Transcript Document 7110708

Case Prepared By: Corey Daigle, Seth Fraser, and Megan Foreman
Overview
Southwest Airlines – Who we are, What we do, and How we got here
Mission and Vision
Internal Assessment
- Financial Condition
- IFE Matrix
External Assessment
- EFE Matrix
- CPM Matrix
Strategy Formulation
- SWOT Matrix
- Space Matrix
- IE Matrix
- Grand Strategy Matrix
- QSPM Matrix
- Matrix Analysis
Strategic Planning for the Future
EPS/EBIT
Implementation
2004 Financials
Southwest in the News
Southwest Airlines Co.
Headquarters: P.O. Box 36611
2702 Love Field Drive
Dallas, TX 75235
Phone: 214-792-4000
Stock Symbol: LUV (NYSE)
all graphics and information found on Southwest
Airlines website at www.iflyswa.com or
www.southwest.com
Who We Are and What We Do
Major domestic airline that provides short haul,
high frequency, point-to-point, low fare service
Incorporated in Texas and commenced Customer
Service on June 18, 1971 with 3 Boeing 737
aircrafts serving 3 cities – Dallas, Houston, and
San Antonio
Today, SW operates over 400 Boeing 737
aircrafts in over 59 cities
Lowest operating cost structure in the domestic
airline industry and consistently offers the lowest
and simplest fares
Fun Facts
In 2004, SW served:
49 million cans of soda, juices, and water
8.1 million alcoholic beverages
3.3 million bags of pretzels
95.3 million bags of peanuts
Innovation
1st airline to offer a profit-sharing plan to
employees beginning in 1979, employees
now own about 10% of company stock
1st major airline to offer “ticketless” travel
system-wide
1st major airline to enter information
superhighway by creating its own web page
1st airline to offer online booking
How We Began
32 years ago, Rollin King and Herb Kelleher
got together and on a cocktail napkin they
came up with a simple notion that turned
into the 4th largest airline
- If you get your passengers to their
destinations when they want to get there, on
time, at the lowest possible fares, and make
darn sure they have a good time doing it,
people will fly your airline.
Existing Mission Statement
The 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.
New and Improved
The mission of Southwest Airlines is to provide
excellent customer service and timely air travel at
an affordable price for markets in the United
States. We commit ourselves to the highest
standards of integrity in doing what is best for our
passengers, the airline industry, our employees
and our stockholders. By using the latest
technology in engine maintenance, we ensure
safety, efficiency, and keep fuel emissions below
governmental regulations. Through this mission,
we at Southwest ensure high company spirit and
long term financial prosperity.
Vision Statement
To provide the most affordable, reliable, and
comfortable air transportation in the world.
Delta’s Vision
Since the founding of Delta Air Lines, our company has stood
for safe and reliable air transportation, distinctive customer
service, and hospitality from the heart. Our vision is for Delta
to build on its traditions and always to meet our customers’
expectations while taking service to even higher levels of
excellence. We are a leader in a business we know best—
airline transportation. We intend to be an even greater
company and will focus our time, attention, and investment
on building that leadership. We are dedicated to being the
best airline in the eyes of our customers. We will provide
value and distinctive products to our customers, a superior
return for investors, and challenging and rewarding work for
Delta people in an environment that respects and values their
contributions.
* From www.delta.com
Financial Condition
Overall
Posted a profit for 31st consecutive year
Airline industry as a whole suffered a net loss
for 3rd consecutive year
Strong Financials (End of 2003)
- 1.87 billion in cash on hand
- fully available bank revolving credit of
575 million
- unmortgaged assets of over 5 billion
- debt to capital ratio of less than 40%
(includes leases as debts)
* From 2003 Annual Report
Net Income increased 83.4% in 2003
Operating Revenue increased 415 million
(7.5%)
400 million (7.5%) increase in passenger
revenues
5.6% increase in revenue passenger
miles
4.2% increase in added capacity as
measured in available seat miles
Addition of 13 aircrafts in 2003
* From 2003 Annual Report
Key Financial Ratios
Valuation Ratios
P/E Ratio
Price to Sales
Dividends
Dividend Yield
Payout Ratio
Growth Rates %
