.. st Airlines created a family atmosphere that motivated to creativity, independence and friendliness between employees. The company even set up a culture committee about a decade ago. The responsibilities of the culture committee are: arranging Hokey Days, when some committees clean up a airplane to give flight attendants a break, select a candidate for employee of the month. Also, the members of committee discuss the ways to improve workforce, service, and customer’s complaints. Southwest Airlines has a culture inside the company, and this culture is a spirit of the company.
Southwest Airlines is a high-quality service, high employee moral and low operating costs carrier. The external factors that affect Southwest’s strategy would be different kinds of laws and restrictions like safety and training regulations. In fact, recently the government regulation of non-smoking flights came out and Southwest Airlines had to follow that. On top of that, traveling in and out of Dallas Love Field is a subject to the limitations of the Wright Amendment. Federal law prohibits Southwest Airlines from offering for sale tickets or providing transportation between Dallas Love Field and any destination beyond the territory of Texas, Louisiana, Arkansas, Oklahoma, New Mexico, Mississippi, and Alabama.
Currently, Southwest Airlines is debating this restriction in Supreme Court. There are several airports in the area of New York that not congested such as Newburgh, Trenton, New Jersey, and Allentown, Pa., that afford Southwest with low airport costs. The only impediment on the carrier’s growth last year has been rising fuel prices, which were up 34 percent and are causing earnings to be flat on a year to year basis. As a result, if price of fuel will continually rise, the company would lose money or it would have to increase price of fares. Nowadays, Southwest Airlines conquered the market niche of low-fare airline industry in the United States. Moreover, this market has a potential to grow and Southwest Airlines will play the major role in its future.
SUCCESS FROM A SIMPLE STRATEGY How has Southwest achieved such phenomenal success in the face of stiff competition? Basically, Southwest offers no-frills service at low fares on relatively short flights. Additional benefits the airline provides include simple scheduling, ticketless travel, and point-to-point service. The core of Southwest’s marketing strategy is the short-haul domestic route. An average trip of 394 miles that last about an hour allows airline to be at or near top in periodic measures of on-time performance. Southwest serves airports that are readily accessible, rather than large, crowded international airports.
Low fare airlines compete in the segment of market that accounts for approximately 40 percent of the passenger traffic in the United States. Southwest selects new markets where there are too few flights and high fares. When it enters the market, fares drop by as much as 70 percent. This action often triggers a price war, which in turn benefits customers and increases traffic in that area. Before starting service to a new city, Southwest launches an extended public relations program that emphasizes community relations, special events, and direct marketing.
The intent is to build awareness of Southwest Airlines and make it a part of community even before service starts to the city. For example, in 1993, Southwest Airlines used baseball theme to enter the Baltimore market, because the city was hosting the All-Star game that year. Although other airlines have implemented a marketing strategy emphasizing low prices and modest services, few have achieved stable success. ValuJet, Western Pacific and Kiwi Airlines have tried to copy Southwest’s approach. For example, ValuJet also offers ticketless system, no meal or assigned seats are offered, and only short hauls are flown. Some large airlines also have decided to supplement their regular service with low fare, low cost service. In the past 5 years, Delta Airlines, USAir and several other major airlines announced the launch of their low-fare, short haul, divisions.
However, Southwest stayed strong. Continental Airlines abandoned its Continental Lite unit, when it could no longer finance its half-price fare sale long enough to capture the market. FINANCIAL OVERVIEW Southwest Airlines (LUV – NYSE symbol) belongs to the transportation industry, specializing in the transportation airline sector. Precisely, the company provides short haul, high frequency, point-to-point, low fare air transportation services. Southwest Airlines’ fleet consists of 280 aircrafts all of which are Boeing 737, which simplifies scheduling, maintenance, flight operations and training activities. Of the total fleet, 99 and 13 were under operating and capital leases, respectively; the remaining 168 aircraft were owned.
Southwest leases terminal passenger service facilities at each of the airports it serves. Recently the company was ranked number 7 in the sector. Its major competitors are Skywest Airlines (ranked number 1), KLM Royal Dutch Airlines (ranked number 4). The company is to be compared to Skywest Airlines (ranked number one) and Delta Airlines (ranked number fourteen) to show advantages and disadvantages. Starting in 1971, with President Lamar Muse at the helm, the company was performing increasingly well surpassing S&P 500 and the sector/industry averages.
