Benjamin Rank BMGT370, Gardner 3/8/11 Transportation Profile Project Southwest Airlines 1. Southwest Airlines is located at 2702 Love Field, Dr. in Dallas, TX. The company is headed by Chief Executive Officer and President Gary Kelly, who has been with the company for almost 25 years. He served as CFO before being promoted to the company’s highest position. The company currently employs nearly 35,000 people, with 34,901 employed. Southwest Airlines is publicly traded under the stock symbol LUV, in respect for its main hub Love Field Airport. The firm’s corporate website is www.southwest.com. 2. Southwest Airlines was founded in 1967 and placed its headquarters in Dallas, Texas. The company was founded by Rollin King and Herb Kelleher as Air Southwest Co. The young airline was immediately met with resistance from other local airlines in the Southern United States. Air Southwest Co. was brought to court and the Texas State Supreme Court upheld the case, allowing Southwest to operate in 1970. On March 29, 1971, the company changed its name to Southwest Airlines Co. According to the company’s website, Southwest’s premier customer service began on June 18, 1971. The company began with just three Boeing 737 aircrafts serving three Texas cities: Houston, Dallas, and San Antonio. Today, Southwest Airlines sits as the most successful airline of today. Southwest is the only major U.S airline to remain profitable over a consistent period (38 years in a row) since the 1980’s. The company achieved this accomplishment through proper leadership and a strong strategy following deregulation of the airline industry in 1978. Southwest was instrumental in spreading deregulation across the U.S so as to expand its market and continually crushed its opponents. Into the late 1990’s and early 2000’s, Southwest made great strides in buying engine fuel in bulk before oil prices sky rocketed. Southwest is known for its leading customer service, low prices, and great operations. The airline now operates 548 Boeing 737 aircrafts among 75 cities in the United States, flying 3,200 flights per day. Southwest is the largest U.S carrier based on domestic passengers carried and is traded publicly under the symbol LUV. 3. Operating Statistics for Southwest Airlines includes a fleet of 548 Boeing 737 aircrafts among 75 cities within the U.S. These 75 cities cover 39 states. Southwest operates 3,200 flights domestically per day, carrying 88 million passengers per year, making it the largest domestic airline carrier of passengers in the U.S. In 2010, Southwest moved 176 million pounds of cargo in addition to its passenger-carrying primary objective. 4. Being a part of the airline industry, Southwest Airlines’ costs are majority variable, even though some fixed costs do apply. Having mainly variable costs, Southwest’s volume of services provided varies directly with its cost. This fact is attributed to the extent to which the industry is responsible for building and maintaining its rights-of-way. In the airline industry, the government provides the airways and regulates the operation of all aircraft within the airways. For this very reason, airlines do not have high fixed costs to cover the construction or maintenance of their rights-of-way, so just need to cover all short run costs, making them variable. 5. From Yahoo! Finance: Trades at: 12.48 Market Cap: 9.32 B EPS: .61 P/E: 20.46 Income Statement 2010: Dec 31, 2010 Dec 31, 2009 Dec 31, 2008 Total Revenue 12,104,000 10,350,000 11,023,000 Cost of Revenue 5,358,000 4,667,000 8,590,000 Gross Profit 6,746,000 5,683,000 2,433,000 - - - 5,130,000 4,805,000 1,385,000 - - - 628,000 616,000 599,000 - - - 988,000 262,000 449,000 Period Ending Operating Expenses Research Development Selling General and Administrative Non Recurring Others Total Operating Expenses Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net (94,000) 67,000 (66,000) Earnings Before Interest And Taxes 894,000 329,000 383,000 Interest Expense 149,000 165,000 105,000 Income Before Tax 745,000 164,000 278,000 Income Tax Expense 286,000 65,000 100,000 - - - 459,000 99,000 178,000 Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Minority Interest Net Income From Continuing Ops Non-recurring Events Other Items Net Income - - - 459,000 99,000 178,000 - - - 459,000 99,000 178,000 Preferred Stock And Other Adjustments Net Income Applicable To Common Shares Balance Sheet 2010: Dec 31, 2010 Dec 31, 2009 Dec 31, 2008 Cash And Cash Equivalents 1,261,000 1,114,000 1,368,000 Short Term Investments 2,277,000 1,479,000 435,000 Net Receivables 409,000 460,000 574,000 Inventory 243,000 221,000 203,000 89,000 84,000 313,000 4,279,000 3,358,000 2,893,000 - - - 10,578,000 10,634,000 11,040,000 Goodwill - - - Intangible Assets - - 84,000 Accumulated Amortization - - - 606,000 277,000 291,000 - - - 15,463,000 14,269,000 14,308,000 1,602,000 1,461,000 2,643,000 505,000 190,000 163,000 1,198,000 1,044,000 - Total Current Liabilities 3,305,000 2,695,000 2,806,000 Long Term Debt 2,875,000 3,325,000 3,498,000 Other Liabilities 465,000 493,000 - 2,581,000 2,302,000 3,051,000 Minority Interest - - - Negative Goodwill - - - 9,226,000 8,815,000 9,355,000 Period Ending Assets Current Assets Other Current Assets Total Current Assets Long Term Investments Property Plant and Equipment Other Assets Deferred Long Term Asset Charges Total Assets Liabilities Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Deferred Long Term Liability Charges Total Liabilities Stockholders' Equity Misc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 808,000 808,000 808,000 5,399,000 4,971,000 4,919,000 Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity (891,000) 1,183,000 (262,000) (963,000) 1,216,000 (578,000) (1,005,000) 1,215,000 (984,000) Total Stockholder Equity 6,237,000 5,454,000 4,953,000 Net Tangible Assets Currency in USD. 6,237,000 5,454,000 4,869,000 6. The airline industry is considered one massive network economy, which is absolutely subject to economies of scale, economies of density, and economies of scope. Airlines are subject to economies of scale, as airlines that produce more flights and are located at more locations, should be able to technically provide lower prices. Also, those airlines that are able to sell out all flights, should be able to provide lower prices. In some cases, this doesn’t apply due to outside forces. Economies of density also occur in the airline industry, both when flying customers and when shipping cargo. Most flights will not fly unless filled due to economies of density – those airlines that can fill the flights the best make the most efficient use of the flight. For economies of scope, the more flights to different locations, the better for each airline. Southwest dominates in all of these areas, leading to their great success. 7. Southwest Airlines serves the entire U.S population as a premier passenger airline carrier that prides itself in providing premier customer service to its customers. Southwest covers 39 states in the U.S and 75 cities. Southwest’s top ten hub cities include: Las Vegas, NV; Chicago, IL; Phoenix, AZ; Baltimore, MD/Washington, D.C; Denver, CO; Houston, TX; Dallas, TX; Los Angeles, CA; Oakland, CA; and Orlando, FL. 8. Southwest Airline’s primary competitors are all intramodal. Being primarily a passenger-carrying airline, Southwest competes against other passenger airlines. For the most part, those who demand Southwest’s services will only be demanding airway transportation. Southwest’s direct competitors include American Airlines, United Airways, Delta Air Lines, Continental Airlines, and Jet Blue Airways. 9. Southwest Airlines, just like others in the airline industry, has an inherent advantage of speed, especially over long distances. This inherent advantage compares to the intermodal. Inside the airline industry, Southwest Airlines has a comparative advantage in being able to provide the lowest prices with the highest value of customer service. Southwest doesn’t charge for bags, blankets, or other amenities on the airline and is still able to provide these low fares. The successful airline giant is able to succeed in these areas by having smaller aircrafts that are easier to fill, flying out of smaller U.S hub airports, saving money on jet engine fuel, and providing such a high level of service. 10. Considering Southwest Airlines has been able to survive throughout the airline industry decline of the past decade, the issues that face Southwest are far fewer than those that face other airlines in the industry. However, Southwest has plenty of issues facing them. First and foremost, like any other airline, Southwest needs to make sure that they remain on top of the competition in the industry as it continues to struggle. More specifically to Southwest, Southwest had issues with safety requirements in 2008 and safety is a top priority among airline customers. Also, Southwest’s commitment to their Corporate Social Responsibility and improving the environment should be a primary concern. 11. The firm’s future prospects are extremely promising. Southwest has solidified itself as a staple in the airline industry and one that will always be a leader among its competitors. The company has been profitable for the past 38 years, while most airlines have struggled to even survive; the company provides the lowest fares to its customers with the highest perks of flying with them; the company delivers premier customer service that continues bringing customers back time and time again; and the company has an excellent reputation as a firm to work for. Its only weaknesses exist inside the industry itself: airlines have massive issues with expense and convenience, while being seen as a dangerous form of travel (although not true at all) that pollutes the environment. Nonetheless, Southwest is beyond competitively and financially viable and will only continue to march forth in the industry. For now, the company has recently announced expanding into South Carolina through Charleston and Greeneville and New Jersey through Newark. This is a big move and one that will be very profitable. Another opportunity for growth could exist in expanding nationally – Southwest is profitable because they have managed to contain their expansion and stick to what they do best, but expansion nationally could be in the near future. 12. In order to continue prospering, Southwest must maintain its low fares and must expand on these low fares to other destinations. For a while, Southwest held Florida deals only. Today, the company has expanded those deals to cities all across the United States. If Southwest continues this expansion with the prices, the company will capture a vast majority of the market share, as more and more Americans across the nation will realize that Southwest is the most successful airline around. The company will also need to maintain its high value of customer service and its great company culture. Another strategy for success would be to expand from the 39 states to at least 45 within the next ten years. In missing the market share from 11 states, Southwest is missing out on a portion of the population. In succeeding with all these initiatives, Southwest will only continue as the nation’s leading airline carrier. Sources: Yahoo! Finance Southwest Airlines Official Company Website Leland Gardner BMGT370 Class Notes