Sales vs 1 Yr Ago
EPS – 5 Yr Growth
Financial Strength
Quick Ratio
Total Debt to Equity
Southwest
Industry
Sector
S&P 500
24.72
1.84
23.71
1.24
25.41
1.62
24.01
3.33
.14
3.18
.27
1.88
1.38
23.05
2.04
26.78
7.52
-.26
12.79
-2.27
8.27
6.80
11.90
12.15
1.16
.30
1.20
1.19
1.18
.59
1.26
.85
Profitability Ratios
%
Gross Margin
Net Profit Margin
Management
Effectiveness %
Return on Assets
Return on
Investment
Return on Equity
Southwest
Industry
Sector
S&P 500
29.97
7.46
26.52
5.27
33.15
6.77
47.32
13.12
4.69
5.63
4.71
6.51
6.66
8.59
6.40
9.97
9.41
11.68
14.57
18.71
Stock Information
LUV compared to Airline Industry
Net Worth Analysis
Cash Value of Southwest Airlines at year-end
2003
1. Equity + PIC + RE = $4930
2. Net Income x 5
= $2210
3. SP (14.5)/EPS(.66)xNI(398) = $8879
4. # Shares Outstanding x SP = $11446
Method Average
= $6886
Strengths / Weaknesses
Strengths –
1. High capacity usage
2. Named the best low cost airline leader for the last three
consecutive years
3. Diversity in upper management
4. Revenues increase by 8 percent to 5.94 billion in fiscal
year 2003
5. Net income increased 83 percent to $402 million in fiscal
year 2003
6. Dominates the short haul segment of airline industry
7. Fourth largest domestic airline
8. In 2003 Southwest posted a profit for the 31st consecutive
year
Weaknesses –
1. No international flights
2. No segmented seating
3. Dependent on a single producer
4. Lack of exposure towards online booking agencies
5. Four out of five employees are members of the union
6. Carry a small amount of freight and cargo
7. Do not use chat communication such as e-mail
8. Do not offer morning flights
Key Internal Factors
Weight
Rating
Weighted
Score
1. High capacity usage
0.08
4
0.32
2. Named the best low cost airline leader for the last three consecutive years
0.10
4
0.40
3. Diversity in upper management
0.04
3
0.12
4. Revenues increase by 8 percent to 5.94 billion in fiscal year 2003
0.05
3
0.15
5. Net income increased 83 percent to $402 million in fiscal year 2003
0.08
4
0.32
6. Dominates the short haul segment of airline industry
0.10
4
0.40
7. Fourth largest domestic airline
0.03
3
0.09
8. In 2003 Southwest posted a profit for the 31st consecutive year
0.10
4
0.40
1. No international flights
0.09
1
0.09
2. No segmented seating
0.03
2
0.06
3. Dependent on a single producer
0.05
2
0.10
4. Lack of exposure towards online booking agencies
0.05
2
0.10
5. Four out of five employees are members of the union
0.02
1
0.02
6. Carry a small amount of freight and cargo
0.02
2
0.04
7. Do not use chat communication such as e-mail
0.03
2
0.06
8. Do not offer morning flights
0.03
2
0.06
TOTAL
1.00
Strengths
Weaknesses
2.73
External Audit
Opportunities
1.National and international markets
2.Growth of older generation
3.Industrial research and development
4.Growth of Hispanic population
5. New technology opens the door for new products/services
6.Increased Internet advertising
7.Longer flights
8. Growth of business and leisure travel
Threats
1.Decline of leisure travel due to economy and terrorism
2. Competing online ticket reservation systems.
3.New government regulations that make operations costlier.
4.Demand for air travel has dropped sharply since September 11th.
5.Gas and oil price fluctuations.
6.Terrorist attacks.
7.Increased restrictions to limit noise (including restrictions on types of
aircraft used and limits on number of operations)
8. Annual airline security costs have increased.
EFE Matrix
Key External Factors
Weight
Rating
Weighted Score
Opportunities
1. National and international markets
0.03
2
0.06
2. Growth of older generation
0.05
2
0.10
3. Industrial research and development
0.02
3
0.06
4. Growth of Hispanic population
0.05
3
0.15
5. New technology opens the door for new products/services
0.04
3
0.12
6. Increased Internet advertising
0.06
3
0.18
7. Familiarity of Generation X with air travel and technology
0.07
3
0.21
8. Growth of business travel
0.06
3
0.18
1. Decline of leisure travel due to economy and terrorism
0.10
3
0.30
2. Competing online ticket reservation systems
0.11
3
0.15
3. New government regulations that make operations costlier
0.03
4
0.12
4. Demand for air travel has dropped sharply since September 11
0.10
2
0.32
5. Gas and oil price fluctuations
0.06
3
0.18
6. Terrorist attacks
0.15
3
0.45
7. Increased restrictions to limit noise (including restrictions on types of aircraft used and
limits on a number of operations)
