April 3rd, 2015
IME
Southwest Airlines
Ticker: LUV
Recommendation: Buy
Current Price: $44.30
Key Statistics
52 Week Price Range
50-Day Moving Average
Investment Thesis
$22.35 - $47.17

$44.24
Estimated Beta
0.92
Dividend Yield
0.50%
Market Capitalization
31.84B
3-Year Revenue CAGR
6.50%



Trading Statistics
Diluted Shares Outstanding
676mm
Average Volume (3-M onth)
7.67mm
Institutional Ownership
Insider Ownership
EV/EBITDA
Price Target: $52.12
83%
0%
Southwest’s low cost business models offers attractive fare prices to
consumers with little to no additional fees allowing the company to capture
market share in the domestic airline industry as customers seek lower
prices.
Increased corporate profit and consumer spending will drive demand for
domestic air travel in the future giving Southwest the ability to capture
more market share and increase passenger revenues.
The recent repeal of the Wright Amendment allows southwest to increase
capacity and expand current routes.
Southwest’s low cost business model and large size attracts consumers by
providing non-stop flights through its point to point service compared to
legacy providers that typically operate a hub and spoke model. This will
also help Southwest to further capture market share in the growing US
airline industry.
Five-Year Stock Chart
$60.00
400,000,000
350,000,000
$50.00
6.7X
300,000,000
$40.00
250,000,000
Margins and Ratios
Gross M argin
18.92%
EBITDA M argin
23.95%
Net M argin
11.17%
$30.00
200,000,000
150,000,000
$20.00
100,000,000
$10.00
50,000,000
Debt to Enterprise Value
.08X
$0.00
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
Covering Analysts: Becca Katzen
Bkatzen@uoreogn.edu
Volume
1
Adj Close
50-Day Avg
0
200-Day Avg
University of Oregon Investment Group
University of Oregon Investment Group
Figure 1: Revenue Breakdown
Business Overview
1%
Founded by Rollin King and Herb Kelleher, Air Southwest Company was
created in 1967 to fly within the state of Texas. On March 29 th, 1971 Air
Southwest Co. changed its name to Southwest Airlines Company with
headquarters located in Dallas Texas. Today, Southwest Airlines serves over 94
destinations across the United States making it a major player in the domestic
airline industry. Southwest ended the 2014 year by servicing 93 destinations
within 40 states, Washington DC, Puerto Rico, and the five near international
countries of; Mexico, Jamaica, The Bahamas, Aruba, and the Dominican
Republic. At the end of 2014 Southwest operated a total of 665 Boeing 737 after
phasing out older AirTran models.
4%
95%
Passenger Services
Freight
AirTran Acquisition
Ancillary Revenue
Source: LUV Financials
Figure 2: Passenger Revenue Growth
In 2011 Southwest bought AirTran for $1.4 billion. On December 28th, 2014
AirTran flew its final passenger service. AirTran international service was
converted to Southwest on July 1, 2014. All AirTran employees were effectively
converted to Southwest employees as of December 31, 2014. In 2014 Southwest
completed the removal of all 66 AirTran Boeing 717-200s from service enabling
an all Boeing 737 fleet. December 28th, 2014 marked the end of the AirTran
brand. Overall the AirTran acquisition resulted in net pre-tax synergies of
approximately $500 million for 2014.
Revenue for Southwest airlines is broken down by passenger revenues, freight
revenues, and other revenue.
12
Passenger Revenue – 95%
10
Passenger revenue makes up the majority of Southwest’s sales at 95% of total
revenue. Southwest’s solid point to point system offers the most daily departures
in the world serving more than 3,400 flights a day. LUV has a presence in 79 of
the top 100 domestic airports within the US. Southwest operates the largest fleet
of Boeing aircraft in the world, carrying more than 100 million customers
annually. In order to maintain a high net income, Southwest implements efforts
to modernize its fleet, contain costs, and increase the use of its rapid rewards
program.
8
6
4
2
0
2015
2016
2017
2018
2019
2020
2021
2022
2023
Freight Revenue – 1%
Source: LUV Financials
Figure 3: Picture of Plane
Southwest Airlines offers an Air Cargo shipment service to consumers.
Customers can track their package through the “Cargo Companion” app which
shows both the location and temperature of packages. Southwest allows
consumers to ship anything from seafood, animals, flowers, or human remains in
a fast and efficient manner.
Other Revenue – 4%
Other Revenue is made of Ancillary Revenues that do not come from the direct
purchase of airfare. Southwest receives ancillary revenue from EarlyBird CheckIn, Pets Are Welcome on Southwest (P.A.W.S.) products, Wi-Fi Services, and
in-flight movie purchases.
Southwest’s P.A.W.S. offering allows Customers to bring a small cat or dog into
the aircraft cabin for a $95 one-way fare. Southwest also charges $50 for those
who want extra care when traveling an unaccompanied minor. Customers who
Source: Southwest.com
UOIG 2
University of Oregon Investment Group
purchase EarlyBird Check-In for an additional $12.50 each way can check-in
Figure 4: US Airline Industry Revenue (in Millions) before the general public. In addition, Southwest holds priority-boarding
positions A1-A15 which passengers can purchase for $40.
160,000
150,000
During 2014, AirTran charged fees for checked baggage, carriage of pets, liquor
sales, advance seat assignments, call center services, priority seat selection, and
special services such as the transportation of unaccompanied minors, and
extension or transfer of A+ Miles Rewards. Since the completion of the
integration of AirTran services, other revenues have declined due to the decrease
is checked bag fees.
140,000
130,000
120,000
110,000
100,000
90,000
80,000
2000
2002
2004
2006
2008
2010
2012
2014
Overview
The demand for domestic air travel has increased dramatically since the
recession due to an increase in consumer and business spending. After the
recession low profit margins and price competition forced some airlines out of
business and led others to merge. This lead to lower industry concentration as
high profile companies merged with each other. The top four domestic airline
companies, American, Delta, Southwest, and United, held approximately 66.5%
market share in 2014, Southwest being the only low-cost carrier among them.
Source: IBIS World
Figure 5: Industry Revenue Breakdown
3%
4%
Industry
5%
Airlines can differentiate themselves from competitors in a number of ways.
Legacy carriers, like United and American, typically utilize a hub and spoke
model. The hub and spoke model concentrates most of an airline’s operations
within a few central hub cities and serves destinations by connecting a flight
through the hub. While the hub and spoke model may benefit the airline
company the most it is not as attractive to consumers who would prefer non-stop
flights. In addition, Legacy carriers often have higher fares then low-cost
carriers however they offer more amenities to consumers. Low-cost carriers
typically charge lower fare costs than big legacy carriers, but they make up this
cost through high ancillary revenues. Low-cost carriers often typically utilize a
point to point service, rather than a hub and spoke model.
10%
78%
Coach Class Fares
Business Classes Fares
Air Freight Services
Other
First Class Fares
Source: IBIS World
Figure 6: Projected Industry Revenue (in millions)
The Department of Transportation (DOT) has adopted “Passenger Protection
Rules,” which address a wide variety of matters including flight delays on the
tarmac, chronically delayed flights, denied boarding compensation, and
advertising of airfares, among others. Airlines that violate the Passenger
Protection Rules can be subject to fines up to $27,500 per occurrence or per
passenger.
Demand for Air travel is seasonal. Generally, demand for air travel is greater
during the summer months, and therefore, revenues in the airline industry tend
to be stronger in the second and third quarters of the year.
160,000.00
Industry Operating Metrics
Because an airline’s business model is so unique relative to another business,
airlines utilize specific operating metrics in order to measure operating
performance and efficiency. These airline metrics are defined below.
155,000.00
150,000.00
Available Seat Mile (ASM): The Basic Measure of Capacity - One seat
(empty or filled) flying one mile is an ASM.
145,000.00
140,000.00
Revenue Passenger Mile (RPM): The Basic Measure of Production- A
paying passenger flying one mile creates an RPM
135,000.00
2015
2016
2017
2018
2019
2020
Source: IBIS World
UOIG 3
University of Oregon Investment Group
Load Factor: Production Compared to Capacity - RPMs divided by ASMs.
Figure 7: Corporate Profit Growth
Passenger revenue per available seat mile (PRASM) – Passenger revenue
divided by ASMs, also known as unit revenue.
7
6
Operating Revenue per available seat mile (RASM) – Operating Revenue
divided by ASMs.
5
4
Average Stage Length – The average number of miles flown per flight.
3
Yield – Scheduled service revenue divided by scheduled rpm.
2
1
Macroeconomic Environment
0
2015
2016
2017
2018
2019
2020
2021
Source: IBIS World
Figure 8: Crude Oil Growth Rates
The airline industry is extremely competitive and historically has been volatile
due to being subject to numerous external factors. The airline industry has been
cyclical, energy intensive, labor intensive, capital intensive, technology
intensive, highly regulated, heavily taxed, and extremely competitive. In
addition, unforeseen events can also impact the airline industry such as; acts of
terrorism (for example, 9/11), poor weather, and natural disasters. Within recent
years the industry was affected by uncertain economy conditions, volatile fuel
prices, and also U.S. government shut downs. All of these factors can lead to
unpredictable demand for air travel thus causing pricing challenges.
40%
Economic Conditions
The airline industry is sensitive to different changes in economic conditions that
can often require a company to adjust their business strategy. Because airlines
are subject to a lot of fixed costs, economic conditions can greatly impact
demand, which can unfavorably affect an airlines net income. Historically, poor
economic conditions have driven lower demand for both business and leisure
travel. In addition, airlines cannot counteract this low demand by raising fares
to higher prices because it would result in a further decrease in demand.
30%
20%
10%
0%
-10%
-20%
-30%
-40%
2009
2010
2011
2012
2013
2014
Source: IBIS World
Figure 9: 2014 Market Segmentation
3%
10%
25%
62%
Businesses
Coach Customers
First and Business Class
Source: IBIS World
Business travel demand accounts for a significant portion of domestic air travel
demand. Therefore significantly impacting domestic flight revenues. Companies
tend to pay for travel when corporate profit is high and business activity is
strong. When corporate profit declines, demand for air travel declines.
Rebounding demand and loosening credit conditions will drive future growth for
corporate profit until interest rates begin to rise. However slowly rising interest
rates allow profit levels to remain strong for the next decade. The expected
increase corporate profit represents a potential opportunity for companies to
increase market share.
