,000. Also, the operating income has been on the rise in

the span of the three years with a drop in 2016 in the industry as shown by Analytics, (2017).

The firm’s investment and financing activities have taken lions share from the net earnings of the

company as shown in the table above. With the large investments within the last five years in the

industry like the acquisition of AirTran back in 2011 has resulted on the growth of the net

income as shown above for the span of the three years respectively.

Recommendation

The company has established itself among the passengers using local flights through various

strategies set to lure passengers to use their airline. Through their ‘Bags fly free’ program, it has

fully served them over a span of time that enabled it distinguish itself from its competitors in the

organizational market. Also the airline has opened up a grace window that allows its customer to

reserve their tickets without being charged any fees. Southwest has lost relatively much revenue

that would be collected from these avenues in the industry. Thus, there is need for the company

to venture into other avenues that will generate more income and also improve the firms’ image

in the industry. The fee collected from the other sources will automatically supplement the ticket

revenue collected from the passengers. This will boost its ranking among the other competitors

in the industry and will also enhance its total income collected. This will boost its ancillary

revenue and enable it to compete effectively with other leaders in the industry.

Secondly, there is need for the airline to institute strategies that will aim at ensuring an increase

in the carrying capacity of its flights to its respective destinations. With the acquisition of

AirTran. This will enable it to start operating into other cities with more passenger population

and expensive airports across the America airline industry. If the airline is set to maintain its

low-operating costs in the industry commonly referred to as Cost per available seat mile

(CASM), it ought either increase its prices or increase the capacity of their aircrafts to

accommodate more passengers in order to collect more revenue from the flights. The company

through its board approved the purchase of 73 Boeing 737-800s within the period of 2012-2017

which is aimed at increasing the flight capacity to destinations with many passengers of the

company. Griffin recommends expanding this mandate and expediting delivery if possible by the

airline management. Since slots at these larger, more congested airports have fixed costs

regardless of plane size, operating larger aircraft can be more profitable if the demand can

sustain it. By implementing the larger 737-800s in their fleet, Southwest will also be improving

the profitability of long-haul flights. At present, Southwest offers some, but still relatively few

long-haul flights. By expanding capacity, they can add longer routes at similar levels of

profitability to shorter ones. With larger planes, the marginal expense of additional customers is

reduced while they bring in the same revenue, allowing for more profitability. The risk here is

that the demand must be sustainable so as to consistently fill the larger planes, or operating

losses on these flights are likely. These 737-800s would allow for the continued growth they

desire, without necessarily entering the most congested markets, or at least only in limited slots.

Thirdly, the airline should also consider venturing into additional international destinations

within the continent as the acquisition of the above aircrafts will definitely allow for more

flexibility with routes over the water, such as that of the Caribbean destinations that was recently

introduced. The near-international flights will provide a significant growth opportunities for

Southwest if they can maintain the same low-cost structure that has made them so successful.

AirTran already has access to some of these markets, which should help Southwest transition to

full service. Southwest is also in the process of revamping the technology behind their

reservation system so as to facilitate reservation to international locations. Furthermore, aside

from regulatory issues, Canadian markets could be accessible and profitable much as many of

Southwest’s U.S. airline industry. Also, the airline management should spearhead more benefits

through penetration of the entire Mexico market on the basis of the early signed agreement back

in 2008 allowing their flights into its airspace. It is presumed that they have been able to conduct

a detailed feasibility study for the Mexican market and analyze if it could contribute to the

growth of the airline.

Expanding the airlines’ fuel efficient fleet is the next target that will assist the company to

improve on its CASM as it will be able to minimize its dependency on fuel. Fuel plays a pivotal

role on the company’s operating costs and if it is reduced it will enable the company to reduce its

operating margin. With company expecting to receive new generation Boeing planes like 737

MAX that is lighter and fuel efficient by the end of the year (2017), Southwest airline will save

much operating costs as the new generation Boeing 737 is a more immediate modernization and

will replace the old aircrafts (Boeing 717s) as the management has ordered for 150 modern

aircrafts. Southwest must continue to be on the forefront of these developments, and though

investing in the first of a technology carries an inherent risk, it is important that they take every

opportunity to minimize fuel expenses and differentiate from the rest of the industry.

Finally, the airline should consider integrating into the Point-to-point strategy upon acquisition

of AirTran aircrafts that are operating on strategic routes within the industry. AirTran currently

operates more of hub-and-spoke route strategy, wherein routes tend to connect through a

centralized airport, which for AirTran has been Atlanta. The need for smaller planes arises in

these strategies, because often smaller flights are operated to shuttle passengers to the airline’s

hub. However, as Southwest now operates AirTran’s flights, there are conflicting route

strategies. In order to synchronize these differences and maintain their low-cost advantage,

Southwest should enforce their point-to-point method onto AirTran’s most popular destinations.

The most significant of these is Atlanta, where Southwest had not serviced before; likely because

of its congestion and role as Delta’s hub. As this integration occurs, Southwest will find reduced

need for the smaller 717 aircraft, and can begin replacing them with the new, more efficient,

Next-Generation 737 planes. This should reduce some of the increased temporary expenses for

the AirTran merger, and allow the Southwest to gain as much profit as possible from their most

recent acquisition.

Conclusion

Southwest Airline Company has been in the market for the last 40 years since its inception,

throughout the period it has been able to distinguish itself as one of the best and unique airline in

the industry. The airline has been able set sustainable long term strategies aimed at future growth

and development through its solid platform that has yielded outstanding performance. The report

has highlighted on the S.W.O.T analysis of the airline in the industry and its financial

performance for the past five years ranging from 2012-2016 respectively. Comparison has been

done on the performance of the various financial ratios of the company. The airline has over the

past five years witnessed numerous changes in the industry that has forced it to strategize

properly in order to remain competitive in the market. It has set up key technological

advancements that comprise of inflight WiFi and entertainment installation, the integration of the

company with AirTran network and operations in 2013, fleet modernization that was projected to

run from 2011-to-2017 that also incorporated the use of larger Boeing 737-800 into its fleet;

modern international reservation system in 2014 which enabled it to inaugurate its first

international flights to Jamaica and Bahamas respectively. In general, the airline has gone a

milestone ahead in the industry and the stakeholders are looking forward to a successful year

ahead with its financial projections expected to grow by the year 2022.

References

Analytics, I. (2017). Southwest Airlines Co.: Financial ratios (LUV | USA | Airlines) - Infront

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