1

Running Head: SOUTHWEST AIRLINES

Southwest Airlines
Abel Martinez
BAM-479
Siena Heights University
Professor Deborah Harvel-Jenkins
April 4, 2016

SOUTHWEST AIRLINES

Introduction
Southwest Airlines was started in Texas and began operation on June 18, 1971, with three
Boeing 737 aircraft and about 200 employees. The company serviced the three Texas cities of
Houston, Dallas, and San Antonio. Now in its 45 year of existence the airline employs over
48,000 workers and flies to 97 destinations across the US and seven other countries. Southwest
services 100 million customers annually with peak departures over 3,900 a day.

Case Statement
Southwest Airlines is in a highly competitive market where consumers have high
bargaining power and copy cat ULCCs are constantly trying to capture a portion of the
companys sales impacting the companys market share.

Vision Statement:
No vision statement was found. With Southwests efforts to continue expanding and
going international an appropriate vision statement would be:
New Vision Statement:
To become the leading airline service in the world.
Mission Statement
The mission of Southwest Airlines is dedication to the highest quality of customer service
delivered with a sense of warmth, friendliness, individual pride, and company sprit.
Mission Statement Evaluation Components that are satisfied

SOUTHWEST AIRLINES
Customers
Product
Philosophy
Analysis for the components included
Customers
By it being an airline one could assume that customers are those seeking air travel.
Product
The product is identified through the company name. We know by Southwest Airlines
that the product is flight service.
Philosophy
Southwests philosophy is all about customer service. The mission statement lets the
customer know that Southwest is dedicated to the highest quality of customer service. Customer
service is the main focus of its mission statement.
Components excluded
Self-concept
Southwests ability to offer low airfare with great service is a distinct competitive
advantage. It could have benefitted by including this in their mission statement.
Markets
It could do a better job of it by specifying whether it includes domestic and international
flights.
Concern for public image
No mention of public imagine in the mission statement. It only addresses customers and
the quality of service they will receive.
Concern for employees

SOUTHWEST AIRLINES
This was also not addressed in the mission statement but employees are mentioned in
their own section below the mission statement titled Employees. I believe this more significant
than being included in the mission statement by three or four words.
Technology
This is probably best left out, as part of the key for Southwest to keeping cost down was
to have a single type of plane. They did acquire another airline with a smaller type plane but
again this would not be a technological selling point.
Concern for survival, growth, and profitability
Southwest doesnt bother to mention any of this in their mission statement. Not ran like a
traditional airline, it chooses to allow its quality of product to take care of the rest.
New mission statement?
Sometimes less is more. It would be easy to add to Southwest mission Statement to
include many of the unmentioned elements but all you have to do is look at the numerous awards
that Southwest has earned concerning the companys activates in communities, technology,
employees, customer satisfaction, business and performance. Their actions speak louder than
any words. I am sure there are many rivals that have much more detail mission statements but
not anywhere close to the amount of awards.
Milestones

March 2011, ranked fourth on Fortunes Worlds Most Admired Company list and was
also the highest ranking commercial airline

Fortunes Worlds Most Admired Company list, number 7 in 2013 and number 9 in 2014

December 2010, named Best Low Cost Airline in North America by Business
Travelers magazine.

2013, Ranked number one by the American Customer Satisfaction Index for the 17th year
in a row.

SOUTHWEST AIRLINES

Top 25 Brands of 2013, number 1 Among Travel- Related Companies and number 5
overall, The Business Journals

Corporate Equality Index, Scored 90 out of 100 in 2014. Human Rights Campaign

One of the Top 100 Military Friendly Employers, #58 in 2013, #70 in 2014, G.I. Jobs
magazine

External Assessment

Weight

Rating

Weighted Score

Explore social media options for

reaching new customers
2. Increase the number of flights to
domestic sites
3. Expand into international markets

.08

.32

.08

.16

.08

.16

4.