Fuel and Energy Costs
Airlines are dependent on energy in order to operate. Even a small change in
market fuel prices can impact a company’s profitability. Volatile fuel prices can
be caused by external factors that are beyond a company’s control. Fuel prices
can be impacted by both political factors and economic factors such as foreign
imports, conflicts in oil producing areas, limited domestic or pipeline capacity,
worldwide demand for fuel, U.S. policies involving fuel production,
transportation, taxes, and marketing. An airline’s ability to combat increasing
fuel price is limited by its ability to increase fares, at the risk that an increase in
fares will reduce demand. Fuel and oil expense remains one of Southwest’s
largest operating costs, despite the decrease in fuel prices in 2014. In order to
manage risk in the volatility of oil price Southwest enters into fuel derivative
contracts. Southwest utilizes these contracts to hedge a portion of their future jet
Freight Forwarders
UOIG 4
University of Oregon Investment Group
Figure 10: Southwest Boeing 737-800
fuel purchases. Fuel derivatives contracts are discussed further under
Southwest’s business strategy.
Labor relations
The airline industry is extremely labor intensive. The majority of airline
employees are represented by labor unions which exposes airlines to laborrelated job actions. An increase in wages could put a lot of pressure on a
company’s labor costs. In addition, a company’s success depends on its ability
to maintain a skilled staff. Companies may be required to increase compensation
in order to maintain a skilled workforce.
Southwest currently operates with over 46,000 employees with 83% of them
represented by unions. While labor negotiations are ongoing Southwest
currently does not expect any changes that will dramatically affect salaries and
wage expense.
Source: Google Images
Figure 11: Projected Domestic Trips (in millions)
840
820
800
780
Consumer Income
The airline industry revolves around consumer demand. The majority of revenue
earned by an airline comes from a consumer’s discretionary income. Because
the cost of air travel is high, changes in disposable income directly affect
demand for domestic air travel. When consumer disposable income goes up,
they are much more likely to spend money on travel plans. However when
disposable income decreases consumers are much more likely to find cheaper
methods of transportation for short haul trips. Southwest tries to counteract this
risk by utilizing a low cost model. While the average ticket price may be
comparable to a competitors Southwest does not charge additional fees for
carryon items, the first two checked bags, or seat arrangements.
760
Since the recession housing and stock values are continually increasing as well
as the number of Americans going back to work. With increased disposable
income, American consumers are more willing to spend money on luxury goods
that they had forgone during the recession. Southwest’s combined low-fares and
fees remain attractive to these consumers who are used to being conscious of
how much they spend.
740
720
700
680
660
640
620
2015
2016
2017
2018
2019
2020
2021
Source: IBIS World
Figure 12: Per Capita Disposable Income Growth
3.20%
3.00%
2.80%
2.60%
2.40%
2.20%
2.00%
2015
2016
2017
2018
2019
2020
2021
Security Concerns
Terrorist attacks or threatened attacks have affected demand for air travel. The
results of these attacks have caused increased safety measures which increased
security costs for the airline industry in general. Safety measures also create
delays and inconveniences, which can reduce a company’s competitiveness for
short-haul routes as customers would prefer to take other methods of
transportation.
Competition
The airline industry is extremely competitive with competition being intense and
unpredictable. Southwest currently competes with other airlines on virtually all
of its current routes. Different competitive factors can differentiate airlines
including pricing and cost structure, routes, frequent flyer programs, schedules,
customer service, comfort, and amenities. Within recent years Southwest and the
other largest major U.S. airlines have provided the majority of domestic service
including; American Airlines, Delta Air Lines, United Airlines, and US
Airways. In 2013 American Airlines merged with US Airways as a result from
emerging out of bankruptcy. Currently there are 15 major U.S. Airlines, which
are defined by the U.S. Department of Transportation as airlines with annual
revenues of at least $1 billion. With recent improved economic conditions and
improved profitability the airline industry is becoming even more competitive.
Source: IBIS World
UOIG 5
University of Oregon Investment Group
Figure 13: Southwest’s New Logo
Southwest generally provides point-to-point service model, rather than the huband-spoke service provided by most major U.S. airlines. Southwest’s point-topoint route structure has allowed for more direct nonstop routing than hub-andspoke service by not concentrating operations through one or more central
transfer points. In 2014, approximately 73% of Southwest’s consumers flew on
non-stop flights to their destination. Southwest’s point to point service allows
the company to provide conveniently timed flights for low costs. As of
December 2014, Southwest served 581 nonstop city pairs.
Strategic Positioning
In order to preserve Southwest’s low-cost advantage and low-fare brand the
company has undertaken numerous cost containment projects. Southwest has a
lower unit cost than the majority of major US air carriers. In addition, the use of
a single aircraft type, the Boeing 737, has allowed for simplified scheduling,
maintenance costs, and training activities.
Marketing Efforts
Source: Southwest.com
Southwest continually markets and benefits from its points of differentiation
from its competitors. Through national and local marketing campaigns
Southwest aggressively promotes the fact that they do not charge additional fees
for the first and second checked bags with its “Bags Fly Free” message.
In September 2014 Southwest launched its new Heart aircraft livery, airport
experience, and logo. New aircrafts will be delivered in the Heart livery while
existing aircrafts are scheduled to receive this new livery within the aircrafts
existing repainting schedule, thus allowing this launch to be cost neutral.
Fare Structure
Southwest offers fares split into three major categories: Wanna Get Away,”
“Anytime,” and “Business Select.”
Figure 14: Southwest Marketing Efforts
“Wanna Get Away” fares are generally the cheapest and subject to advance
purchase requirements.
“Anytime” fares can be refunded or changed, and funds can also be used
towards future travel. These fares have a higher frequent flyer multiplier than
“Wanna get away” fares that go towards Southwest’s Rapid Rewards frequent
flyer program.
“Business Select” fares can be refunded or changed and funds can also be used
towards future travel on Southwest. Business select allows for priority boarding
within the first 15 positions, a higher frequent flyer point multiplier, priority
security and ticket counter access and also one complimentary adult beverage
coupon to be used on the day of travel.
Source: Google Images
Southwest is currently the only major U.S. airline that does not charge
customers for changing a flight reservation. Southwest emphasizes customer
service by showing that they understand that plans can change and allow
customers to change their flights up to 10 minutes prior to scheduled departure
time. While a customer may be asked to pay the difference in airfare between
tickets, they will not be charged a change fee.
UOIG 6
University of Oregon Investment Group
Figure 15: Southwest Fuel Costs Per Gallon
3.5
3
2.5
2
Unlike most other competitors, Southwest does not charge additional fees for
seat selection, fuel surcharges, snacks, curb-side check-in, or telephone
reservations. Southwest also allows each customer to check a stroller and or car
seat with no additional charge, in addition to two free checked bags.
Southwest offers inflight Wi-Fi service on approximately 80 percent of its fleet.
The arrangement made with the Wi-Fi provider allows for Southwest to control
the pricing of the Wi-Fi service, which is currently at $8 a day per device.
Southwest has improved entertainment options for customers on Wi-Fi enabled
planes allowing free access to Southwest’s live and on-demand television
product. Revenues also come from movie options and limited Wi-Fi services.
1.5
1
0.5
0
Route Structure
Southwest generally utilizes a point-to-point service, rather than the “hub-andspoke” service provided by most major U.S. airlines. Because Southwest does
not concentrate operations through one (or more) central transfer locations,
Southwest has been able to provide more nonstop flights than a typical hub-andspoke service.
Source: Southwest Financials
Figure 16: Aircraft Fleet
The addition of 737-800s has allowed Southwest to adjust its route network in
order to allow for more long-haul routes. The addition of these new planes also
gives Southwest the ability to expand to new destinations, including extended
routes over water, potentially flying to more distant markets such as Hawaii,
Alaska, Canada, and other near-international locations.
400
350
300
250
Fuel Derivatives Contracts
200
150
100
50
0
717-200 (2)
737-300
737-500
Aircraft Owned
737-700
Aircraft Leased
Source: Southwest Financials
Figure 18: Revenue by Location
1.21%
737-800
The key to Southwest’s profitability has been fuel hedging. At the end of 2014
Southwest had participated in over 1,100 financial derivative instruments related
to fuel hedging programs for the years 2015 through 2018. The fair value of
these contracts can vary based on changes in commodity prices. For example,
during 2014, Brent crude oil was at an all-time high of approximately $115 per
barrel and also hit a low price of approximately $57 per barrel.
2014 Fourth Quarter economic fuel costs were $2.62 per gallon, including $.03
per gallon representing unfavorable cash settlements from hedging activities.
This is compared to fourth quarter 2013 $3.05 per gallon, including a $.03 per
gallon in favorable cash settlements from hedging activities.
First quarter 2015 fuel costs are expected to be approximately $1.90 per gallon,
based on the company’s de-hedging of 2015 fuel contracts and market prices.
Southwest has unhedged for 2015 fuel consumption by purchasing offsetting
hedges that resulted in a liability of $.10 per gallon. The fair value of the
Company’s fuel derivative contracts was a net liability of $234 million.
Southwest estimates 2015 economic jet fuel price per gallon to be between
$1.95-$2.05.
Business Growth Strategies
Steady Introduction into International Markets
98.79%
Foreign Operations
Domestic Operations
Source: Southwest Financials
In 2014, Southwest airlines completed transition of AirTran international service
into Southwest service. In January of 2014, Southwest began servicing
AirTran’s international routes to be flown by Southwest aircrafts. In 2014,
Southwest launched its own international service to Jamaica, The Bahamas,
Aruba, Mexico, and the Dominican Republic. Southwest plans to add more
destinations in 2015 to Central America and Belize subject to government
approval.
UOIG 7
University of Oregon Investment Group
In 2014 operating revenues from foreign operations, including revenues from
AirTran operations were approximately $226 million while $18.4 billion in
revenues were received from domestic operations within the US.
Figure 19: Aircraft Fleet Ownership
15%
Fleet Modernization
In order to maintain low costs Southwest Airlines has multiple strategies
involving fleet modernization. In order to maintain low maintenance costs
Southwest Airlines has historically used the same model aircraft. After acquiring
AirTran Southwest had to integrate AirTran models out of their fleet (Boeing
717s). Southwest’s fleet consists of 665 Boeing 737s. Of these aircraft 500 are
owned outright while 14 are on capital leases and 98 are under operating leases.
