Southwest Airlines(2009)
 Outstanding Service at the Lowest
Fares
1
Mission Statement (actual)
The mission of Southwest Airlines is
dedication to the highest quality of
Customer Service delivered with a
sense of warmth, friendliness, individual
pride, and Company Spirit.
Vision Statement (Proposed)
 At Southwest, we strive to be the new
generation of flight transportation while
providing luxury at a price anyone can
afford.
2
Mission Statement (expanded)
We are committed to quality service for the everyday
person (1). Southwest provides air transportation to
cities all around the United States (2, 3). We fly the
most luxurious planes on the market with the latest
technology money can buy (4). We competitively
provide the lowest airfare price in search for the
greatest advantage in today’s busy world (5). We
provide the highest standards of safety for all our
customers while still offering a reasonable price (6,
7). A portion of our proceeds are donated to various
charities throughout the United States (8). Since our
first flight in 1971, our employees have been the vital
asset in making Southwest the most recognized
3
airline today (9).
Mission Statement Components
1.
2.
3.
4.
5.
6.
7.
8.
9.
Customer
Product or services
Markets
Technology
Concern for survival, growth, profitability
Philosophy
Self-concept
Concern for public image
Concern for employees
4
Competitive Profile Matrix
SouthWest
American
United
Critical Success Factors
Weight
Rating
Weighted
Scor
e
Rating
Weighted
Score
Rating
Weighted
Score
Market Share
Price competitiveness
Financial Position
Consumer Loyalty
Advertising
Management
Security Precautions
Organizational Structure
Customer Service
0.13
0.10
0.12
0.10
0.15
0.10
0.09
0.06
0.15
2
4
3
4
4
4
3
3
4
0.26
0.40
0.36
0.40
0.60
0.40
0.27
0.18
0.60
4
2
1
2
4
3
3
3
3
0.52
0.20
0.12
0.20
0.60
0.30
0.27
0.18
0.45
3
2
1
2
2
2
3
2
1
0.39
0.20
0.12
0.20
0.30
0.20
0.27
0.12
0.15
Total
1.00
3.47
2.84
1.95
5
EFE Matrix-Opportunities
Key External Factors
Opportunities
1.
There is an increased demand for international
travel.
2.
There is a decline of 11 percent in airline
companies with funding leading to used planes
being able to be purchased.
3.
Increased demand for cities that are currently
without SW airline flights (Atlanta, New York,
etc.)
4.
Each year airline companies (Delta and
Northwest in 2006) are declaring bankruptcy
leaving more cities existing allowing more
airlines to fly to.
5.
Increase popularity of internet leads to an
expected rise of 22 percent from 2006 in flights
booked online.
6.
Increase popularity with Visa check card
purchases with reward points.
7.
With an increase of nearly 3 million people in
the US there is an expansion of developing cities
across the United States.
8.
Technology is increasing making older planes
outdated.
9.
Increased amount of upper level business
travelers has led to greater demand for better
seats.
10. Stock market has increased leading to more
money to being spent on vacations or business
affairs.
11. Decline of 11 percent in airline companies with
funding leading to experienced workers being
laid off.
Weight
Rating
Weighted Score
0.10
1
0.10
0.01
1
0.01
0.10
1
0.10
0.05
1
0.05
0.03
4
0.12
0.01
1
0.01
0.01
2
0.02
0.03
2
0.06
0.01
1
0.01
0.05
1
0.05
0.03
3
0.09
6
EFE Matrix-Threats
Threats
1. Specialization expertise of Jet Blue using one
plane model allows them to provide less
expensive mechanics to maintain planes.
2. Jet Blue is the only airline to carry satellite
televisions on planes.
3. Higher ticket taxes.
4. Increase in airport security due to possible
terrorism.
5. Many companies such as AirTran Airways are
offering a business class in their B717 jet.
6. Competing airlines offer satellite radio in their
passenger jets.
7. High cost of fuel leads to increase in ticket
prices.
8. Studies in 2000 report that obese passengers cost
airlines an extra $275 million in fuel costs.
9. Other airline companies offer in-flight meals
adding luxury.
10. SW competitors are flying newer and more
technologically advanced jets with luxury items.