.07

.14

.06

.12

.05

.15

.06

.12

Key External Factors

Opportunities
1.

Growth potential and expansion by

adding cities that service is provided in.
5.
Possible partnership with foreign
international airlines
6. Utilize new technology to enhance
customers flight experience
7. Research and development to expand
product choices
Threats

1.

Rising price of fuel

.09

.27

2.

Shorter flights burn more fuel

.07

.14

.06

.24

.07

.21

3.

TSA rules requiring pat downs for those

refusing to full body x-ray.
4. Possible increase cost of operations
with FAA proposed changes in rest
requirements for flight crew

SOUTHWEST AIRLINES

Jet Blue, Spirit and other ULCCs

.09

.27

6. Union labor cost

.07

.14

7.

.07

.14

5.

Strikes or labor disputes

TOTAL

Key Internal Factors

1.00

2.58

Weight

Rating

Weighted
Score

Strengths

1. Unique management strategies

.05

.15

2. 20 minute average in turnaround time

.9

.36

3. 45 years experience in the airline industry

.1

.4

4. Employee loyalty and morale very high

.08

.32

5. Known for low airfare and high customer

service
6. AirTran acquisition increased capacity by 22
percent
7. Bags Fly Free only airline with no charge for
first or second bad checked in
Weaknesses

.08

.32

.08

.32

.09

.27

1. Conservative growth tactics

.07

.07

2. Doesnt offer baggage transfers to other

carriers
3. No first or business class offered

.05

.10

.07

.14

4. Limited international flights

.08

.08

5. Offers no meals

.06

.12

6. No assigned seating

.06

.12

SOUTHWEST AIRLINES
7. Not on any centralized reservation sites

.06

TOTAL

1.00

.12
2.89

SWOT Analysis
Southwests reaction to External factors scores 2.58 out of 4.0 A higher score would be
possible with a more aggressive approach to capitalizing on opportunities to expand into
international flights and longer domestic flights. The lower score coincides with their reputation
to a slow growth approach. Southwest biggest threat would be copycat ULCCs which a slow
growth approach again makes this a bigger threat that it would be by allowing these smaller
companies to get a stronger foothold.
Southwest is doing better with handling internal factors, scoring a 2.89 out of a possible
4.0. Their score is credited to their strengths which helped define their niche and weaknesses
that do not harm them as much while they stay in that niche. In order to expand beyond their
present market they will have to address these weaknesses and enhance their strengths

Strengths
45 years experience in the airline industry:
Southwest has managed to turn a profit for 42 consecutive years in row.(Southwest) This
does not happen by luck or accident. Their know how allowed them to make money even during
income down turns that put rivals out of business
20 min turnaround time:

SOUTHWEST AIRLINES
A plane only makes money while it in the air. By keeping an average turnaround that is
about a third of what the rest of the industry is capable of, southwest is able to maximize the use
of flight time.
Bag Fly Free:
A big selling point to price conscious consumers. Southwest is only airline to offer free
first and 2nd bag checked free.
Employee loyalty and morale:
Southwest counts employees as its biggest asset and holds their value over that of the
customer themselves.(David,2012) Southwest proves this by acts such as being the first airline to
institute a profit sharing program, avoiding layoffs whenever possible and have Numerous
Fortune best places to work awards as evidence.(Southwest)
Known for low airfare and high customer service:
The Company has recognizable brand name. This will serve them well against the battle
with other ULCCs. While Southwest may no longer offer the very lowest price on every airfare,
consumers will know the high quality and reliability they will receive and judge for themselves if
it worth sacrificing over a few dollars.
AirTran acquisition increased capacity by 22 percent:
This also helped Southwest take step in the direction of increase international flights as
well.
Unique management strategies:
Thinking outside the box before people had even began talking about their being a box.
Although unorthodox their strategies have served them well. They need to continue to be
innovative if they are going to stand out and grow against copycats.
Weakness