2%
Southwest is currently replacing classic Boeing 737s aircrafts with new Boeing
737-800s and pre-owned Boeing 737-700s. These new aircrafts are less
maintenance intensive and more fuel-efficient. In 2014 Southwest completed the
retirement of AirTran 717-200s. During 2014 the company’s fleet decreased by
16 to 665 aircrafts. This reflects the retirement of 66 AirTran 717-200s as well
as the retirement of 5 Boeing 737 Classics. Southwest received 33 new Boeing
737-880s and 22 pre-owned Boeing 737-700s. These new planes can also fly
longer distances at a lower cost. Southwest Airlines can uses long-term fleet
modernization effects in order to operate in varying economic conditions.
83%
Operating Lease
Capital Lease
Owned
Source: Southwest Financials
Southwest’s Rapid Rewards Frequent Flyer Program
Southwest’s Rapid Rewards program is designed to increase revenues by
bringing in new customers, increasing business from existing customers, and
strengthening the company’s Rapid Rewards hotel, rental car and retail
partnerships. Southwest’s Rapid Rewards frequent flyer program allows
consumers to earn points for every dollar spent. Points can be used to purchase
future flights or provide upgrades from “Wanna Get Away” fares to “Business
select.” Rapid rewards members can also earn points by buying items through
purchases made with Rapid Rewards partners those of which in include car
rental agencies, hotels, restaurants, and retail locations, or by using a Southwest
branded chase visa credit card.
Figure 20: Seats per Aircraft
737-800
737-700
737-500
737-300
717-200 (2)
0
50
100
150
Source: Southwest Financials
200
Consumers under the Rapid Rewards program are able to redeem their points for
every available seat, every day, on every flight, with no blackout dates. So long
as the member has points-earning activity during the most recent 24 months
Rapid Rewards points do not expire. Members who achieve “A-List” or “A-List
Preferred” status can receive top tier benefits. These members can utilize “Fly
By” priority check-in and security lanes, as well as free inflight Wi-Fi on
equipped flights. Members who qualify can also receive a companion pass,
which allows for unlimited free travel for one year to any destination available
on Southwest for a designated companion of the qualifying Rapid Rewards
member. Revenue attributable to Rapid Rewards was approximately $400
million for the fiscal year 2014.
The Wright Amendment
The Wright Amendment, Section 29 of the International Air Transportation
Competition Act of 1979, prohibited nonstop and through passengers on
commercial flights between Dallas Love Field and all states outside of Texas,
with the exception of the “Wright Amendment States”; Alabama, Arkansas,
Kansas, Louisiana, Mississippi, Missouri, New Mexico, and Oklahoma
In 2006, Southwest Airlines, the City of Dallas, the City of Fort Worth,
American Airlines, Inc., and the DFW International Airport Board, sought to
UOIG 8
University of Oregon Investment Group
amend the Wright Amendment. Congress passed the Wright Amendment
Reform Act which enabled the purchase of a single ticket between Dallas Love
Field and any destination, but the customer still had to stop within a Wright
Amendment State. On October 13, 2014, the amendment was completely
repealed, allowing airlines to fly from Love Field to any city in America.
However nonstop international service to or from Dallas Love Field will
continue to be prohibited.
Figure 21: Dallas Love Field Airport
Since the lifting of the Wright Amendment, Southwest has launched 17
destinations from the newly renovated Dallas Love Field. Dallas ASM capacity
was up over 80% for fourth quarter 2014 compared to year over year fourth
quarter 2013. These new routes have also been exceeding approximately a 90%
load factor.
Management and Employee Relations
Gary C. Kelly – Chairman of the Board, President, & Chief
Executive Office
Source: Google Images
In 1986 Gary Kelly joined Southwest Airlines as its controller. In 1989 Kelly
served as Chief financial officer and Vice president of Finance until 2001 where
he became Executive Vice President. Kelly was named Chief Executive Officer
in July 2004. In May of 2008, Kelly became the Company’s Chairman of the
Board and during July became President.
Robert E Jordan – Executive Vice President & Chief
Commercial Officer
Figure 23: Aircraft Delivery Schedule
In 1988 Jordan joined Southwest Airlines as a programmer and since then has
worked his way through the different roles of; Director Revenue Accounting
(though 1997), Vice President of Purchasing (2002), Senior Vice President
Enterprise Spend Management (2006), Executive Vice President Strategy &
Technology (2008), where he finally moved to the president of AirTran after
Southwest acquired the company in May 2011. Robert Jordan now serves as the
company’s Executive Vice President and Chief Commercial Officer since
September 2011.
Tammy Romo – Senior Vice President Finance & Chief
Financial Officer
Tammy Romo joined the company as the manager of Financial Reporting in
September of 1991 where she was then promoted to Director of Investor
Relations in 1994. Romo also served many positions including; Senior Director
of Investor Relations (2004), Vice President Treasurer (2006), Vice President
Controller (2008), and Vice President of Financial Planning (2010). In 2010
Romo became Senior Vice President of Finance and Chief Financial officer in
2012.
Management Guidance
Source: Southwest One Report
Because the airline industry is extremely volatile due to external factors
management forecasts only the near future. Southwest management guidance
has historically been in line with actuals. For 2014 management forecasted a
target of 15% ROIC. Actual ROIC for 2014 was 21.2% primarily due to a
decrease in fuel costs
.
For first quarter 2015 management predicts a 6% increase in passenger revenues
in line with similar ASM growth. So far this year travel demand has remained
UOIG 9
University of Oregon Investment Group
strong based on Southwest’s current booking trends. While it is too early to
provide revenue guidance for the full year 2015 Southwest management aims to
keep revenue growth in line with capacity growth.
Recent News
Figure 24: Customer Complaint Levels
2.5
Southwest Airlines Reports February Traffic
Southwest Investor Relations - March 11, 2015
2
Southwest Airlines announced February RPMs at 7.6billion, a 6% increase
compared to last February. ASM increased 3.6% and the load factor was up
1.8% in comparison to last February’s numbers. Year to date numbers have also
increased with a 7.3% increase in RPMS, and a 7% increase in ASMs. Overall
load factor has also increased by .2%.
1.5
1
0.5
Southwest Adjusts Fuel Hedges as Oil Rout Adds Uncertainty
Bloomberg Business – December 14, 2014
0
Southwest
Airlines
Alaska
Airlines
Delta Airlines
JetBlue
Airlines
American
Airlines
Source: Southwest One Report
United
Airlines
Southwest Airlines is adjusting their hedges in order to capitalize on volatile fuel
costs. Due to the decline in oil prices Southwest will save approximately $1
billion in 2015 even after accounting for losses from de-hedging. Southwest
currently utilizes hedging in order to manage risk in the energy market.
Southwest Airlines (LUV) Stock Rises Today as Airline Stocks
Advance, Oil Declines
Yahoo Finance – March 27, 2014
Southwest share prices are up, along with most other airline stocks, as oil prices
decline. Even though oil prices are declining consumers are still paying the same
amount for a ticket as before the decline in oil prices. This is because an airlines
cash is currently being used to reinvest in the company and improve operations.
Fuel savings are also going towards rewarding investors with stock buybacks
and dividend payments.
Catalysts
Figure 25: New Plane Paint Design
Upside









Decreased Energy Costs
Increased Consumer Disposable Income
Increased Corporate Profits
Expansion to International Markets
Demand for Non-Stop Flights
Southwest’s Brand for Great Customer Service
Fleet Modernization
Rapid Rewards
Repeal of Wright Amendment
Downside
Source: Southwest.com



Government Regulation
Volatility in Energy Costs
Terrorist Attacks
UOIG 10
University of Oregon Investment Group


Figure 26: Alaska Logo
Labor Negotiations
Political Instability
Comparable Analysis
Alaska Air Group Inc. – 35%
Based in Seattle Washington, Alaska Air Group, Inc. provides passengers and
cargo air transportation services primarily in the United States. It serves
approximately 100 cities in Alaska, the Lower 48, Hawaii, Canada, and Mexico.
As of December 31, 2014 the company’s fleet consisted of 137 Boeing 737 jet
aircraft; and 51 Bombardier Q400 turboprop aircraft. – Yahoo Finance.
Source: Google Images
Figure 27: Alaska Plane
Alaska was weighted the most due to the similarities in their business model in
relation to Southwest. Alaska’s Aircraft fleet is predominately made up of
Boeing Aircrafts and also receives the majority of revenues from domestic
operations. Like Southwest, Alaska is a low cost airline that stresses the
importance of employee customer relationships. While Southwest is a larger
company than Alaska they are both subject to similar industry risks because of
equal target markets.
Spirit Airlines Inc. – 20%
Headquartered in Miramar Florida, Spirit Airlines Inc. provides low-fare airline
services. As of February 17, 2015, it operated approximately 325 daily flights to
57 destinations in the United States, Caribbean, and Latin America. As of
December 31, 2014, the company had a fleet of 65 Airbus single-aisle aircraft
comprising 29 A319s, 34 A320s, and 2 A321s. – Yahoo finance
Source: Google Images
Figure 28: Spirit Logo
Spirit Airlines is also a low cost airline that operates in the same industry as
Southwest. They run a similar business model of trying to maintain low costs in
order to support ultra-low fares. Unlike Southwest, Spirit receives a significant
portion of revenues from ancillary products in order to support ultra-low fare
costs. Spirit also is subject to similar industry risk factors as its routes are
primarily domestic and nearby international markets. Southwest competes with
Spirit on most of its routes.
Allegiant Travel Company – 15%
Source: Google Images
Figure 29: Allegiant Logo
Allegiant Travel Company focuses on the provision of travel services and
products to residents of under-served cities in the United States. The company
offers scheduled air transportation on limited frequency nonstop flights between
under-served cities and leisure destinations. As of February 2, 2015, it operated
a fleet of 53 MD-80 aircraft, 4 Airbus A319 aircraft, 9 Airbus 320 aircraft and 6
Boeing 757-200 aircraft provided services on 229 routes to 94 cities. The
company also provides air-related services and products in conjunction with air
transportation, including use of its call center for purchases, baggage fees,
advance seat assignments, travel protection products, change fees, priority
boarding, food and beverage purchases on board, and other air-related services.
In addition, it offers third party travel products, such as hotel rooms, ground
transportation, and attractions; and air transportation services through fixed fee
agreements and charter service on a seasonal and ad-hoc basis. – Yahoo finance
While allegiant is smaller and have different growth rates than Southwest
airlines it was weighted 15% due to similar business models. Allegiant is a low
cost airline like Southwest however it also receives a significant portion of
revenue from ancillary product offerings. Allegiant also operates primarily in
the US subjecting it to similar industry risk factors.