0.03
2
0.06
8. Increasing annual airline security costs.
0.04
2
0.08
TOTALS
1.00
Threats
3.04
Competitive Profile Matrix
Southwest
Critical Success
Factors
Advertising
Product Quality
Price
Competitiveness
Management
Financial
Position
Customer
Loyalty
Global
Expansion
Market Share
Reward
Programs
Security
Total
Delta
American Airlines
Weight
Rating
Weighted
Score
Rating
Weighted Score
Rating
Weighted Score
.15
.11
3
3
0.45
0.33
4
4
0.60
0.44
2
4
0.30
0.44
.14
4
0.56
2
0.28
2
0.28
.09
4
0.36
3
0.27
3
0.27
.14
4
0.56
2
0.28
1
0.14
.08
3
0.24
3
0.24
2
0.16
.06
1
0.06
4
0.24
3
0.18
.05
.05
2
2
0.10
0.10
3
4
0.15
0.20
3
2
0.15
0.10
.13
3
0.39
3
0.39
3
0.39
1.00
3.15
3.52
2.41
SWOT
Opportunities
1.National and
International Markets
2.Growth Of Older
Generation
3.Industrial Research and
Development
4.Growth of Hispanic
Population In U.S.A.
5.New Technology Opens
the Door for New Products/
Services
6.Increased Internet
advertising
7.Longer flights
8.Growth of business and
leisure travel
Threats
1.Decline of leisure travel
due to economy and
terrorism
2.Competing online ticket
reservation systems.
Strengths
1. High capacity usage.
2. Named the Best Low
Cost Airline leader for the
last three consecutive
years.
3. Diversity in upper
management.
4. Revenues increased by
8% to 5.94 billion in fiscal
year 2003.
5. Net Income increased
83% to $402million in fiscal
year 2003.
6.Dominates the Short
haul segment of Airline
Industry.
7. Fourth largest domestic
airline.
8. In 2003 Southwest
posted a profit for the 31st
consecutive years.
S-O Strategies
1. Expand into other
countries or new cities.
(S2, S6, S7, O1, O7)
Weaknesses
1.No international flights.
2.No segmented seating.
3.Dependent on a single
producer. (Boeing)
4.Lack of exposure
towards online booking
agencies.
5.Four out five employees
are members of the union.
6.Carry a small amount of
freight and cargo.
7.Do not use chat
communication such as email.
8.Do not offer morning
flights.
S-T Strategies
1. Increase advertising
for southwest.com.
(S8, T2)
W-T Strategies
W-O Strategies
1. Expand into Canada.
2. Expand into Mexico.
(W1, W2, W3, O1,
O3, O6, O7)
SPACE Matrix
 Y axis
 Financial strength
Y axis: 5 + (-3) = 2
 Environmental stability
+5
+1 worst to + 6 best
-3
-1 best to –6 worst
 X axis
 Industry strength
X axis: 3 + (-2) = 1
 Competitive advantage
3
1 worst to 6 best
-2
-1 best to -6 worst
IE Matrix
 Segment
Revenue
EFE
IFE
 Passenger
 Freight
$5.4 B
$1.1 M
3.34
3.20
3.32
3.80
High
Strong
Average
Weak
3.0 to 4.0
2.0 to 2.99
1.0 to 1.99
I
II
III
3.0 to 3.99
Freight
Southwest
Medium
The EFE Total
Weighted Score
2.0 to 2.99
Low
1.0 to 1.99
Grow and Build
IV
V
VI
VIII
IX
Passenger
VII
RAPID MARKET GROWTH
Grand Strategy Matrix
Quadrant
II
Quadrant I
WEAK
COMPETITIVE
STRONG
POSITION
COMPETITIVE
POSITION
1. Concentric diversification
Southwest
2. Conglomerate diversification
3. Horizontal diversification
Quadrant III
4. Joint venture
SLOW MARKET GROWTH
Quadrant IV
Strategic Alternatives
Key Internal Factors
Weight
Expand Into Mexico
Strengths
Expand Into Canada
AS
TAS
AS
TAS
1. High capacity usage
0.08
---
---
---
---
2. Named the best low cost airline leader for the last three consecutive years
0.10
---
---
---
---
3. Diversity in upper management
0.04
---
---
---
---
4. Revenues increase by 8 percent to 5.94 billion in fiscal year 2003
0.05
---
---
---
---
5. Net income increased 83 percent to $402 million in fiscal year 2003
0.08
2.00
0.16
4.00
0.32
6. Dominates the short haul segment of airline industry
0.10
3.00
0.30
2.00
0.20
---
---
---
---
---
0.10
---
---
---
---
1. No international flights
0.09
---
---
---
---
2. No segmented seating
0.03
1.00
0.03
2.00
0.06
3. Dependent on a single producer
0.05
---
---
---
---
4. Lack of exposure towards online booking agencies
0.05
2.00
0.10
1.00
0.05
5. Four out of five employees are members of the union
0.02
---
---
---
---
6.Carry a small amount of freight and cargo
0.02
---
---
---
---
7.Do not use chat communication such as e-mail
0.03
2.00
0.06
1.00
0.03
8.Do not offer morning flights
0.03
---
---
---
---
7. Fourth largest domestic airline
8. In 2003 Southwest posted a profit for the 31 st consecutive year
Weaknesses
Total
0.65
0.65
Key External Factors
We ight
Opportunities
Expand Domestic Routes
Expand Freight Loads
AS
TAS
AS
TAS
1. National and international markets
0.03
2.00
0.06
4.00
0.12
2. Growth of older generation
0.05
---
---
---
---
3. Industrial research and development
0.02
2.00
0.04
3.00
0.06
4. Growth of Hispanic population
0.05
3.00
0.15
1.00
0.05
5. New technology opens the door for new products/services
0.04
2.00
0.08
3.00
0.12
6. Increased Internet advertising
0.06
2.00
0.12
3.00
0.18
---
---
---
---
---
0.06
---
---
---
---
1. Decline of leisure travel due to economy and terrorism
0.10
---
---
---
---
2. Competing online ticket reservation systems
0.11
4.00
0.12
3.00
0.09
3. New government regulations that make operations costlier
0.03
---
---
---
---
4. Demand for air travel has dropped sharply since September 11
0.10
---
---
---
---
5. Gas and oil price fluctuations
0.06
---
---
---
---
6. Terrorist attacks
0.15
7. Increased restrictions to limit noise (including restrictions on types of aircraft
used and limits on a number of operations)