SOUTHWEST AIRLINES
Limited international flights:
In order for Southwest to become the number one airline in the world they would have to
be able to offer international flights on a regular basis.
No first or business class offered:
With no assigned seating first or business class doesnt fit into Southwests profile.
Without these type of seating they will be avoided by a certain market who expect these type of
accommodations.
Conservative growth tactics:
This has served them well in the past but with more and more aggressive tactics used by
rival airlines to capture or carve out their own niche Southwest could end up occurring avoidable
losses if it were to take a less conservative approach.
No assigned seating:
A certain number of consumers are always going to feel better about be able to book their
seats. Some people will only fly if they can book a widow, or aisle seat.
Offers no meals:
With the majority of their flights being short, this is currently not of high importance.
With looking to expand into longer flights, peanuts are not going to satisfy the consumer.
Doesnt offer baggage transfers to other carriers:
With low airfare this hasnt been an issue but if other ULCCs offer baggage to transfers
to other carriers it may be necessary to reconsider.
Not on any centralized reservation sites:

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SOUTHWEST AIRLINES
Not on Orbitz or Expedia Southwests price may not be seen by consumers unless they
directly search on Southwests site. Consumers not aware of this may believe they are seeing the
best prices available by clicking on sites that are touted to compare the best prices available.
Opportunities
Explore social media options for reaching new customers:
Younger customers are growing up with marketing through social media. A key to
reaching them is utilizing social media sites.
Increase the number of flights to domestic sites:
To compete, airlines must offer more cities and further destination. I you cant offer the
flights people want they will seek out other airlines.
Expand into international markets:
Quite a bit of untapped revenue on the international market. A great opportunity to
expand domestic brands internationally.
Growth potential and expansion by adding cities that service is provided in:
Cities know the positive affect airlines can bring to a community hesitation could leave
the door open for others to take the opportunity.
Possible partnership with foreign international airlines:
This could be a less risky venture for an airline to ease into the international market. It
could give an airline a partner with more experience in international flights.
Utilize new technology to enhance customers flight experience:
Airlines need to set themselves apart from the competition. Being able to offer a more
pleasurable experience and conveniences that the competition could be the edge in winning the
consumers choice.

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SOUTHWEST AIRLINES
Research and development to expand product choices:
In order to be consumers number one choice an airline must have a wide range of
product choices to offer consumers. One size does not fit all.

Threats
Rising price of fuel:
Jet fuel price continue to rise and will affect the bottom line.
Shorter flights burn more fuel:
With the majority of their flights less than 800 miles they are not the most fuel efficient
flights. Short flights burn more fuel per mile than longer flights.
TSA rules requiring pat downs for those refusing to full body x-ray:
New TSA rules turned people off from air travel a few years again but many have
returned and have learned to live with it.
Possible increase cost of operations with FAA proposed changes in rest requirements for
flight crew:
With Southwests 20minute turnaround time their planes are in the air more often but this
could be hampered by rest requirements or more shifts might have to be added with additional
cost.
Jet Blue, Spirit and other ULCCs:
There are copycats out there such as JetBlue that have patterned themselves after
Southwest and looking to take a chunk of their market.
Union labor cost:

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SOUTHWEST AIRLINES
Wages are negotiated every contract and will affect the bottom line. They have to be
settled on an amount that the airline can afford and remain profitable and that the workers feel
they are receiving fair wage.
Strikes or labor disputes:
Contract still has to be agreed upon every so many years and could disrupt business if
not settled amicably
Industry Analysis
Porters Five Forces Model of Competition

Rivalry among competing firms

Potential entry of new competitors

Bargaining power of suppliers

Potential development of substitute products

Bargaining power of consumers

Rivalry among competing firms

Threat of rivalry is high due to the number of competing airlines. For 2015 Southwest
enjoyed 18.2% of the market share with Delta at 16.9% and American at 16.1 %.(Transtat)
Mergers and acquisition are always a possibility that can increase the threat of rivalry. There are
also copycat ULCC such as Jetblue and Spirit that offer similar product and possibly in some
case lower prices making it easy for consumers to choose another brand.
Potential entry of new competitors