Source: Google Images
UOIG 11
University of Oregon Investment Group
JetBlue Airways Corporation – 15%
Figure 30: JetBlue Logo
JetBlue Airways Corporation, a passenger carrier company, provides air
transportation services. As of December 31, 2014, the company operated a fleet
of 13 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 EMBRAER 190
aircrafts. It also served 87 destinations in 27 states in the United States, the
District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin
Islands, and 17 countries in the Caribbean and Latin America.
JetBlue Airways operates in the same markets as Southwest airlines however the
company is smaller and offers less daily flights than Southwest. JetBlue utilizes
fuel derivative contracts to manage fuel prices like Southwest. JetBlue Airways
receives 8% of revenue from ancillary products and offers which is similar to
Southwest’s 4%. Because JetBlue operates in most domestic and near
international markets it is exposed to the same market risks as Southwest.
Source: Google Images
Figure 31: United Logo
United Continental Holdings – 10%
United Continental Holdings, Inc., together with its subsidiaries, provides air
transportation services in North America, the Asia-Pacific, Europe, the Middle
East, Africa, and Latin America. It transports people and cargo through its
mainline operations, which use jet aircraft with at least 118 seats, and its
regional operations. As of December 31, 2014, the company operated a fleet of
1,257 aircraft. It also sells fuel; and provides maintenance, ground handling, and
catering services for third parties. The company was formerly known as UAL
Corporation and changed its name to United Continental Holdings, Inc. in
October 2010. – Yahoo Finance
United Airlines is larger than Southwest and also operates in more markets.
However, United’s use of larger planes is similar to Southwest’s fleet model and
they also offer a lot of the same domestic routes as Southwest. United
international market operates exposes the company to different industry risk
factors and market growth rates, however it is important to offset the weightings
of other small comparable companies.
Delta Air Lines Inc. – 5%
Source: Google Images
Source: Google Images
Figure 31: Allegiant Logo
Delta Air Lines, Inc. provides scheduled air transportation for passengers and
cargo worldwide. The company operates in two segments, Airline and Refinery.
Its route network comprises various gateway airports in Amsterdam, Detroit,
Los Angeles, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK,
Paris-Charles de Gaulle, Salt Lake City, Seattle, and Tokyo-Narita. Delta also
provides maintenance and repair services for third parties, as well as offers
staffing services, professional security and training services, and aviation
solutions; vacation packages; and aircraft charters, and aircraft management and
programs. The company operates approximately 900 aircrafts. – Yahoo Finance
Delta is a legacy airline that operates on a hub and spoke business model. While
Southwest competes with Delta daily on domestic routes, Delta was only
weighted 5% because Delta operates in numerous international markets thus
exposing it to a different industry. Delta is most comparable in Southwest to
size, but not many other factors. Delta’s weighting does offset the weighting of
smaller domestic airlines.
Source: Google Images
UOIG 12
University of Oregon Investment Group
Discounted Cash Flow Analysis
Figure 32: Projected ASMs
Revenue Model
Passenger Revenue
190000
In order to most accurately project passenger revenue regressions were run in
order to correlate the relationship between ASM and other variables. Some of
these variables include; consumer spending, US domestic tips, Consumer
Income, GDP, % change in consumer spending, and also % change in US trips
(which were compared to % change in ASMs). ASMs were projected off of both
US domestic trips and consumer spending through a multi-variable regression.
Using ASMs and a slightly increasing load factor RPMS were projected. In
order to get passenger revenue RPMs were multiplied by yield per passenger
mile.
180000
170000
160000
150000
140000
130000
120000
2015
2016
2017
2018
2019
2020
2021
Source: Southwest Spreads
Other Revenues
Due to the final integration of AirTran other revenues are projected to decline
caused by a decrease in ancillary revenues. A significant portion of other
revenues came from checked baggage fees associated with AirTran. Southwest
offers more customer friendly fee policies such as no checked bag fees and no
charge for seat selection thus decreasing other revenues.
Figure 33: Beta Calculation
Beta
SE
Freight Revenues
Since the acquisition and integration of AirTran freight revenues increased due
to new and maturing markets. Going forward Freight is projected to grow at a
decreasing rate as Southwest does not market this effort due to its low revenue
segment.
Weighting
3 Year Daily
1.03
0.03
50.00%
Beta
3 Year Weekly
1.01
0.06
5.00%
Vasicek - ETF
0.78
10.00%
Hamada - Comps
0.71
15.00%
Hamada - ETF
0.70
15.00%
Beta was calculated by running regressions against the S&P 500. Hamada and
Vasicek betas were weighted in order to capture the different capital structure of
Southwest and also to show convergence towards the industry mean.
Regressions were run for the 1-year, 3-year, and 5-year time frames with both
daily and weekly prices for those time frames.
Southwest Airlines Beta
0.90
Source: Southwest Spreads
Figure 35: Boeing 737 Landing at Dallas Love
Operating Expenses
Southwest currently implements numerous strategies at cost containment in
order to maintain their low cost model. Operating expense line items were
calculated to trend slightly lower than historical averages (excluding energy
costs).
Fuel Costs
Energy Costs are projected to increase after 2015. Southwest de-hedged all fuel
derivative contracts for 2015 thus allowing it to capture current low fuel prices.
Southwest currently has fuel derivative contracts in place for a portion of fuel
purchases through 2018 thus allowing Southwest’s fuel and oil price growth to
remain more neutral in volatile markets. Oil expense as a percentage of ASMs is
trending towards the historical average.
Tax Rate
Aviation taxes are relatively high because the federal government uses much of
those taxes to fund programs administered by the FAA (Federal Aviation
Administration). Historically Southwest has had a tax rate between 37%-39%
and management currently projects a tax rate of 38% going forward.
Source: Google Images
UOIG 13
University of Oregon Investment Group
Figure 36: Final Valuation
Method
Implied Price
Discounted Cash Flow
53.34
Forward Comparables
48.47
Weight
75%
25%
Implied Price
52.12
Current Price
44.58
Undervalued
16.92%
Source: Southwest Spreads
Capital Expenditures
Capital expenditures include payments made for aircraft, flight equipment,
purchase deposits related to future aircraft deliveries, and ground and other
property and equipment. Capital expenditures following the AirTran acquisition
were high as Southwest continued to remove AirTran aircraft from their fleet
and purchase new Boeing 737-800s. In the future capital expenditures are
projected to grow at a decreasing rate as Southwest acquires and maintains a
strong Boeing fleet to manage capacity growth.
Net Working Capital
Historically net working capital for Southwest Airlines is negative. In order to
effectively project a positive net change in working capital in the terminal year
current assets were projected higher than industry averages for the year 2023
while liabilities were lower for that year. Negative net working capital is due to
high air traffic liability and low current assets as most of Southwest assets are
held in long term PPE.
Recommendation
I am recommending a buy for Southwest Airlines in all 3 portfolios. While
Southwest has strong growth potential long term, decreased oil prices make
Southwest a good investment for the Dadco portfolio.
Southwest’s unique business model allows it to charge moderately priced fares
with approximately no other fees necessary for a consumer. Customers looking
for a low cost airline find Southwest attractive due to ticket price, amenities, and
refund ability for tickets purchased. As consumer income and corporate profit
increases the demand for domestic air fare is also predicted to increase giving
Southwest an extremely strong position to capitalize on this growth.
UOIG 14
April 3rd, 2015
University of Oregon Investment Group
Appendix 1 – Relative Valuation
Comparables Analysis
LUV
Southwest
Airlines
($ in millions)
Stock Characteristics
Current Price
Beta
Max
$194.97
1.37
Min
$19.36
0.76
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
1,216.00
10,692.00
4,384.00
1.19
0.00
824.27
37,553.82
45,322.82
10.43
135.82
89.61
0.00
0.00
17.41
3,394.73
3,899.40
113.50
1,327.00
486.89
0.00
0.00
221.07
7,354.61
8,648.61
Growth Expectations
% Revenue Growth 2015E
% Revenue Growth 2016E
% EBITDA Growth 2015E
% EBITDA Growth 2016E
% EPS Growth 2015E
% EPS Growth 2016E
20.40%
23.10%
78.60%
18.00%
138.00%
18.10%
0.70%
3.30%
27.00%
-3.07%
44.70%
-10.39%
0.00%
27.96%
37.79%
16.47%
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
EBIT
EBITDA
EBITDAR
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
EV/EBITDAR
Market Cap/Net Income = P/E
Multiple
EV/Revenue
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
EV/EBITDAR
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
SAVE
Spirit Airlines
Inc.
ALGT
JBLU
Allegiant Travel JetBlue Airways
Company
Corporation
UAL
United
Continental
Holdings
DAL
Delta Air Lines
Inc.