TOTAL
0.09
4
0.36
0.04
1
0.04
0.04
0.10
1
4
0.04
0.40
0.05
1
0.05
0.03
1
0.03
0.10
3
0.30
0.03
1
0.03
0.03
3
0.09
0.06
1
0.06
1.00
2.02
7
Ratios (12/07)
Growth Rates %
Sales (Qtr vs year ago qtr)
Net Income (YTD vs YTD)
Net Income (Qtr vs year ago qtr)
Sales (5-Year Annual Avg.)
Net Income (5-Year Annual Avg.)
Dividends (5-Year Annual Avg.)
Price Ratios
Current P/E Ratio
P/E Ratio 5-Year High
P/E Ratio 5-Year Low
Price/Sales Ratio
Price/Book Value
Price/Cash Flow Ratio
Southwest
9.50
29.30
96.50
12.30
21.76
0.00
Industry
14.50
17.50
28.20
24.71
36.88
6.81
SP-500
8.30
16.00
6.60
13.34
20.14
10.00
15.2
62.9
13.6
0.95
1.36
7.80
18.0
70.0
27.0
1.39
2.36
9.80
21.9
22.3
5.9
2.38
3.39
10.60
8
Ratios (12/07) Continued
Profit Margins
Gross Margin
Pre-Tax Margin
Net Profit Margin
5Yr Gross Margin (5-Year Avg.)
5Yr PreTax Margin (5-Year Avg.)
5Yr Net Profit Margin (5-Year Avg.)
Financial Condition
Debt/Equity Ratio
Current Ratio
Quick Ratio
Interest Coverage
Leverage Ratio
Book Value/Share
26.1
10.7
6.5
28.4
9.4
5.9
28.5
12.2
9.7
27.7
12.3
9.7
33.8
17.5
12.4
33.5
16.8
11.7
0.30
0.9
0.9
31.6
2.4
9.45
0.74
1.2
1.2
44.7
2.5
8.41
1.19
0.9
0.7
43.3
4.0
16.25
9
Ratios (12/07) Continued
Investment Returns %
Return On Equity
Return On Assets
Return On Capital
Return On Equity (5-Year Avg.)
Return On Assets (5-Year Avg.)
Return On Capital (5-Year Avg.)
Management Efficiency
Income/Employee
Revenue/Employee
Receivable Turnover
Inventory Turnover
Asset Turnover
9.6
4.3
5.7
7.8
3.7
4.8
17.1
5.9
7.7
12.8
4.3
5.5
20.8
5.8
7.7
14.5
5.1
6.8
18,762
286,840
36.9
32.2
0.7
51,840
355,791
44.5
214.4
0.7
37,696
343,930
9.5
5.6
0.6
10
Ratios (12/07) Continued
Date
12/07
12/06
12/05
12/04
12/03
Avg. P/E
17.60
27.20
24.70
55.80
30.00
Price/Sales
0.95
1.39
1.75
2.00
2.23
Price/Book
1.29
1.86
1.97
2.31
2.52
Net Profit Margin (%)
6.5
5.5
6.4
3.3
7.4
11
Ratios (12/07) Continued
Date
12/07
12/06
12/05
12/04
12/03
Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage
$9.45
0.30
9.3
3.8
11.5
$8.23
0.26
7.7
3.7
12.1
$8.33
0.30
7.3
3.5
8.7
$7.04
0.33
3.9
1.9
8.2
$6.40
0.30
8.7
4.5
8.3
12
Net Worth Analysis (Year-end 2007)
1. Stockholders’ Equity + Goodwil = 6,941 + 0
2. Net income x 5 = $645 x 5=
3. Share price = $13/EPS 0.84 =$15.47 x Net Income $645=
4. Number of Shares Outstanding x Share Price = 735 x $13 =
Method Average
$ 6,941
$ 3,225
$ 9,982
$ 9,555
$ 9,900
13
IFE Matrix-Strengths
Key Internal Factors
Weight
Rating
Weighted
Score
0.10
0.05
0.05
0.10
0.10
0.02
0.10
0.05
0.05
0.05
0.03
0.10
0.03
0.02
4
4
4
4
4
4
4
4
3
4
4
3
3
4
0.40
0.20
0.20
0.40
0.40
0.08
0.40
0.20
0.15
0.20
0.12
0.30
0.09
0.08
Strengths
1. Eighty-five percent hedge position on fuel.
2. RPM’s for 42.2 billion.
3. Thirty-one consecutive years of profitability.
4. Employee loyalty.
5. Excellent public image.
6. Long-term orientation.
7. Strong management team.
8. Thirteen billion in market value.
9. Three hundred and eighty-eight new jets.
10. Average age of jets is <10 years.
11. Fourth largest domestic airline.
12. Growth rate higher than industry.
13. 54 percent of revenues from SW Website.