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SOUTHWEST AIRLINES
Threat is low due to high entry barriers such as the large amount of capital it would take
to start up a new airline. The average price of Southwest most common airplane, the Boeing 737700, was 80.6 million in 2015.(Boeing) The smallest fleet for a US airline belongs to Spirit
which as of February 2016 had 79 aircraft. (Spirit)
Bargaining power of suppliers
Bargaining power of suppliers is high. Limited suppliers of aircraft and Southwests fleet,
as of 2015 consisted of 692 737 Boeing aircraft with no plans to switch to other
aircraft.(Southwest) 463 of those aircraft were the 737-700 with an average cost of 80.6 million
today. The Fuel prices have a great affect on airlines bottom line giving suppliers a great deal of
leverage. Soutwest paid 19.6 billion in fuel cost in 2015 for domestic flights alone. When
combined with international flights it brings total fuel cost to 30.8 billion.(Transtat)
Potential development of substitute products
Travel time makes threat of substitution low. People look towards airlines when they
need to cover a significant distance and dont want to spend the time it would take to travel by
car, bus or train.

Bargaining power of consumers

There is virtually no cost involved for consumers to switch between products. A
consumer can pick any airline that flies to the destination they are seeking. Consumers may fly
out on one airline and return on another booking one way travels instead of round trips if suits
their needs. There are numerous web search engines to help consumers compare prices of
competing airlines. Sites such as Travelocity, Kayak, Google Flights, and Priceline allow
consumers to compare prices and book the best fares; bargaining power for consumers is high.

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SOUTHWEST AIRLINES

Financial Analysis
Net income margin for Southwest is 11% with the industry median at 4.52%. While this
margin seems to be very healthy this ratios reliability is questionable due to it being able to be
manipulated through adjusting the numbers of depreciation, depletion and amotorization. A long
term positive trend is much more convincing of a companys financial health and competiveness
than a short term.

Return on Assets is 10.51% with the standard for the industry at 11.7%. The ratio shows
that Southwest is getting better at using its assets to obtain earnings. Southwest saw a large
increase in this ratio almost double from the previous year which was also an increase over the
year before that. This could be a start of much more meaningful long term trend

Return on Equity for Southwest is 30% which exceeds the normally desired 15% to 20%
ROE investors look for. This ratio shows how well Southwest uses investment funds to generate
earnings growth. Investors might look closely at a company with a high ROE to make sure they
do not have too high of a leverage ratio. Southwest has been showing an increasing trend over
the last four years while marinating a low leverage ratio.

Debt to assets looking at Southwest debt to equity ratio which .37 versus the industry
median of 1.02 while it shows that they retain much more financial flexibility than the industrys
standard. The lower D/E ratio could be explained by the reputation Southwest has for
conservative growth tactics. It could also be a sign that the companys operating margin is too

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SOUTHWEST AIRLINES
tight to borrow more funds but in this case it is untrue. When examining Southwests operating
margin it can be seen that it is a very healthy 20.77% compared to the industry standard of
7.88%. This is a good indicator on whether the company is facing problems.

Total debt ratio for Southwest is 65% determined by taking total liabilities $13,954m/
$21,312m total assets = 65%. This could be interrupted that Southwest would have to sell of
65% of its assets to pay off its debt. Companies with high ratios may seek to finance through
equity

Interest Coverage is a ratio that determines how easily a company can pay interest
expenses on outstanding debt Southwests ratio of 46.2% compared to the industry standard of
7.79 shows that Southwest would have no trouble paying its interest expense. This is a good
indicator of financial strength. Investors would be wary of low ratios that could mean a company
may have quite a bit of debt and run into problems if there is a lull in the industry or if there is a
recession.