$44.58
0.90
35.00%
$66.20
1.13
20.00%
$78.30
1.37
15.00%
$194.97
0.76
15.00%
$19.36
1.19
10.00%
$68.19
1.15
5.00%
$45.56
1.29
162.66
2,140.61
767.40
0.18
0.00
189.38
10,091.20
11,627.25
258.00
2,434.00
1,282.00
0.00
0.00
675.99
30,135.81
31,545.81
117.00
686.00
107.00
0.00
0.00
131.28
8,691.04
9,387.04
10.43
135.82
632.78
0.00
0.00
72.78
5,698.35
5,211.82
53.82
539.28
89.61
1.19
0.00
17.41
3,394.73
3,899.40
265.00
1,968.00
341.00
0.00
0.00
310.86
6,018.17
7,910.17
110.00
10,692.00
4,384.00
0.00
0.00
384.23
26,200.40
32,618.40
1,216.00
8,561.00
2,008.00
0.00
0.00
824.27
37,553.82
45,322.82
6.40%
8.40%
64.60%
4.45%
71.15%
5.15%
8.54%
10.85%
58.63%
6.10%
75.50%
6.19%
6.59%
4.85%
49.77%
-3.07%
94.36%
-10.39%
4.70%
7.40%
39.90%
1.30%
47.00%
4.40%
20.40%
23.10%
76.80%
18.00%
61.20%
13.00%
9.10%
11.20%
64.90%
1.40%
81.10%
2.40%
8.10%
9.40%
78.60%
6.90%
138.00%
5.90%
0.70%
3.30%
64.30%
2.00%
117.10%
-1.00%
3.30%
4.30%
27.00%
12.00%
44.70%
18.10%
0.00%
13.97%
18.86%
9.24%
0.00%
20.39%
26.82%
12.62%
0.00%
22.52%
29.03%
13.71%
0
18.85%
23.89%
11.13%
0
23.43%
29.94%
14.37%
0
26.45%
31.83%
16.47%
0
27.96%
37.79%
16.20%
0
17.35%
23.71%
9.24%
0
13.97%
18.86%
10.86%
0
16.75%
21.44%
9.56%
$683.00
0.33
1.50
269.09
$2.75
0.03
0.20
10.81
$80.50
0.18
1.18
18.28
$132.73
0.14
0.82
81.66
$409.00
0.09
0.57
11.58
$28.00
0.09
0.48
60.11
$2.75
0.03
0.20
269.09
$21.21
0.15
1.26
22.11
$133.00
0.28
1.50
11.21
$683.00
0.33
1.46
10.81
$619.00
0.22
1.093746504
14.44
$41,689.00
$6,982.00
$8,939.00
$9,008.00
$4,254.00
$2,959.00
$1,241.00
$347.00
$469.00
$469.00
$201.00
$11.54
$5,955.00
$1,204.00
$1,587.00
$1,636.00
$694.50
$765.50
$9,562.20
$1,695.75
$2,216.60
$2,343.05
$1,101.45
$927.68
$19,831.68
$3,739.16
$4,737.23
$5,197.58
$2,207.91
$1,963.52
$5,621.00
$1,317.00
$1,683.00
$1,727.00
$808.00
$667.00
$2,325.00
$615.00
$740.00
$895.00
$383.00
$687.00
$1,241.00
$347.00
$469.00
$469.00
$201.00
$11.54
$6,289.00
$1,091.00
$1,491.00
$1,545.00
$581.00
$844.00
$39,159.00
$5,470.00
$7,386.00
$8,071.00
$4,254.00
$2,959.00
$41,689.00
$6,982.00
$8,939.00
$9,008.00
$3,987.00
$2,652.00
3.14x
11.24x
8.31x
98.34x
8.31x
16.89x
0.83x
5.96x
4.42x
7.21x
4.04x
6.16x
1.46x
7.19x
5.44x
8.88x
5.28x
10.56x
1.83x
7.88x
6.10x
27.11x
5.74x
11.91x
1.59x
8.44x
6.66x
11.37x
6.07x
13.65x
1.67x
7.13x
5.58x
9.24x
5.44x
10.76x
2.24x
8.47x
7.04x
98.34x
5.82x
14.88x
3.14x
11.24x
8.31x
8.52x
8.31x
16.89x
1.26x
7.25x
5.31x
12.23x
5.12x
10.36x
0.83x
5.96x
4.42x
7.37x
4.04x
6.16x
1.09x
6.49x
5.07x
7.21x
5.03x
9.42x
Implied Price
Weight
51.61
0.00%
41.52
0.00%
40.65
20.00%
109.15
10.00%
42.03
70.00%
38.91
0.00%
$48.47
44.58
8.72%
Median
Weight Avg.
$67.20
$80.08
1.17
1.14
ALK
Alaska Air
Group Inc.
UOIG 15
April 3rd, 2015
University of Oregon Investment Group
Appendix 2 – Discounted Cash Flows Valuation
Discounted Cash Flow Analysis
Q1
Q2
Q3
Q4
03/31/2014A 06/30/2014A 09/30/2014A 12/31/2014A
2014A
Q1
Q2
Q3
Q4
03/31/2015E
06/30/2015E
09/30/2015E
12/31/2015E
($ in millions)
2009A
2010A
2011A
2012A
2013A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Total Revenue
$10,350.00
$12,104.00
$15,658.00
$17,088.00
$17,699.00
$4,166.00
$5,011.00
$4,800.00
$4,628.00
$18,605.00
$4,451.18
$5,224.16
$5,093.14
$5,063.21
$19,831.68
$20,793.62
$22,688.01
$23,955.55
$25,052.61
$26,318.27
$27,610.29
$28,968.22
$30,382.47
% YoY Growth
(6.11%)
16.95%
29.36%
9.13%
3.58%
2.01%
7.93%
5.61%
4.52%
5.12%
6.85%
4.25%
6.11%
9.40%
6.59%
4.85%
9.11%
5.59%
4.58%
5.05%
4.91%
4.92%
4.88%
3,468.00
4,749.00
5,035.00
1,275.00
1,406.00
5,434.00
1,363.84
1,484.18
5,871.30
6,126.89
6,653.21
6,991.27
7,276.26
7,606.90
7,941.56
8,291.46
8,653.59
Operating Expense
Salaries,Wages, and Benefits
3,704.00
4,371.00
1,363.00
1,390.00
1,470.39
1,552.89
%Change
3.83%
6.81%
18.01%
8.65%
6.02%
7.78%
8.32%
7.24%
17.50%
7.92%
6.97%
5.56%
7.88%
11.72%
8.05%
4.35%
8.59%
5.08%
4.08%
4.54%
4.40%
4.41%
% Revenue
33.51%
30.60%
27.92%
27.79%
28.45%
30.60%
28.06%
28.40%
30.03%
29.21%
30.64%
28.41%
28.87%
30.67%
29.61%
29.47%
29.32%
29.18%
29.04%
28.90%
28.76%
28.62%
28.48%
Fuel and Oil
3,044.00
3,620.00
5,644.00
6,120.00
5,763.00
1,314.00
1,425.00
1,386.00
1,167.00
5,293.00
852.80
1,068.06
1,212.58
1,032.81
4,166.26
4,573.87
5,217.52
5,734.50
6,221.54
6,486.05
6,751.73
7,028.42
7,312.85
(18.02%)
18.92%
55.91%
8.43%
(5.83%)
(9.81%)
(4.30%)
(4.41%)
(19.90%)
(8.16%)
(35.10%)
(25.05%)
(12.51%)
(11.50%)
(21.29%)
9.78%
14.07%
9.91%
8.49%
4.25%
4.10%
4.10%
4.05%
3.11%
3.68%
4.68%
4.78%
4.42%
4.31%
4.18%
4.10%
3.57%
4.04%
2.64%
3.03%
3.44%
2.93%
3.02%
3.19%
3.36%
3.53%
3.70%
3.71%
3.73%
3.74%
3.75%
Maintenance, Materials and Repairs
719.00
751.00
955.00
1,132.00
1,080.00
250.00
236.00
248.00
224.00
978.00
246.39
235.87
241.91
220.71
944.89
1,006.02
1,124.12
1,214.78
1,298.29
1,391.47
1,486.69
1,592.34
1,699.69
%Change
(.28%)
4.45%
27.16%
18.53%
(4.59%)
(14.09%)
(16.01%)
(8.49%)
(23.02%)
(9.44%)
(1.44%)
(.05%)
(2.45%)
(1.47%)
(3.39%)
6.47%
11.74%
8.07%
6.87%
7.18%
6.84%
7.11%
6.74%
%Flight Equipment
5.24%
5.37%
6.14%
6.92%
6.38%
1.46%
1.34%
1.38%
1.21%
5.29%
1.38%
1.29%
1.27%
1.08%
4.80%
4.92%
5.05%
5.17%
5.30%
5.42%
5.54%
5.67%
5.79%
Aircraft Rentals
186.00
180.00
308.00
355.00
361.00
81.00
75.00
71.00
68.00
295.00
123.74
105.01
122.74
108.86
460.35
468.87
496.52
508.35
514.99
523.53
530.90
537.77
543.85
%Change
20.78%
(3.23%)
71.11%
15.26%
1.69%
(12.90%)
(18.48%)
(22.83%)
(26.88%)
(18.28%)
52.77%
40.01%
72.88%
60.09%
56.05%
1.85%
5.90%
2.38%
1.31%
1.66%
1.41%
1.29%
%Revenue
1.80%
1.49%
1.97%
2.08%
2.04%
1.94%
1.50%
1.48%
1.47%
1.59%
2.78%
2.01%
2.41%
2.15%
2.32%
2.25%
2.19%
2.12%
2.06%
1.99%
1.92%
1.86%
1.79%
Landing Fees and Other Rentals
718.00
807.00
959.00
1,043.00
1,103.00
266.00
295.00
289.00
262.00
1,111.00
267.96
321.29
307.63
305.31
1,202.18
1,261.55
1,377.63
1,455.80
1,523.74
1,602.05
1,682.10
1,766.29
1,854.06
%Revenue
6.94%
6.67%
6.12%
6.10%
6.23%
6.39%
5.89%
6.02%
5.66%
5.97%
6.02%
6.15%
6.04%
6.03%
6.06%
6.07%
6.07%
6.08%
6.08%
6.09%
6.09%
6.10%
6.10%
Depreciation and Amortization
616.00
628.00
715.00
844.00
867.00
221.00
228.00
238.00
251.00
938.00
238.61
236.97
251.99
270.50
998.07
1,201.95
1,316.41
1,394.32
1,462.05
1,538.18
1,613.86
1,696.79
1,780.59
% of Equipment
3.94%
3.90%
3.98%
4.50%
4.42%
1.11%
1.12%
1.14%
1.18%
4.40%
1.15%
1.12%
1.14%
1.14%
5.03%
5.06%
5.09%
5.11%
5.14%
5.17%
5.20%
5.22%
5.25%
Other Operating Expenses
1,337.00
1,426.00
1,879.00
2,039.00
2,126.00
526.00
533.00
568.00
577.00
2,205.00
558.18
643.09
623.40
624.80
2,449.47
2,557.38
2,778.48
2,921.15
3,041.80
3,181.68
3,323.40
3,471.67
3,625.23
% Revenue
12.92%
11.78%
12.00%
12.54%
12.31%
12.24%
12.34%
12.35%
12.30%
12.25%
12.19%
12.14%
12.09%
12.04%
11.98%
11.93%
%Change
%ASM
4.37%
1.13%
11.93%
12.01%
12.63%