14. Seventy-five percent of flights are E-tickets.
14
IFE Matrix-Weaknesses
Weaknesses
1. SW has highest percentage of full-time employees
leading to increased overhead.
2. SW only flies one plane, the Boeing 737.
3. They will not fly outside the continental United States,
63 cities and 32 states.
4. Difficult to convince customers SW offers benefits other
airlines do not.
5. Flying only 737s could lead to negative press if
problems with that plane arise.
6. Does not accommodate for severely handicapped.
7. Large cities (Atlanta, Charlotte, etc) are without SW
service.
8. Does not provide a first class for passengers.
9. Do not provide assigned seating.
10. Only some 737s carry televisions.
11. SW does not offer any type of in-flight meals.
TOTAL
0.06
2
0.12
0.01
0.10
1
1
0.01
0.10
0.01
2
0.02
0.01
1
0.01
0.02
0.10
1
1
0.02
0.10
0.01
0.01
0.01
0.01
1.00
1
1
2
2
0.01
0.01
0.02
0.02
2.89
15
SWOT Analysis-Strengths
1.
2.
3.
4.
5.
6.
SW has a larger market capital compared to others with $11.3 billion.
SW has all flights going to cities within the United States.
Use point-to-point flight system with no hubs one way.
Ability to determine cost/prices within the organization.
Leader in market capitalization.
Largest in US by the number of passengers carried yearly and 3rd in the
world.
7. One of the world’s most profitable and highest posted profits for 34
consecutive years.
8. In 2006 70 percent of flight bookings and 73 percent of revenue came from
bookings on Southwest’s website.
9. Low prices and relaxed atmosphere made it an icon.
10. First airline to have a webpage in 1995.
11. SW has 481 Boeing 737s jets.
12. Financially they purchase fuel options to hedge cost years in advance to
smooth market fluctuations.
16
SWOT Analysis-Weaknesses
1. SW has highest percentage of full-time employees leading to increased
overhead.
2. SW only flies one plane, the Boeing 737.
3. They will not fly outside the continental United States, 63 cities and 32 states.
4. Difficult to convince customers SW offers benefits other airlines do not.
5. Flying only 737s could lead to negative press if problems with that plane
arise.
6. Does not accommodate for severely handicapped.
7. Large cities (Atlanta, Charlotte, etc) are without SW service.
8. Does not provide a first class for passengers.
9. Do not provide assigned seating.
10. Only some 737s carry televisions.
11. SW does not offer any type of in-flight meals.
17
SWOT STRATEGIES-SO
1. Through increased advertising online SW can increase flight bookings (S8,
O5).
2. Using a point-to-point system SW can increase flights with business travelers
who need timely flights (S3, O9).
3. Use incentives to purchase flights using credit cards to increase profits (S7,
O6).
4. Less expensive flights, due to cutting fuel costs by $155M, leave market
capitalization available on areas where airline companies no longer fly due to
bankruptcy (S12, O4).
5. Cut ticket cost by $2.00, but add a charge of $2.00 to each extra bag (one
allowed) (S4, O10).
18
SWOT STRATEGIES-WO






Hire more part time workers (W1, O11).
Add new technology to older planes in order to become up-todate and accommodate the handicapped (W6, O8).
With airline companies selling planes SW can purchase
models similar to the 737, which could lead to better press if a
problem with the 737 arises (W5, O2).
Offer in flight meals for those who meet appropriate
requirements based on points received from Visa card usage
(W11, O6).
Install televisions and satellite radio in planes for enhanced
customer service (W10, O7).
Provide higher quality and luxuries (first class) in some jets for
customers willing to pay extra (W8, O9).