Quick ratio is just above industry standard with .48 versus .47 has had a decreasing trend
over the last five years (Guru). Showing Southwest is having more and more trouble being able
to meet short term obligations. This could be caused by an inability to generate new growth and
sales or possibly paying out to quickly and/or collecting to slowly.

Current ratio for Southwest is lower than the industry standard with a .54 to .62
decreasing trend over the last six years. (Guru) This shows Southwest isnt very efficient at
turning service into cash in a timely manner.

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SOUTHWEST AIRLINES

Where is the firm financially strong and weak?

Southwest has shown improvement over the last few years in utilizing the companys
assets and investors funds in generating earnings. Southwests low leverage ratio and high
interest coverage ratio make it appear to be a low risk investment. The company may have some
liquidity difficulty. Southwests Quick and Current ratios show a bad trend over the last few
years and may have problems paying off short term obligations.
Raising short term capital?
Southwests best source of short term capital may be through equity financing. Due to its
low current and quick ratios southwest could experience difficulty getting a short term loan.
Raising long term capital?
Southwest would be able to use either debt or equity or a mix to finance long term
capital.

Does the firm have sufficient working capital?

With current liabilities higher than its current assets southwest does not have sufficient
working capital.
Southwests key ratios for management of effectiveness:
Southwest

Industry

Return on Equity
%

30.86

62.55

(5-Year Average)

(13.3)

28.69

Return on Assets
%

10.51

11.7

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SOUTHWEST AIRLINES
(5-Year Average)

(4.7)

5.04

Return on Capital
%

22.13

25.78

(5-Year Average)

(9.9)

11.41

Income/Employee

43.97k

Inventory
Turnover

18.45

41.38k

22.47

Looking at Southwests key ratios for management of effectiveness it looks as if there is

improvement that can be made on how effective the company handles capital budgeting. All
management of effectiveness ratios for 2015 and the 5 year average are below industry
standards. Dividend payout policies seem reasonable when considering they have 8.75 payout
ratio and a 3 year dividend growth rate of 101.1%. This in part helps keep good relations with
investors and shareholders. 1.4 billion In returns to shareholders through payments of cash
dividends and the repurchase of common stock. (southwest) Southwests website offers investor
alerts and shareholder service making it easy for investors and shareholders to stay in touch with
current happenings.
From the Southwest website, Southwest financial managers include;
Gary C. Kelly CEO/Chairman of the Board/Director/President- Gary is a 29-year
Southwest veteran who began his career at Southwest Airlines as Controller, moving up to Chief
Financial Officer and Vice President Finance, then Executive Vice President and CFO, before
being promoted to CEO and Vice Chairman in July 2004. Gary assumed the roles of Chairman
and President in 2008. Prior to joining Southwest Airlines in 1986, Gary was a CPA for Arthur
Young & Company in Dallas and Controller for Systems Center, Inc. (Southwest)

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SOUTHWEST AIRLINES
Ron Ricks Vice Chairman of the Board/Director has served in roles including Director
Revenue Accounting, Corporate Controller, Vice President Procurement, Vice President
Technology, Senior Vice President Enterprise Spend Management, and Executive Vice President
Strategy and Technology. During his time at Southwest he has led numerous significant change
initiatives, including the acquisition of AirTran Airways, the development of the new
southwest.com e-commerce platform, the all new Rapid Rewards loyalty program, and an
enhanced boarding process. (Southwest)

Ms. Tammy Romo CFO/Chief Accounting Officer/Executive VP - Tammy is currently a

member of the Accounting Advisory Council at the McCombs School of Business at the
University of Texas at Austin and is a graduate of Leadership Texas. In 2014, Tammy was
named as an Outstanding CFO for a Public Company by D CEO Magazine and was named CFO
of the Year by the Dallas Business Journal. In 2015, Tammy was appointed to the Board of
Directors of Tenet Healthcare Corporation.