10.64%
11.83%
12.47%
11.85%
-
-
134.00
183.00
86.00
18.00
38.00
23.00
48.00
126.00
-
-
-
-
-
-
-
-
-
-
-
-
0.00%
0.00%
.86%
1.07%
.49%
.43%
.76%
.48%
1.04%
.68%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
$262.00
$988.00
$693.00
$623.00
$1,278.00
$215.00
$775.00
$614.00
$641.00
$2,225.00
$799.66
$1,129.69
$862.49
$947.32
$3,739.16
$3,597.09
$3,724.12
$3,735.37
$3,713.93
$3,988.40
$4,280.05
$4,583.48
$4,912.61
Gross Margin
2.53%
8.16%
4.43%
3.65%
7.22%
5.16%
15.47%
12.79%
13.85%
11.96%
17.97%
21.62%
16.93%
18.71%
18.85%
17.30%
16.41%
15.59%
14.82%
15.15%
15.50%
15.82%
16.17%
Other Gains or Losses (Gains)
(54.00)
106.00
198.00
(181.00)
(32.00)
(53.00)
3.00
66.00
293.00
309.00
15.13
17.76
17.32
17.21
67.43
70.70
77.14
81.45
85.18
89.48
93.87
98.49
103.30
Acquisition and Integration
%Revenue
Operating Income
-
% of Revenue
(.52%)
.88%
1.26%
(1.06%)
(.18%)
(1.27%)
.06%
1.38%
6.33%
1.66%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
.34%
Interest Expense
186.00
167.00
194.00
147.00
131.00
33.00
34.00
31.00
32.00
130.00
40.06
39.18
34.63
32.40
146.28
155.95
170.16
179.67
187.89
197.39
207.08
217.26
227.87
% Revenue
1.80%
1.38%
1.24%
.86%
.74%
.79%
.68%
.65%
.69%
.70%
.90%
.75%
.68%
.64%
.74%
.75%
.75%
.75%
.75%
.75%
.75%
.75%
.75%
Interest (Income)
(13.00)
(12.00)
(10.00)
(7.00)
(6.00)
(2.00)
(2.00)
(2.00)
(1.00)
(7.00)
-
-
-
-
-
-
-
-
-
-
-
-
-
(.13%)
(.10%)
(.06%)
(.04%)
(.03%)
(.05%)
(.04%)
(.04%)
(.02%)
(.04%)
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
(21.00)
(18.00)
(12.00)
(21.00)
(24.00)
(7.00)
(6.00)
(6.00)
(5.00)
(23.00)
-
-
-
-
-
-
-
-
-
-
-
-
-
% Revenue
(.20%)
(.15%)
(.08%)
(.12%)
(.14%)
(.17%)
(.12%)
(.13%)
(.11%)
(.12%)
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Earnings Before Taxes
164.00
745.00
323.00
685.00
1,209.00
244.00
746.00
525.00
322.00
1,816.00
744.46
1,072.75
810.54
897.70
3,525.46
3,370.44
3,476.82
3,474.25
3,440.86
3,701.54
3,979.10
4,267.72
4,581.44
% Revenue
1.58%
6.15%
2.06%
4.01%
6.83%
5.86%
14.89%
10.94%
6.96%
9.76%
16.73%
20.53%
15.91%
17.73%
17.78%
16.21%
15.32%
14.50%
13.73%
14.06%
14.41%
14.73%
15.08%
65.00
286.00
145.00
264.00
455.00
92.00
281.00
196.00
111.00
680.00
282.90
407.64
308.01
341.13
1,339.67
1,280.23
1,320.09
1,318.56
1,305.34
1,403.65
1,508.27
1,617.00
1,735.14
Tax Rate
39.63%
38.39%
44.89%
38.54%
37.63%
37.70%
37.67%
37.33%
34.47%
37.44%
38.00%
38.00%
38.00%
38.00%
38.00%
37.98%
37.97%
37.95%
37.94%
37.92%
37.90%
37.89%
37.87%
Net Income
$99.00
$459.00
$178.00
$421.00
$754.00
$152.00
$465.00
$329.00
$211.00
$1,136.00
$461.57
$665.10
$502.54
$556.58
$2,185.78
$2,090.21
$2,156.73
$2,155.69
$2,135.51
$2,297.89
$2,470.83
$2,650.73
$2,846.31
% Revenue
Capitalized Interest
Less Taxes (Benefits)
Net Margin
.96%
3.79%
1.14%
2.46%
4.26%
3.65%
9.28%
6.85%
4.56%
6.11%
10.37%
12.73%
9.87%
10.99%
11.02%
10.05%
9.51%
9.00%
8.52%
8.73%
8.95%
9.15%
9.37%
Add Back: Depreciation and Amortization
616.00
628.00
715.00
844.00
867.00
221.00
228.00
238.00
251.00
938.00
238.61
236.97
251.99
270.50
998.07
1,201.95
1,316.41
1,394.32
1,462.05
1,538.18
1,613.86
1,696.79
1,780.59
Add Back: Interest Expense*(1-Tax Rate)
112.28
102.89
106.91
90.35
81.70
20.56
21.19
19.43
20.97
81.32
24.84
24.29
21.47
20.09
90.69
96.72
105.55
111.48
116.61
122.54
128.58
134.94
141.57
$827.28
$1,189.89
$999.91
$1,355.35
$1,702.70
$393.56
$714.19
$586.43
$482.97
$2,155.32
$725.01
$926.36
$776.00
$847.17
$3,274.54
$3,388.87
$3,578.70
$3,661.49
$3,714.18
$3,958.61
$4,213.27
$4,482.46
$4,768.46
% Revenue
7.99%
9.83%
6.39%
7.93%
9.62%
9.45%
14.25%
12.22%
10.44%
11.58%
16.29%
17.73%
15.24%
16.73%
16.51%
16.30%
15.77%
15.28%
14.83%
15.04%
15.26%
15.47%
15.69%
Current Assets
765.00
741.00
1,201.00
1,257.00
1,304.00
1,316.00
1,323.00
1,425.00
1,416.00
1,416.00
1,106.07
1,287.04
1,311.61
1,348.96
1,348.96
1,425.19
1,497.21
1,606.26
1,703.51
1,803.20
1,902.96
2,008.55
2,121.64
Operating Cash Flow
% Revenue
7.39%
6.12%
7.67%
7.36%
7.37%
30.60%
7.61%
26.64%
6.80%
6.85%
6.60%
6.71%
6.80%
6.85%
6.89%
6.93%
6.98%
Current Liabilities
2,486.00
2,800.00
3,889.00
4,379.00
5,047.00
5,799.00
6,422.00
5,839.00
5,665.00
5,665.00
8,340.70
5,319.97
5,348.08
5,394.85
5,394.85
5,575.06
6,012.84
6,310.66
6,527.23
6,799.33
7,064.35
7,333.83
7,446.74
% Revenue
24.02%
23.13%
24.84%
25.63%
28.52%
139.20%
128.16%
121.65%
122.41%
30.45%
187.38%
101.83%
105.01%
106.55%
27.20%
26.81%
26.50%
26.34%
26.05%
25.84%
25.59%
25.32%
24.51%
($1,721.00)
($2,059.00)
($2,688.00)
($3,122.00)
($3,743.00)
($4,483.00)
($5,099.00)
($4,414.00)
($4,249.00)
($4,249.00)
($7,234.63)
($4,032.93)
($4,036.47)
($4,045.89)
($4,045.89)
($4,149.86)
($4,515.63)
($4,704.39)
($4,823.73)
($4,996.12)
($5,161.39)
($5,325.28)
($5,325.11)
(16.63%)
(17.01%)
(17.17%)
(18.27%)
(21.15%)
(107.61%)
(101.76%)
(91.96%)
(91.81%)
(22.84%)
(162.53%)
(77.20%)
(79.25%)
(79.91%)
(20.40%)
(19.96%)
(19.90%)
(19.64%)
(19.25%)
(18.98%)
(18.69%)
(18.38%)
(17.53%)
Net Working Capital
% Revenue
Change in Working Capital
$
(616.00) $
(506.00) $
(2,985.63) $
3,201.70
25.75%
685.00 $
165.00 $
1,348.00
1,447.00
407.00
500.00
443.00
467.00
1,748.00
401.27
498.38
530.20
533.66
1,963.52
1,980.61
2,075.79
2,101.74
2,103.84
2,111.22
2,111.11
2,106.07
2,094.71
% Revenue
5.65%
4.07%
6.18%
7.89%
8.18%
9.77%
9.98%
9.23%
10.09%
9.40%
9.02%
9.54%
10.41%
10.54%
9.90%
9.53%
9.15%
8.77%
8.40%
8.02%
7.65%
7.27%
6.89%
$
(740.00) $
24.64%
968.00
Discounted Free Cash Flow
(621.00) $
24.85%
493.00
Unlevered Free Cash Flow
(434.00) $
29.69%
585.00
% Revenue
(629.00) $
26.40%
Capital Expenditures
Acquisitions
(338.00) $
31.59%
$
(3.54) $
(9.42) $
203.11 $
(103.98) $
(365.77) $
(188.76) $
(119.33) $
(172.40) $
(165.26) $
(163.90) $
0.17
-
-
35.00
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.00%
0.00%
.22%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
242.28
$ 1,034.89
$
625.91
$
441.35
$
876.70
$
726.56
$
830.19
$
(541.57) $
(149.03) $
913.32
$
3,309.37
$ (2,773.73) $
249.34
$
322.93
$ 1,107.91
$ 1,512.24
$ 1,868.67
$ 1,748.51
$ 1,729.67
$ 2,019.78
$ 2,267.43
$ 2,540.28
$ 2,673.58
$
3,249.44
$ (2,674.18) $
236.04
$
300.17
$ 1,107.91
$ 1,306.56
$ 1,500.71
$ 1,305.23
$ 1,200.15
$ 1,302.66
$ 1,359.29
$ 1,415.52
$ 1,384.78
UOIG 16
April 3rd, 2015
University of Oregon Investment Group
Appendix 3 – Revenue Model
Revenue Model
($ in millions)
2009A
2010A
2011A
2012A
2013A
Q1
Q2
Q3
Q4
03/31/2014A
06/30/2014A
09/30/2014A
12/31/2014A
2014A
Q1
Q2
Q3
Q4
03/31/2015E
06/30/2015E
09/30/2015E
12/31/2015E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Passenger
9892.00
11489.00
14754.00
16093.00
16721.00
3933.00
4752.00
4564.00
4409.00
17658.00
4223.52
4970.30
4861.19
4848.86
18903.87
19879.17
21786.16
23064.01
24161.20
25412.78