0.03
---
---
---
---
8. Increasing annual airline security costs.
0.04
3.00
0.12
2.00
0.08
7. Familiarity of Generation X with air travel and technology
8. Growth of business travel
Threats
SUBTOTAL
0.69
0.70
SUM TOTAL ATTRACTIVENESS SCORE
1.34
1.35
Matrix Analysis and SWOT
summary














Alternative Strategies
IE
Forward Integration
X
Backward Integration
X
Horizontal Integration
X
Market Penetration
X
Market Development
X
Product Development
X
Concentric Diversification
Conglomerate Diversification
Horizontal Diversification
Joint Venture
Retrenchment
Divestiture
Liquidation
SPACE
X
X
X
X
X
X
X
X
X
X
GRAND
COUNT
2
2
2
2
2
2
2
2
2
X
X
X
1
Strategic plans for the future
Southwest Airlines should expand into
Mexico.
Expand into Canada
Expand domestically
EPS/EBIT Analysis
Amount Needed
Interest
Tax Rate
Share Price
Shares Outstanding
$1,000M
5%
38%
$7.20
770M
EPS/EBIT Analysis
Common Stock Financing
Recession
Normal
Boom
EBIT
300,000,000 500,000,000 800,000,000
Interest
0
0
0
EBT
300,000,000 500,000,000 800,000,000
Taxes
114,000,000 190,000,000 304,000,000
EAT
186,000,000 310,000,000 496,000,000
# Shares 838,965,517 838,965,517 838,965,517
EPS
0.22
0.37
0.59
70 Percent Stock - 30 Percent Debt
Recession
Normal
Boom
EBIT
300,000,000 500,000,000 800,000,000
Interest
15,000,000
15,000,000 15,000,000
EBT
285,000,000 485,000,000 785,000,000
Taxes
108,300,000 184,300,000 298,300,000
EAT
176,700,000 300,700,000 486,700,000
# Shares 818,275,862 818,275,862 818,275,862
EPS
0.22
0.37
0.59
Debt Financing
Recession
Normal
Boom
300,000,000 500,000,000 800,000,000
50,000,000
50,000,000 50,000,000
250,000,000 450,000,000 750,000,000
95,000,000 171,000,000 285,000,000
155,000,000 279,000,000 465,000,000
770,000,000 770,000,000 770,000,000
0.20
0.36
0.60
70 Percent Debt - 30 Percent Stock
Recession
Normal
Boom
300,000,000 500,000,000 800,000,000
35,000,000
35,000,000 35,000,000
265,000,000 465,000,000 765,000,000
100,700,000 176,700,000 290,700,000
164,300,000 288,300,000 474,300,000
790,689,655 790,689,655 790,689,655
0.21
0.36
0.60
Implementation
Objectives
5 Year Plan
Increase domestic routes to include
80% of the continental United States
Increase operating revenue by
addition of more aircrafts
10 Year Plan
1st in industry for short-haul flights
2004 Financial Condition
Operating Revenue
Net Income
EPS
Total Debt
$6.53 billion
$313 million
$.40
$1.7 billion
Southwest in the News
03/09/05
Hungry? Southwest Airlines Takes Care of Its Customers With
Free Inflight Snack and Beverage Service
05/10/04
Southwest Airlines Flies Into Philly With a 'Ding
06/19/03
Southwest Airlines Pilot Honored as an American Hero