Southwest has a capable team of financial managers and have been profitable for over 44
consecutive years.

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SOUTHWEST AIRLINES
Competitive Strategy

SWOT MATRIX
Strengths

Weaknesses

1.Unique management
strategies

1.Conservative growth tactics

2. 20 minute average in
turnaround time
3. 45 years experience in the
airline industry
4. Employee loyalty and
morale very high
5. Known for low airfare and
high customer service
6. AirTran acquisition
increased capacity by 22
percent

2. Doesnt offer baggage

transfers to other carriers
3. No first or business class
offered
4. Limited international flights
5. Offers no meals
6. No assigned seating
7. Not on any centralized
reservation sites

7.Bags Fly Free only airline

with no charge for first or
second bad checked in
Opportunities

SO Strategies

WO Strategies

8. Explore social media

options for reaching new
customers
9. Increase the number of
flights to domestic sites
10. Expand into international
markets
11. Growth potential and
expansion by adding cities
that service is provided in
12. Possible partnership with
foreign international
airlines
13. Utilize new technology to
enhance customers flight
experience
14. Research and development
to expand product choices

1. Expand the brand

1. Add 1st class and or
internationally by increase the business class to some flights
number of countries it services (W3, W6, O6, O7)
from 7 to 15. ( S5, O3, O5)
2. Offer meals on longer
flights. (W5, O6)
2. Add 20 more domestic
routes. (S6,O2)
3. Try to reach more
3. Increase the number of
consumers through social
media. (W 7, O1)
cities that service is provided
from 97 to 120. (S3, O4)

20

SOUTHWEST AIRLINES

Threats

ST Strategies

WT Strategies

8. Rising price of fuel

9. Shorter flights burn more
fuel
10. TSA rules requiring pat
downs for those refusing
to full body x-ray.

1. increase to 50% of flights

over 750 miles. (S3, T1,T2)

1. Join Orbitz and

Expedia(W7, T5)

2. Continue to set themselves

apart from the competition by
developing more progams
such as bags fly free. (S5,
S7, T5)

2. Partner with a foreign

airline (W4, T2)

11. Possible increase cost of

operations with FAA
proposed changes in rest
requirements for flight
crew
12. Jet Blue, Spirit and other
ULCCs
13. Union labor cost
14. Strikes or labor disputes

3. Maintain good labor

relations, avoiding layoffs
when possible. Keep
communication flowing with
employees. ( S4, T7)

SO Strategies
Southwest has great experience with over 45 years in the airline industry and a very good
reputation with consumers. Southwest should use these strengths to expand their brand both
domestically and internationally. With the acquisition of Airtran it has increased their fleet size
and international connection which would help them to add more domestic and international
flights

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SOUTHWEST AIRLINES
WO Strategies
Southwest has opportunities to increase the products they offer by adding 1st class and
business class seating at least on some of their longer flights. They could also offer meals on
these flights. By offering these products they could increase the amount of consumers they
would appeal to. By utilizing social media outlets they could reach many consumers who are not
reachable through other marketing techniques.

ST Strategies
In order to increase the efficiency of fuel use Southwest should make sure at least 50% of
their flights are greater than 750 miles. Southwest has said that employees should be treated as
customers, maintaining this philosophy will help diminish the threat of strikes and labor disputes.
Southwest Bags fly free program and quality of service at a low price helps make them
standout but they should continue to looks for ways to make them the choice over copycat
ULLCs that may offer a lower price.

WT Strategies
If Southwest believes they have a great product at a lower than average price they should
have no reason to avoid centralized reservation sites such as Orbitz and Expedia. Some consumer
may only use these sites to compare flights which leaves Southwest out of the running and gives
more opportunities to the competition. Southwest can mitigate risk and still expand further into
the international market, while increasing flight lengths by partnering up with a foreign airline.