26689.67
28031.58
% Growth
(6.23%)
16.14%
28.42%
9.08%
3.90%
2.48%
8.49%
5.99%
5.05%
5.60%
7.39%
4.59%
6.51%
9.98%
7.06%
5.16%
9.59%
5.87%
4.76%
5.18%
5.02%
5.03%
4.99%
% of Total Revenue
95.57%
94.92%
94.23%
94.18%
94.47%
94.41%
94.83%
95.08%
95.27%
94.91%
94.89%
95.14%
95.45%
95.77%
95.32%
95.60%
96.02%
96.28%
96.44%
96.56%
96.67%
96.77%
96.86%
Freight
29429.70
118.00
125.00
139.00
160.00
164.00
40.00
44.00
45.00
46.00
175.00
42.40
45.32
47.70
48.30
183.74
192.78
201.47
209.43
217.07
224.35
231.64
239.05
246.46
(18.62%)
5.93%
11.20%
15.11%
2.50%
2.56%
2.33%
9.76%
12.20%
6.71%
6.01%
3.01%
6.01%
5.01%
4.99%
4.92%
4.51%
3.95%
3.65%
3.35%
3.25%
3.20%
3.10%
% of Total Revenue
1.14%
1.03%
.89%
.94%
.93%
.96%
.88%
.94%
.99%
.94%
.95%
.87%
.94%
.95%
.93%
.93%
.89%
.87%
.87%
.85%
.84%
.83%
.81%
Other
340.00
490.00
765.00
835.00
814.00
193.00
215.00
191.00
173.00
772.00
185.26
208.53
184.24
166.05
744.07
721.68
700.39
682.11
674.33
681.14
688.97
697.59
706.31
% Growth
3.34%
44.12%
56.12%
9.15%
(2.51%)
(6.76%)
(2.27%)
(3.54%)
(8.95%)
(5.16%)
(4.01%)
(3.01%)
(3.54%)
(4.02%)
(3.62%)
(3.01%)
(2.95%)
(2.61%)
(1.14%)
1.01%
1.15%
1.25%
1.25%
% of Total Revenue
3.29%
4.05%
4.89%
4.89%
4.60%
4.63%
4.29%
3.98%
3.74%
4.15%
4.16%
3.99%
3.62%
3.28%
3.75%
3.47%
3.09%
2.85%
2.69%
2.59%
2.50%
2.41%
2.32%
$10,350.00
$12,104.00
$15,658.00
$17,088.00
$17,699.00
$4,166.00
$5,011.00
$4,800.00
$4,628.00
$18,605.00
$4,451.18
$5,224.16
$5,093.14
$5,063.21
$19,831.68
$20,793.62
$22,688.01
$23,955.55
$25,052.61
$26,318.27
$27,610.29
$28,968.22
$30,382.47
(6.11%)
16.95%
29.36%
9.13%
3.58%
2.01%
7.93%
5.61%
4.52%
5.12%
6.85%
4.25%
6.11%
9.40%
6.59%
4.85%
9.11%
5.59%
4.58%
5.05%
4.91%
4.92%
4.88%
% Growth
Total Revenue
% Growth
Passenger Revenue
2009A
2010A
2011A
2012A
2013A
03/31/2014A
06/30/2014A
09/30/2014A
12/31/2014A
2014A
03/31/2015E
06/30/2015E
09/30/2015E
12/31/2015E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
ASM
980.02
984.37
1205.79
1281.27
1303.44
304.75
340.96
337.86
326.47
1310.04
323.03
352.50
352.50
352.50
1380.52
1434.52
1553.32
1624.75
1681.50
1747.08
1812.54
1880.51
RPM
744.57
780.47
975.83
1028.75
1043.48
241.55
285.90
285.22
267.68
1080.35
256.35
298.05
299.39
290.25
1144.06
1190.24
1290.48
1351.57
1400.74
1457.56
1514.44
1573.59
1634.42
75.98%
79.29%
80.93%
80.29%
80.06%
79.26%
83.85%
84.42%
81.99%
82.47%
79.36%
84.56%
84.94%
82.34%
82.87%
82.97%
83.08%
83.19%
83.30%
83.43%
83.55%
83.68%
83.81%
Loadfactor
Yield per passenger mile
%Growth
Passenger Revenue
1950.09
13.29
14.72
15.12
15.64
16.02
16.28
16.47
16.00
16.47
16.34
16.48
16.68
16.24
16.71
16.52
16.70
16.88
17.06
17.25
17.44
17.62
17.81
18.01
1.22%
10.76%
2.72%
3.44%
2.43%
.74%
3.58%
.38%
.67%
2.00%
1.20%
1.25%
1.48%
1.43%
1.12%
1.08%
1.08%
1.08%
1.08%
1.08%
1.08%
1.08%
1.08%
29429.70
9892.00
11489.00
14754.00
16093.00
16721.00
3933.00
4752.00
4564.00
4409.00
17658.00
4223.52
4970.30
4861.19
4848.86
18903.67
19879.17
21786.16
23064.01
24161.20
25412.78
26689.67
28031.58
%Growth
(6.23%)
16.14%
28.42%
9.08%
3.90%
2.48%
8.49%
5.99%
5.05%
5.60%
7.39%
4.59%
6.51%
9.98%
7.05%
5.16%
9.59%
5.87%
4.76%
5.18%
5.02%
5.03%
4.99%
%of Total Revenue
95.57%
94.92%
94.23%
94.18%
94.47%
94.41%
94.83%
95.08%
95.27%
94.91%
94.89%
95.14%
95.45%
95.77%
95.32%
95.60%
96.02%
96.28%
96.44%
96.56%
96.67%
96.77%
96.86%
Availible Seat Miles
2009A
ASM
%Growth
RPM
98,001,550
2010A
98,437,092
2011A
2012A
2013A
120,578,736
128,127,110
130,344,072
03/31/2014A
30,474,582
06/30/2014A
34,096,212
09/30/2014A
33,785,824
12/31/2014A
32,647,339
2014A
03/31/2015E
131,003,957
32,303,057
06/30/2015E
35,249,533
09/30/2015E
35,249,533
12/31/2015E
35,249,533
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
138,051,655
143,452,301
155,331,846
162,474,523
168,149,719
174,708,361
181,254,389
188,051,428
195,009,331
(5.10%)
.44%
22.49%
6.26%
1.73%
(1.06%)
(.39%)
1.08%
2.39%
.51%
6.00%
5.24%
4.67%
2.14%
5.38%
3.91%
8.28%
4.60%
3.49%
3.90%
3.75%
3.75%
3.70%
74,456,710
78,046,967
97,582,530
102,874,979
104,348,216
24,155,317
28,589,997
28,522,164
26,767,655
108,035,133
25,635,362
29,805,347
29,939,357
29,025,477
114,405,543
119,023,799
129,047,919
135,157,450
140,074,297
145,756,170
151,444,235
157,359,079
163,442,455
%Growth
1.31%
4.82%
25.03%
5.42%
1.43%
1.68%
2.36%
5.60%
4.35%
3.53%
6.13%
4.25%
4.97%
8.43%
5.90%
4.04%
8.42%
4.73%
3.64%
4.06%
3.90%
3.91%
3.87%
LoadFactor
75.98%
79.29%
80.93%
80.29%
80.06%
79.26%
83.85%
84.42%
81.99%
82.47%
79.36%
84.56%
84.94%
82.34%
82.87%
82.97%
83.08%
83.19%
83.30%
83.43%
83.55%
83.68%
83.81%
%Growth
6.71%
4.36%
2.07%
(.79%)
(.29%)
2.81%
2.76%
4.48%
1.98%
3.01%
.12%
.84%
.61%
.43%
.49%
.12%
.13%
.13%
.14%
.15%
.15%
.15%
.16%
UOIG 17
April 3rd, 2015
University of Oregon Investment Group
Appendix 4 – Working Capital Model
Working Capital Model
($ in millions)
Total Revenue
Current Assets
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Inventory
Days Inventory Outstanding
% of Revenue
Prepaid Expenses
% of Revenue
Defered Income Taxes
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Flight Equipment
Ground Property and Equipment
Capital Expenditures
Acquisitions
Deposits on flight equipment purchases
Depreciation and Amortization
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
% of Revenue
Accrued Liabilities
% of Revenue
Air traffic liability
% of Revenue
Total Current Liabilities
% of Revenue
2009A
2010A
2011A
2012A
2013A
$10,350.00 $12,104.00 $15,658.00 $17,088.00 $17,699.00
Q1
Q2
Q3
Q4
03/31/2014A
06/30/2014A
09/30/2014A
12/31/2014A
2014A
Q1
Q2
03/31/2015E
06/30/2015E
Q3
Q4
09/30/2015E 12/31/2015E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
$4,166.00
$5,011.00
$4,800.00
$4,628.00 $18,605.00
$4,451.18
$5,224.16
$5,093.14
$5,063.21 $19,831.68 $20,793.62 $22,688.01 $23,955.55 $25,052.61 $26,318.27 $27,610.29 $28,968.22 $30,382.47
419.00
8.64
2.37%
467.00
24.91
2.64%
250.00
1.41%
168.00
.95%
$1,304.00
7.37%
457.00
9.87
10.97%
438.00
25.20
10.51%
241.00
5.78%
180.00
4.32%
$1,316.00
31.59%
447.00
8.12
8.92%
435.00
23.83
8.68%
276.00
5.51%
165.00
3.29%
$1,323.00
26.40%
468.00
8.97
9.75%
429.00
24.15
8.94%
291.00
6.06%
237.00
4.94%
$1,425.00
29.69%
365.00
7.26
7.89%
342.00
22.62
7.39%
232.00
5.01%
477.00
10.31%
$1,416.00
30.60%
365.00
7.16
1.96%
342.00
19.91
1.84%
232.00
1.25%
477.00
2.56%
$1,416.00
7.61%
403.08
8.15
9.06%
252.08
20.64
5.66%
267.52
6.01%
183.39
4.12%
$1,106.07
24.85%
519.55
9.05
9.95%
295.75
20.64
5.66%
299.87
5.74%
171.87
3.29%
$1,287.04
24.64%
404.68
7.31
7.95%
326.31
20.64
6.41%
247.53
4.86%
333.09
6.54%
$1,311.61
25.75%
394.05
7.16
7.78%
282.52
20.73
5.58%
245.57
4.85%
426.83
8.43%
$1,348.96
26.64%
13,719.00
13,991.00
15,542.00
16,367.00
16,937.00
1,922.00
2,122.00
2,423.00