19
SWOT STRATEGIES-ST
1. Upgrade our fleet by adding 12 of the similar Boeing 717 jets in order to
accommodate to the travelers desiring the luxury of a business class. These
jets will be flown in the larger cities with more travel demand with an
approximate cost of $700 M.
2. Expand the rapid rewards program to offer one reward point for every three
purchases made on the Southwest website at least one month in advance. This
will help Southwest in the booking processes so that there will be less
complications and delays associated with last minute purchases.
3. In order to compete with the luxury airlines offering in flight meals,
Southwest will now offer in flight drinks (soda, water, juices, and limited
alcohol items) and small snack foods available to the passengers by cash or
charge.
4. Make all flights with in the 48 states point-to-point flights with strict time
lines given to the employees in order to alleviate delays. We predict this will
increase our percent of on-time flights from 83.96% to approximately 90.00%.
Then create a marketing program through television and magazines
advertising the new policies.
20
SWOT STRATEGIES-WT



Using the code share with ATA airlines begin
offering flight to select areas outside the US
including (Cozumel Mexico, Select Canada
locations, Paris, London, etc.)
Shorten the flight life span of the B737’s in order
maintain planes that are consistently up to date
with technology. This will allow us to hedge any risk
of negative problems arising with the 737’s.
Maintaining new equipment allows us to easily
liquidate the assets when new items are needed to
be purchased.
Add new cities not flown to by Southwest such as
Atlanta, Charlotte, Chicago, and New York
21
SPACE Matrix
FS
Conservative
Aggressive
6
5
4
3
2
1
CA
-6
-5
-4
-3
-2
-1
1
2
3
4
5
6
IS
-1
-2
-3
-4
-5
-6
Defensive
ES
Competitive
22
SPACE Matrix
Financial Strength (FS)
Net Income
Leverage
ROA
Inventor Turnover
Income/Employee
Financial Strength (FS) Average
Competitive Advantage (CA)
Market Share
Product Quality
Customer Loyalty
Technological know-how
Control over Suppliers and Distributors
Competitive Advantage (CA) Average
3
1
3
3
2
2.4
-3
-2
-1
-2
-2
Environmental Stability (ES)
Rate of Inflation
Technological Changes
Price Elasticity of Demand
Competitive Pressure
Barriers to Entry into Market
Environmental Stability (ES) Average
Industry Strength (IS)
Growth Potential
Financial Stability
Ease of Entry into Market
Resource Utilization
Profit Potential
-2.0 Industry Strength (IS) Average
-2
-1
-2
-6
-4
-3.0
5
4
3
5
5
4.4
x-axis: -2.0 + 4.4 = 2.4
y-axis: 2.4 + -3.0 = - 0.6
23
Grand Strategy Matrix
Rapid Market Growth
Quadrant II
Quadrant I
Weak
Competitive
Position
Strong
Competitive
Position
Quadrant III
Quadrant IV
Slow Market Growth
24
IE Matrix
The IFE Total Weighted Score
High
Strong
3.0 to 4.0
Average
2.0 to 2.99
Weak
1.0 to 1.99
I
II
III
IV
V
VI
3.0 to 3.99
Medium
The EFE Total 2.0 to 2.99
Weighted Score
Southwest
Low
VII
VIII
IX
1.0 to 1.99
Hold and Maintain
25
QSPM-STRENGTHS
Strategic Alternatives
Add 12 B17s to
Fleet
Key Internal Factors
Strengths
1. SW has a larger market capital compared to others
with $11.3 billion.
2. SW has all flights going to cities within the United
States.
3. Use point-to-point flight system with no hubs one
way.
4. Ability to determine cost/prices within the
organization.
5. Leader in market capitalization.
6. Largest in US by the number of passengers carried
yearly and 3rd in the world.
7. One of the world’s most profitable and highest
posted profits for 34 consecutive years.
8. In 2006 70 percent of flight bookings and 73
percent of revenue came from bookings on
Southwest’s website.
9. Low prices and relaxed atmosphere made it an
icon.
10. First airline to have a webpage in 1995.
11. SW has 481 Boeing 737s jets.
12. Financially they purchase fuel options to hedge
cost years in advance to smooth market
fluctuations.