Net Revenue Growth Increase 1999 Increase 1998 Increase 1997 1996 Skywest (SKYW) 23.2% 351,680 26.5% 285,443 26.5% 225,683 210,093 SouthWest (LUV) 13.7% 4,735,587 9.1% 4,163,980 12.1% 3,816,821 3,406,000 Delta Air (DAL) N/A N/A 11,4% 2,554,000 19,4% 2,292,000 1,926,000 SKYW – 5-yr Net Revenue Growth Rate – 15.63% LUV – 5-yr Net Revenue Growth Rate – 12.81% DAL – 5-yr Net Revenue Growth Rate – 4.03% Data demonstrates that although the volume is superior to the leader the moment is low, which causes LUV to lag behind. Nevertheless, averaged five-year growth potential rate exceeds the sector and industry rates, which are 8.52% and 9.34% respectively. Net Profit Growth Increase 1999 Increase 1998 Increase 1997 1996 Skywest (SKYW) 59.7% 13,618 Unordinary 8,525 38.6% 43,143 31,120 SouthWest (LUV) 9.5% 474,378 36.4% 433,431 53.3% 317,772 207,337 Delta Air (DAL) N/A N/A 17.2% 990,000 Unordinary 845,000 74,000 SKYW – 5-yr EBITD Growth Rate – 15.81% LUV – 5-yr EBITD Growth Rate – 18.9% DAL – 5-yr EBITD Growth Rate – 14.63% Data demonstrates that although 1998 to 1999 year transition was not the most successful for the company, the overall prediction about the level of Net Profit Growth is optimistic, and promising to pass the industry and sector rates, which are 14.54% and 17.28%, respectively. But, the industry will under perform the S&P500, where the growth is predicted to be 21.39% Current Ratio 1999 1998 Skywest (SKYW) 3.104 4.067 SouthWest (LUV) 0.62 0.997 Delta Air (DAL) 0.71 0.67 Current ratio for the LUV is certainly pushed below the industry average of 0.82, sector average of 1.68, and S&P500 average of 1.59. This is due to the expansion policy that the company is pursuing.
It expands the fleet by adding 32 new aircrafts and also having 62 ordered for the consecutive years. Low current ratio limits their borrowing power substantially, where is on the other hand, expansion will surely add overall value to the current operations. What the company may do is shift some of its current liabilities to long-term debt and/or equity. Total Debt to Asset Ratio 1999 1998 1997 Skywest (SKYW) N/A 13.47% N/A SouthWest (LUV) 49.5% 49.2% 52% Delta Air (DAL) N/A 19.74 N/A Since the ratio is constant for the company, it shows the ability to maintain a certain level of debt confidently. Compared to the other companies, Southwest Airlines has a high Total Debt ratio, which it might want to reduce. A potential investor might be pleased or displeased depending on his/her level of risk tolerance and outlook for the future.
Company shows a financial risk above average, which is once again triggered by the expansion of the fleet. Accounts receivables 1999 1998 1997 1996 Skywest (SKYW) N/A 29 N/A N/A SouthWest (LUV) N/A 8 8 8 Delta Air (DAL) N/A N/A N/A N/A The length of the collection period is short, since almost 100 percent of the sales are targeted at passenger transportation rather than cargo. Southwest airlines are saving money by not extending its credit terms, unlike Skywest, which has a collection period of 29 days. Unfortunately market data is unavailable to compare and contrast. Return on Equity Company’s Return on equity is measured as following, 17.95% in 1999, 13% in 1998, 12,6% in 1997. Comparatively to the industry it is well below the mark, but the company has just broken out of the sector average of 14.42%.
The company will deliver about average to the investor, and certainly below an average S company where the rate is 24.11% As the conclusion of the ratio analysis we’ll use the Du Pont analysis for the two companies. Net Profit Margin Asset Turn-Over 1-Debt to Asset Ratio R.O.E. SkyWest Airlines 11.94% 1.06 1-0.611 20.7% SouthWest Airlines 10.2% 0.91 1-0.517 17.95% As the data suggests, we have a higher R.O.E. for SkyWest Airlines due to several circumstances: SKYW has a higher profit margin than LUV SKYW has a higher Asset-Turnover than LUV In order to increase performance and thus strengthen company’s position, LUV should reevaluate its projects and decrease the number of those that don’t meet the net-profit margin criteria. Also, asset-turnover can be increased through the resources utilization policy restructuring.
Stock In the past 28 years, company stock was on the constant rise. It did experience its lows and highs, but the strong position of the company helped to maintain a constant growth. Even the accident with the plane in the late March, 2000, did not affect the stock price much, since the stability and strength is well trusted. It is hard to evaluate the stock based on the Gordon’s Growth Model since the company is decreasing its dividend pay-out and does that in a constant manner. Free Cash Flow to Equity (FCFE) model was applied to the case.
It did not yield satisfactory results, due to the fact that the large portion of the fleet is already taken of the books, and the left portion yields stock price which doesn’t reflect the current state of nature. The stock is covered by Goldman Sachs and Co., Merrill Lynch and Co., Morgan Stanley Dean Witter and Co., Paine Webber Inc., and Salomon Smith Barney Inc. For the last five month nine of the sixteen analysts have suggested a strong buy. Financial Conclusion Southwest Airlines is in a very strong position and all its activities suggest that it will stay in this state for the time to come. It has several issues, that management would probably want to address: Net Revenue growth – the expansion of the fleet and addition of the destinations addresses it.
Changes in financial statements can be assessed by the time company issues its financial data for the years 2000 and 2001. Current and Long Term liabilities are pressuring company’s ratios. Once the expansion completed and the debt shifted from current to long term, ratios will look in the favor of the company. Return on equity is below its main competitor, Skywest Airlines, due to the comparatively low asset turnover and profit margin. FLYING INTO THE FUTURE Although the airline has scaled back its market expansion plans, Southwest thinks it can expend capacity about 15 to 20percent annually. However, in fiercely competitive world of low-fare service, Southwest differentiates itself by the way it plans the future.
Herb Kelleher, the CEO, said, Southwest does not prepare strategic plans in the traditional sense. We do not even do one-year plans. We bump up against some benchmark that requires us to make a major decision we review our strategic definition of the airline and decide whether we depart from it. Business Reports.