2,383.00
2,666.00
585.00
493.00
968.00
1,348.00
1,447.00
35.00
247.00
230.00
456.00
416.00
764.00
(616.00)
(628.00)
(715.00)
(844.00)
(867.00)
15,857.00
16,208.00
18,674.00
19,670.00
20,947.00
$16,622.00 $16,949.00 $19,875.00 $20,927.00 $22,251.00
160.60%
140.03%
126.93%
122.47%
125.72%
17,107.00
2,716.00
407.00
762.00
(221.00)
20,771.00
$22,087.00
530.17%
17,592.00
2,792.00
500.00
688.00
(228.00)
21,348.21
$22,671.21
452.43%
18,019.00
2,866.00
443.00
601.00
(238.00)
21,695.48
$23,120.48
481.68%
18,473.00
18,473.00
2,853.00
2,853.00
467.00
1,817.00
566.00
566.00
(251.00)
(938.00)
22,112.73
22,772.18
$23,528.73 $24,188.18
508.40%
130.01%
17,854.58
2,893.71
401.27
483.84
(238.61)
0.00
$1,106.07
24.85%
18,284.54
2,873.29
498.38
465.47
(236.97)
21,888.86
$23,175.89
443.63%
19,048.33
3,055.88
530.20
499.64
(251.99)
22,886.50
$24,198.11
475.11%
1,299.00
31.18%
1,168.00
28.04%
3,332.00
79.98%
$5,799.00
139.20%
1,292.00
25.78%
1,645.00
32.83%
3,485.00
69.55%
$6,422.00
128.16%
1,185.00
24.69%
1,277.00
26.60%
3,377.00
70.35%
$5,839.00
121.65%
1,082.08
24.31%
4,354.67
97.83%
2,903.95
65.24%
$8,340.70
187.38%
1,356.71
25.97%
305.82
5.85%
3,657.43
70.01%
$5,319.97
101.83%
1,262.08
24.78%
265.64
5.22%
3,820.36
75.01%
$5,348.08
105.01%
169.00
5.96
1.63%
221.00
21.44
2.14%
84.00
.81%
291.00
2.81%
$765.00
7.39%
746.00
7.21%
696.00
6.72%
1,044.00
10.09%
$2,486.00
24.02%
195.00
5.88
1.61%
243.00
20.29
2.01%
89.00
.74%
214.00
1.77%
$741.00
6.12%
739.00
6.11%
863.00
7.13%
1,198.00
9.90%
$2,800.00
23.13%
299.00
6.97
1.91%
401.00
22.18
2.56%
238.00
1.52%
263.00
1.68%
$1,201.00
7.67%
1,057.00
6.75%
996.00
6.36%
1,836.00
11.73%
$3,889.00
24.84%
332.00
7.11
1.94%
469.00
23.67
2.74%
210.00
1.23%
246.00
1.44%
$1,257.00
7.36%
1,107.00
6.48%
1,102.00
6.45%
2,170.00
12.70%
$4,379.00
25.63%
1,247.00
7.05%
1,229.00
6.94%
2,571.00
14.53%
$5,047.00
28.52%
1,203.00
25.99%
1,565.00
33.82%
2,897.00
62.60%
$5,665.00
122.41%
1,203.00
6.47%
1,565.00
8.41%
2,897.00
15.57%
$5,665.00
30.45%
394.05
7.27
1.99%
282.52
20.23
1.42%
245.57
1.24%
426.83
2.15%
$1,348.96
6.80%
415.76
7.32
2.00%
313.38
20.56
1.51%
258.98
1.25%
437.08
2.10%
$1,425.19
6.85%
457.71
7.36
2.02%
362.78
20.88
1.60%
284.22
1.25%
392.50
1.73%
$1,497.21
6.60%
486.28
7.41
2.03%
403.72
21.20
1.69%
301.83
1.26%
414.43
1.73%
$1,606.26
6.71%
510.29
7.45
2.04%
442.35
21.53
1.77%
317.47
1.27%
433.41
1.73%
$1,703.51
6.80%
540.83
7.50
2.05%
471.66
21.85
1.79%
335.41
1.27%
455.31
1.73%
$1,803.20
6.85%
570.83
7.55
2.07%
500.60
22.18
1.81%
353.87
1.28%
477.66
1.73%
$1,902.96
6.89%
602.53
7.59
2.08%
531.50
22.50
1.83%
373.37
1.29%
501.15
1.73%
$2,008.55
6.93%
634.01
7.64
2.09%
562.14
22.83
1.85%
393.80
1.30%
531.69
1.75%
$2,121.64
6.98%
20,436.37
19,684.93
20,431.81
22,270.55
23,490.81
24,518.99
25,678.74
26,823.39
28,102.07
29,355.54
3,292.10
3,171.09
3,322.82
3,607.39
3,773.00
3,918.23
4,081.96
4,238.18
4,385.79
4,560.41
533.66
1,963.52
1,980.61
2,075.79
2,101.74
2,103.84
2,111.22
2,111.11
2,106.07
2,094.71
582.78
561.24
588.46
623.92
658.78
676.42
697.43
717.87
753.17
774.75
(270.50)
(998.07) (1,201.95) (1,316.41) (1,394.32) (1,462.05) (1,538.18) (1,613.86) (1,696.79) (1,780.59)
24,579.20
24,383.88
25,122.93
27,262.42
28,631.17
29,756.58
31,032.33
32,277.84
33,651.46
35,005.97
$25,928.16 $25,732.84 $26,548.12 $28,759.63 $30,237.43 $31,460.09 $32,835.54 $34,180.80 $35,660.01 $37,127.61
512.09%
129.76%
127.67%
126.76%
126.22%
125.58%
124.76%
123.80%
123.10%
122.20%
1,170.61
23.12%
1,287.07
25.42%
2,937.17
58.01%
$5,394.85
106.55%
1,170.61
5.90%
1,287.07
6.49%
2,937.17
14.81%
$5,394.85
27.20%
1,226.82
5.90%
1,330.79
6.40%
3,017.44
14.51%
$5,575.06
26.81%
1,336.32
5.89%
1,452.03
6.40%
3,224.49
14.21%
$6,012.84
26.50%
1,410.98
5.89%
1,566.69
6.54%
3,332.98
13.91%
$6,310.66
26.34%
1,475.60
5.89%
1,640.95
6.55%
3,410.69
13.61%
$6,527.23
26.05%
1,539.62
5.85%
1,755.43
6.67%
3,504.28
13.32%
$6,799.33
25.84%
1,615.20
5.85%
1,855.41
6.72%
3,593.73
13.02%
$7,064.35
25.59%
1,680.16
5.80%
1,969.84
6.80%
3,683.84
12.72%
$7,333.83
25.32%
1,716.61
5.65%
1,999.17
6.58%
3,730.97
12.28%
$7,446.74
24.51%
UOIG 18
April 3rd, 2015
University of Oregon Investment Group
Appendix 5 – Discounting Cash Flows Valuation Assumptions
Considerations
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
37.87% Terminal Growth Rate
3.00%
51,865
Avg. Industry Debt / Equity
26,863
Avg. Industry Tax Rate
31.17%
11,886
Current Reinvestment Rate
34.38%
95.53% Firm Value
38,750
Reinvestment Rate in Year 2019E
12.40%
% Debt
4.47% Total Debt
2,692
Implied Return on Capital in Perpetuity
24.19%
Cost of Debt
4.45% Cash & Cash Equivalents
1,282
Terminal Value as a % of Total
CAPM
7.81% Market Capitalization
WACC
7.58% Fully Diluted Shares
Terminal Risk Free Rate
2.79% Implied Price
Terminal CAPM
8.57% Current Price
44.58
Terminal WACC
8.31% Undervalued
19.65%
Beta
Market Risk Premium
% Equity
Method
2.03% Terminal Value
0.90 PV of Terminal Value
6.45% Sum of PV Free Cash Flows
Implied Price
36,058
676
53.34
Implied 2014A EBITDA Multiple
133.30%
69.3%
12.3x
Implied Multiple in Year 2023E
4.0x
Free Cash Flow Growth Rate in Year 2023E
5%
Weight
Discounted Cash Flow
53.34
75%
Forward Comparables
48.47
25%
Implied Price
52.12
Current Price
44.58
Undervalued
16.92%
UOIG 19
April 3rd, 2015
University of Oregon Investment Group
Appendix 6 – Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
53
2.0%
2.5%
3.0%
3.5%
4.0%
0
2.3%
2.3%
3.0%
0.70
60.30
65.53
72.05
80.39
91.44
1.10
(13.50%)
(13.50%)
0.80
52.76
56.69
61.45
67.35
74.85
1.00
(3.74%)
(3.74%)
0.90
46.71
49.74
53.34
57.68
63.03
0.90
8.04%
1.00
41.76
44.15
46.93
50.22
54.19
1.00
1.10
37.64
39.55
41.74
44.31
47.33
1.10
Adjusted Beta
Adjusted Beta
Terminal Growth Rate
Implied Price
3.8%
4.5%
(6.36%)
2.63%
14.30%
5.27%
16.89%
32.46%
8.04%
19.64%
35.06%
56.55%
(3.74%)
(3.74%)
5.27%
16.89%
32.46%
(13.50%)
(13.50%)
(6.36%)
2.63%
14.30%
Undervalued/(Overvalued)
Terminal Growth Rate
53
2.3%
2.3%
3.0%
3.8%
4.5%
0
2.3%
2.3%
3.0%
3.8%
4.5%
9.58%
41.37
41.37
45.76
51.58
59.70
9.58%
(7.19%)
(7.19%)
2.64%
15.70%
33.92%
8.58%
44.63
44.63
49.39
55.72
64.53
8.58%
0.11%
0.11%
10.79%
24.98%
44.76%
7.58%
48.18
48.18
53.35
60.23
69.81
7.58%
8.08%
8.08%
19.68%
35.11%
56.60%
6.58%
52.06
52.06
57.69
65.17
75.59
6.58%
16.78%
16.78%
29.40%
46.18%
69.56%
5.58%
56.30
56.30
62.42
70.56
81.91
5.58%
26.28%
26.28%
40.03%
58.29%
83.74%
WACC
WACC
Terminal Growth Rate
UOIG 20
University of Oregon Investment Group
April 3rd, 2015
Appendix 7 - Sources
ALGT Filings
ALK Filings
DAL Filings
FactSet
Google Images
IBISWorld
JBLU Filings
LUV Filings
SAVE Filings
Southwest.com
Southwest One Report
UAL Filings
Wall Street Journal
Yahoo! Finance
UOIG 21
University of Oregon Investment Group