Weight
TAS
0.08
Shorten Life of
Current Planes in
Use
AS
TAS
3
0.12
0.04
AS
2
0.02
2
0.04
3
0.06
0.06
3
0.18
2
0.12
0.06
---
---
---
---
0.03
0.02
2
3
0.06
0.06
3
2
0.09
0.04
0.05
3
0.15
2
0.10
0.10
---
---
---
---
0.01
---
---
---
---
0.01
0.10
--2
--0.20
--3
--0.30
0.15
---
---
---
---
26
QSPM-WEAKNESSESS
1. SW has highest percentage of full-time employees
leading to increased overhead.
2. SW only flies one plane, the Boeing 737.
3. They will not fly outside the continental United
States, 63 cities and 32 states.
4. Difficult to convince customers SW offers benefits
other airlines do not.
5. Flying only 737s could lead to negative press if
problems with that plane arise.
6. Does not accommodate for severely handicapped.
7. Large cities (Atlanta, Charlotte, etc) are without
SW service.
8. Does not provide a first class for passengers.
9. Do not provide assigned seating.
10. Only some 737s carry televisions.
11. SW does not offer any type of in-flight meals.
SUBTOTAL
0.06
---
---
---
---
0.01
0.10
3
3
0.03
0.30
4
2
0.04
0.20
0.01
2
0.02
3
0.03
0.01
4
0.04
3
0.03
0.02
0.10
2
2
0.04
0.20
3
1
0.06
0.10
0.01
0.01
0.01
0.01
1.00
4
3
3
---
0.04
0.03
0.03
--1.50
2
1
4
---
0.02
0.01
0.04
--1.36
27
QSPM-OPPORTUNITIES
Add 12 B17s to
Fleet
Key External Factors
Opportunities
1. There is an increased demand for international travel.
2. There is a decline of 11 percent in airline companies
with funding leading to used planes being able to be
purchased.
3. Increased demand for cities that are currently without
SW airline flights (Atlanta, New York, etc.)
4. Each year airline companies (Delta and Northwest in
2006) are declaring bankruptcy leaving more cities
existing allowing more airlines to fly to.
5. Increase popularity of internet leads to an expected
rise of 22 percent from 2006 in flights booked online.
6. Increase popularity with Visa check card purchases
with reward points.
7. With an increase of nearly 3 million people in the US
there is an expansion of developing cities across the
United States.
8. Technology is increasing making older planes
outdated.
9. Increased amount of upper level business travelers
has led to greater demand for better seats.
10. Stock market has increased leading to more money
being spent on vacations or business affairs.
11. Decline of 11 percent in airline companies with
funding leading to experienced workers being laid
off.
Weight
Shorten Life of
Current Planes in
Use
AS
TAS
-----
0.10
AS
---
TAS
---
0.01
4
0.04
1
0.01
0.10
---
---
---
---
0.05
2
0.10
1
0.10
0.03
---
---
---
---
0.01
---
---
---
---
---
---
---
---
0.03
3
0.09
4
0.12
0.01
4
0.04
2
0.02
0.05
---
---
---
---
0.03
2
0.06
1
0.03
0.01
28
QSPM-THREATS
Threats
1. Specialization expertise of Jet Blue using one plane
model allows them to provide less expensive
mechanics to maintain planes.
2. Jet Blue is the only airline to carry satellite
televisions on planes.
3. Higher ticket taxes.
4.
5.
Increase in airport security due to possible terrorism.
Many companies such as AirTran Airways are
offering a business class in their B717 jet.
6. Competing airlines offer satellite radio in their
passenger jets.
7. High cost of fuel leads to increase in ticket prices.
8. Studies in 2000 report that obese passengers cost
airlines an extra $275 million in fuel costs.
9. Other airline companies offer in-flight meals adding
luxury.
10. SW competitors are flying newer and more
technologically advanced jets with luxury items.
SUBTOTAL
SUM TOTAL ATTRACTIVENESS SCORE
0.09
1
0.09
3
0.27
0.04
3
0.12
2
0.08
0.04
---
---
---
---
0.10
0.05
--4
--0.20
--1
--0.05
0.03
3
0.09
4
0.12
0.10
0.03
-----
-----
-----
-----
0.03
---
---
---
---
0.06
3
0.18
4
0.24
1.01
2.51
1.04
2.40
29
RECOMMENDATIONS
 The QSPM strategies assessed adding
12 new planes to the fleet or retiring
older planes. It is recommended
Southwest add 12 new planes at a total
cost of $500 million.
