Since its beginnings as a scheduled airline in 1971, Southwest Airlines has differentiated itself within the US airline industry as an outstanding airliner. Southwest started with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. Its commitment to offering a low fare structure to both business and leisure travelers has made air travel more affordable to many passengers and has caused a consistent increase in demand for expansion into new markets. Since the airline regulation in 1978, Southwest has dramatically increased the number of markets it serves and its market share. The airline has also been the model for a number of many low cost start-up airlines, such as Ryanair, EasyJet, ValuJet and People's Express. Today, Southwest airlines is the leading airline in the U.S., with a domestic market share of 17.4 percent, followed closely by Delta Airlines (17.2%), and is the third largest airline in the world by the number of passengers. To remain profitable, Southwest Airlines has implemented several cost-effective strategies which allow the savings to be passed along to the consumer. Southwest does not offer full cabin service and provides only "coach class service to its passengers. Meal service is not offered, only snacks and beverages. Southwest only operates one type of aircraft and one type of engine, the Boeing 737 series and GE engines, which greatly reduces maintenance costs, allows for lower spare parts inventory and cuts on training costs for crews. Southwest uses "ticketless" and "paperless" travel reservations systems. Passengers are not issued paper-boarding passes and are not assigned seating when making reservations. Instead, they are given plastic numbered reusable boarding passes based on first come, first served basis. Southwest Airlines offers point-to-point transportation, and does not operate within a hub system like the other major US airlines. It also is a stand-alone carrier with no alliance or partnerships agreements with other domestic or international airlines. Southwest Airlines uses a direct method of distribution, selling tickets directly to the traveler, by passing travel agents and reducing the costs associated with commission incentives. Today, Southwest Airlines operates a fleet of 753 Boeing aircraft and provides service to 101 destinations in in 41 state. The airline has never pretended to be anything more than a transportation service. With an average flight distance of 425 miles, Southwest Airlines' most significant competitor is ground transportation. No matter how long the flight is Southwest offers only a single class, open seating, and no meals. Southwest Airlines also maintains high frequency of flights and quick ground turnaround, yielding approximately 30 minutes ground time between flights. By maintaining this consistency, they have been able to drive cost-cutting efforts and provide superior service. Southwest flies from smaller, lower traffic airports and schedules its planes to minimize the amount of time they spend at the gates. CASE QUESTIONS You have been recently hired as a junior financial analyst by Southwest Airlines. One of your first projects is to analyze the financial performance of the company. Your assignment is to help your boss an answer to the following questions. Provide clear explanations, not yes or no answers. To complete your task, you need to obtain the two most recent financial statements. a. Why Southwest has been profitable 45 years in a row? b. What are the strategies that helped Southwest Airlines to be such successful airlines? c. Assume that Southwest Airlines has recently leased an aircraft hangar in Dallas Love Field for a period of ten years which requires a payment of $12,500 per month. What is the present value of the lease payments, assume the interest rate is 12% annually? d. Calculate Southwest 2012-2018 breakeven load factor. e. Calculate Southwest 2017-2018 current and quick ratios. f. Calculate the 2017-2018 debt, times-interest-earned. What can you conclude from these ratios? g. Calculate the 2017-2018 profit margin, return on assets (ROA), and return on equity (ROE). h. Calculate the 2017-2018 price/earnings ratios. i. What are some potential problems and limitations of financial ratio analysis? Since its beginnings as a scheduled airline in 1971, Southwest Airlines has differentiated itself within the US airline industry as an outstanding airliner. Southwest started with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. Its commitment to offering a low fare structure to both business and leisure travelers has made air travel more affordable to many passengers and has caused a consistent increase in demand for expansion into new markets. Since the airline regulation in 1978, Southwest has dramatically increased the number of markets it serves and its market share. The airline has also been the model for a number of many low cost start-up airlines, such as Ryanair, EasyJet, ValuJet and People's Express. Today, Southwest airlines is the leading airline in the U.S., with a domestic market share of 17.4 percent, followed closely by Delta Airlines (17.2%), and is the third largest airline in the world by the number of passengers. To remain profitable, Southwest Airlines has implemented several cost-effective strategies which allow the savings to be passed along to the consumer. Southwest does not offer full cabin service and provides only "coach class service to its passengers. Meal service is not offered, only snacks and beverages. Southwest only operates one type of aircraft and one type of engine, the Boeing 737 series and GE engines, which greatly reduces maintenance costs, allows for lower spare parts inventory and cuts on training costs for crews. Southwest uses "ticketless" and "paperless" travel reservations systems. Passengers are not issued paper-boarding passes and are not assigned seating when making reservations. Instead, they are given plastic numbered reusable boarding passes based on first come, first served basis. Southwest Airlines offers point-to-point transportation, and does not operate within a hub system like the other major US airlines. It also is a stand-alone carrier with no alliance or partnerships agreements with other domestic or international airlines. Southwest Airlines uses a direct method of distribution, selling tickets directly to the traveler, by passing travel agents and reducing the costs associated with commission incentives. Today, Southwest Airlines operates a fleet of 753 Boeing aircraft and provides service to 101 destinations in in 41 state. The airline has never pretended to be anything more than a transportation service. With an average flight distance of 425 miles, Southwest Airlines' most significant competitor is ground transportation. No matter how long the flight is Southwest offers only a single class, open seating, and no meals. Southwest Airlines also maintains high frequency of flights and quick ground turnaround, yielding approximately 30 minutes ground time between flights. By maintaining this consistency, they have been able to drive cost-cutting efforts and provide superior service. Southwest flies from smaller, lower traffic airports and schedules its planes to minimize the amount of time they spend at the gates. CASE QUESTIONS You have been recently hired as a junior financial analyst by Southwest Airlines. One of your first projects is to analyze the financial performance of the company. Your assignment is to help your boss an answer to the following questions. Provide clear explanations, not yes or no answers. To complete your task, you need to obtain the two most recent financial statements. a. Why Southwest has been profitable 45 years in a row? b. What are the strategies that helped Southwest Airlines to be such successful airlines? c. Assume that Southwest Airlines has recently leased an aircraft hangar in Dallas Love Field for a period of ten years which requires a payment of $12,500 per month. What is the present value of the lease payments, assume the interest rate is 12% annually? d. Calculate Southwest 2012-2018 breakeven load factor. e. Calculate Southwest 2017-2018 current and quick ratios. f. Calculate the 2017-2018 debt, times-interest-earned. What can you conclude from these ratios? g. Calculate the 2017-2018 profit margin, return on assets (ROA), and return on equity (ROE). h. Calculate the 2017-2018 price/earnings ratios. i. What are some potential problems and limitations of financial ratio analysis