22

SOUTHWEST AIRLINES
QSPM
Strengths
ALTERNATIVE 1 increase to 50% of flights over 750 miles
ALTERNATIVE 2 Expand the brand internationally, increase the number of
countries it services from 7 to 15
ALTERNATIVE 3 Add 1st class and or business class to some flights

ALTERNATIVE 1

ALTERNA
TIVE 2

ALTERNA
TIVE 3

WT

AS

TAS

AS

TAS

AS

TAS

.05
.09
.1
.08
.08
.08

4
4
3
4

.36
.40
.24
.32

1
4
4
4

.09
.40
.32
.32

1
2
3
2

.09
.20
.24
.16

.09

.27 2

.18

.27

.07
.05
.07
.08
.06
.06
.06
1.00

1
2
2
1
2
2
-

.07
.10
.14
.08
.12
.12
2.22

3
3
3
4
4
3
-

.21
.15
.21
.32
.24
.18
2.62

.08

16. Add longer non-stop trips

.08

.32

.32

.16

17. Add International flights

18. Over 100 cities have asked for Southwest to begin
service in their cities

.08
.07

1
4

.08
.28

4
1

.32
.07

1
1

.08
.07

19. partnership with foreign international airlines

.06

.12

.24

.06

8. Unique management strategies

9. 20 minute average in turnaround time
10. 45 years experience in the airline industry
11. Employee loyalty and morale very high
12. Known for low airfare and high customer service
13. AirTran acquisition increased capacity by 22
percent
14. Bags Fly Free only airline with no charge for first
or second bad checked in
Weaknesses
8.Conservative growth tactics
9. Doesnt offer baggage transfers to other carriers
10.No first or business class offered
11.Limited international flights
12.Offers no meals
13.No assigned seating
14.Not on any centralized reservation sites
TOTAL

1
3
4
1
3
4
-

.07
.15
.21
.08
.18
.24
1.89

Opportunities
15.

Southwest website number one airline website for

on line revenue

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SOUTHWEST AIRLINES
20. Add more frills

.05

.15

.05

.15

21. Research and development to expand product

choices

.06

8. Rising price of fuel

.09

.27

.36

.09

9. Shorter flights burn more fuel

.07

10. TSA rules requiring pat downs for those refusing to

full body x-ray.

.06

11. Possible increase cost of operations with FAA

proposed changes in rest requirements for flight crew

.07

.21

.28

.07

12. Jet Blue, Spirit and other ULCCs

.09

13.Union labor cost

14. Strikes or labor disputes

.07
.07

TOTAL
GRAND TOTAL

1.00
2.00

Threats

1.43
3.65

1.64
4.26

.68
2.57

Strategy Recommendation
Based on the QPSM score the strategy recommended is to increase the amount of
international flights from seven to fifteen. Capitalizing on several of Southwests strengths such
as 45 years of experience, reputation of low airfare and high service, and utilizing the acquisition
of Airtran, Southwest could easily increase the number of international flights it offers and
eliminate the weakness of limited international flight and expand the companys reputation
internationally.

By using this strategy Southwest could seize several of the opportunities that have been
identified with minimal exposure to recognized threats. By adding international flights

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SOUTHWEST AIRLINES
Southwest also increases the amount of nonstop flights and increases the average length of the
companys flights. Southwest could also implement this strategy through partnership with a
foreign airline and minimize risk. The threats the company faces are the same for the rest of the
industry. Rising fuel cost and FAA proposed changes in rest requirements for flight crew will
affect the entire industry. With shorter flights being less fuel efficient, increasing the average
flight length would be more economical while partnering with a foreign airline would increase
the amount of crew members without having to higher or train new employees.

Ethical and Social Responsibility

Southwest Airlines citizenship has always meant that the company is devoted to each
and every community that we serve. In the attempts of continued growth and extending our
brand internationally, Southwest pledges to uphold these values in every country that we enter.
Implementation Plan
After careful analysis the decision has been made to move along with plans to form an
alliance with another foreign airline in order to increase the amount of international flight we
currently offer from seven to fifteen. In order to implement this plan the following department
heads and their teams have all been assigned objectives to carry out.