30
EPS/EBIT Analysis
 $ Amount Needed: 500M
 Stock Price: $13
 Tax Rate: 35%
 Interest Rate: 7%
 # Shares Outstanding: 735M
31
Mission/Vision
 Give SW Customers
the Freedom to Fly
 Low Fares
 Frequent Flights
 Friendliest Service
in the Sky
32
Strategy to Date
 Low Cost, Low Fare
 High Frequency
 No Frills
 Almost No Interlining
 No Hubs, No International
 Point-to-Point Short-Haul Service
 Regional Service HQ in Texas
33
Strategy Success to Date I
 Net Income at $499.0 million in 2006
 Passenger Revenues in 2006 at $9.086
Billion
 Many years of top airline performance
re: on-time; complaints; and lost
luggage
 33 consecutive years of profit through
2006
34
Strategy Success to Date II
 Diluted EPS of $.61 in 2006
 Rivals Delta & United near Bankruptcy
 Overall SW looks strong in 2007 despite
the aftermath of 9/11
 Long Term Debt at $2.887 billion in
2006
35
Internal Analysis: Strengths
 Low Cost
 Fast Turnaround
 Work Force commitment and flexibility
 Differentiation --not just low cost but
better service (on time, no lost
luggage,fewer complaints)
 Leader in Re-engineering
 Operational Simplicity
36
Internal Analysis: Weaknesses
 Low Economies of Scale (small relative
to other majors, short routes)
 No Hub System
 No code sharing -- can sell only tickets
from its own offices
 No Interlining
 No International Routes
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Internal Analysis
 Financial
 Marketing
 Management
 Operations
 Information Technology
38
External Analysis:
Opportunities
 Market Expansion: over 100 cities have
asked Southwest to offer service
 Longer Flights
 International Expansion to Canada and
Mexico
39
External Analysis: Threats
 Weak Demand
 New Rail Service (Dallas to Houston)
 Increased Competition -- if they lose
their Love Field Restrictions
 Increased Regulation (noise)
 Dependence on Domestic Markets
40
External Analysis:
Porter’s 5 Forces
 Entry of New Competitors: Unlikely
 Substitute Products: High Speed Rail,
Video Conferencing
 Competition Among Existing
Competitors: Strong
 Power of Suppliers: In 2007, Weak for
Aircraft but Strong for Fuel Suppliers
 Power of Customers: Strong
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External analysis
 Economics
 Demographics
 Environmental
 Legal
 …...
42
Strategy Alternatives
 Continue Present Strategy -- --Problem
is limited growth
 Expand Geographically --Point-to-Point
--serve other regions efficiently
 Expand Geographically --Major Hubs
 Remain Regional --through hubs
 Increased ticketing via internet
43
Should Southwest Code
Share?
 PRO: Increase visibility and potential
customers
 CON: Increase Costs
44
How Can High Worker
Commitment and Productivity
be Sustained?
 As Company Expands, New Workers
Will Be Needed with Company Culture
Transferred to them
 Reward System with Bonuses and
Incentives but within Cost Controls
45
Management Depth
 Management will have to be extended
to support expansion
 Kelleher, Kelly and Barrett are still the
top trio (see p. 242)
46
Conclusion
 Southwest is a Benchmark Competitor -
-Setting Industry Standards
 They have successfully expanded and
continued to innovate -- e.g., ticketless
travel, boarding pass download at home
or office prior to going to the airport,
friends fly free, use of underutilized
airports, etc.
47
Recommendations
 Continued Gradual Expansion
 Maintain the characteristics that have
enabled their success:



Conservative Growth
Cost Containment
Commitment of Employees
…
…
 ...
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Update
 2008 Results (from SW Website) operating
revenues at $11.023 Billion up 10% over
2007
 Expansion continues with new service at San
Francisco, planned service to New York
 Stock Price 2/9/09 = $7.18; 52 Week Range
$16.77 to $6.56
 Hedging on Fuel was successful as Fuel
Prices rose but costly when they fell in late
2008.
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