Transcript Southwest Airlines - Aric W Hall

Southwest Airlines
By: Aric Hall
Mission Statement
Dedication to highest quality of customer
service, delivered with a sense of warmth,
friendliness, individual pride, and company spirit.
To employees: commitment to provide a stable
of work environment with equal opportunity for
learning and growth.
Creativity and innovation are encouraged.
Employees are provided same concern, respect,
and caring attitude that employees give to
customers.
History
Small upstart airline
Survived legal and congressional battles
Did war with major airlines
Strategy of being one step ahead
Survived Deregulation
Watches earlier competitors go bankrupt
31+ years of profitability
Southwest Today
No-frills carrier
No food, usually
No First Class
No Movies
Short-haul, direct flights only
Distinctive Competencies
Offer low rates, to begin with, without change
Don’t get drawn into competition at major hubs
SW claims that goal is not profit maximization,
but rather on making air travel available to those
who could not afford it
The customer comes second
Fun-loving corporate culture
Slow, steady expansion and growth, financed
from within
Strategy
Functional: achieve competitive advantage
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Offer the lowest fares
Dominate the market share in markets served
Attain efficiency, doing more with less
Win the rat race, by innovation
Strategy, cont
Business-level:
– Cost leadership
Keep expenses down and provide low prices to consumers
– Differentiation
Market segmentation
Focus on limited market of cost-conscious business traveler
– Distinctive competencies – derived from offering
necessary services without any added costs
Strategy, cont.
Corporate:
– Strategic Alliances
Mostly limited to vendors
Has had one previous alliance with a small carrier
Has had one previous acquisition of a small carrier
– Diversification
Limited to expansion into new markets
Disaster Planning
After Sept 11
– Most airlines cut
routes;
– Most laid off workers;
not SW
– Most reported a
financial loss, not SW
– Most begged for
government subsidies;
SW used resources to
expand further
Future Planning
Southwest plans for the future and for bad days
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Maintains a large cash balance
Carries little long-term debt
Purchases futures on fuel, to lock in prices
Purchases advance options on planes
Southwest Stats
Ticker: LUV
Exchange: NYSE
Market Cap: $10.75bil
P/E: 35.73
P/Book: 1.96
P/Sales: 1.70
Debt/Equity: 0.334
L-T Debt/Equity: 1.18
Profit Margin: 4.81%
Operating Margin: 8.50%
RoA: 2.84%
RoE: 4.10%
Current Ratio: 1.014
Book val per share: 7.06
Beta: 0.874
Profit: $ 5.9 billion
Financial Comments
The book value per share is similar to industry,
but far higher than that of other industries
Current ratio and Debt-to-Equity ratios are low;
Shows company finances activities with cash
from profits and is preserving its lines of credit
Beta is less than 1, so stock is more volatile than
market average. Southwest stock price growth
is limited, being variable within a small range
Cost of Capital
Cost of Capital = sum of costs of equity and debt
Cost of Debt = 1.87%
Cost of Equity = 0.28%
Cost of Capital = 0.7289%
The cost of capital seems erroneously low. But,
this results from a lack of bonds, the use of only
short-term debt payments, and an almost lack of
dividend payments.
Measuring Investment Returns
Return on Capital: 2.69% to 4.60%
RoC measures true return on capital when debt
consists of a large amount of current liabilities
– RoC is low due to costs of assets, airplanes, etc.
RoE: 8.749%
– Airlines are not usually profitable, nor do they engage
in profitable projects.
– RoE is good for an airline
Economic Value Added: $ 410 mil
Southwest is making productive and profitable
use of its financing resources and assets.
Optimal Capital Structure
Capital choices at SW are a unique choice
They finance mostly with profits
They maintain cash
They set 50% as the goal for internal financing
They choose to pay little in dividends
They choose to avoid extreme expansion, and
thus debt
They have the highest market capital in industry
Future Growth
Southwest continues slow expansion into new
markets.
Southwest might benefit from a new alliance or
buyout of another small carrier.
Southwest currently is in an authorized buyback
of stock that may increase stock price.
If expansion stopped, current profits and share
price would likely increase.