Finance:

Obtain funding required to purchase new aircraft to service the additional routes

Determine the cost of any fees, visas or permits required for conducting business outside
the country.

Determine breakeven point

Develop proposed cost and profit split between partners

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Develop and monitor budgeting cost

Marketing:

Conduct research to determine most lucrative foreign sites to provide flights to

Conduct research to determine the best foreign airline to form partnership with.

Develop marketing strategies and advertising campaign to bring brand awareness to the
foreign market.

Develop marketing strategies and advertising campaign domestically to announce new

foreign travel locations

Research & Development:

Continue researching the most economical long range aircraft that offers the best fuel
efficiency per passenger.

Research expectancies of foreign travelers, food, beverages, and comfort.

Human Resources:

Ensure thorough research has been conducted on laws and customs of all countries that
Southwest will be doing business in.

Educate all employees on laws and customs of all countries that Southwest will be doing
business in.

Educate all employees and/or contractors on Southwests ethical business standards.

Southwest estimates cost to implement this plan at 1.6 billion for aircraft with an
additional 50 million allocated among Marketing, R & D and HR for their objectives along with
Financings administrative cost.
Financing

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SOUTHWEST AIRLINES
Tammy Romo, the Executive Vice President and Chief Financial Officer will be responsible for
overseeing the financing of aircraft and the other financing objectives. Southwest plans to
purchase four Boeing 767-300ER at a cost of 197million per and two 777-200ER at 313million
each. The 767 will carry 211 passengers with a non-refueling distance of 6,400 nautical miles
while the 777-200 Extended Range aircraft has a capacity of 440 passengers with a non-refueling
distance of 9,500 nautical miles. (Boeing) These planes will allow for the capacity and distances
needed for economically international travel. The 160 million budgeted for aircraft with an
additional 10 million for administrative fees.
Marketing
Ryan C. Green the Vice President Marketing, with a 20 million budget, will be in charge of the
marketing portion of the implementation plan. Ryan will be responsible to determining what
would be a best alliance, best destinations and developing the marketing strategies to make this a
successful venture.
Research and Development
R&D with 10 million budgeted for this project, will be headed up by Tom Nealon-Executive of
Vice President, Strategy and Innovation.
Tom will ensure that we are utilizing the most effective aircraft that provides us with the most
cost efficient form of long distance passenger transport. Mike will continue researching
international markets that we are entering and may enter to make sure we are providing the type
of service expected by our foreign passengers.
Human Resources
Julie Weber - Vice President People, budgeted 10 million for education and training. Julie will
oversee the education and training of all foreign and domestic employees. She will ensure that

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SOUTHWEST AIRLINES
the company and its employees are aware of all customs and laws for each foreign country where
business is being conducted. Julie will make sure that Southwest ethical standards are followed
both in the US and any foreign countries Southwest conducts business in.

Financing
Southwest has conducted an EPS/EBIT analysis to determine the best way to raise the
capital needed. The analysis included raising capital through Debt financing, Equity Financing
and a combination of either a 70% Debt to 30% equity or 70% equity to 30% Debt.

Amount Required 1.65 Billion

EBIT Range $350million 3.6 Billion

Interest Rate 5%

Tax Rate 37%

Stock Price - $44.62 per share

EPS/EBIT Analysis

EBIT
INTEREST

Common Stock Financing

Recession
Normal
350,000,000 1,000,000,000

Boom
3,600,000,000

Debt Financing
Recession
Normal
Boom
350,000,000 1,000,000,000 3,600,000,000

825,000

825,000

825,000

EBT

350,000,000

1,000,000,000

3,600,000,000

349,175,000

999,175,000

3,599,175,000

TAXES

136500000

390000000

1404000000

136,178,250

389,678,250

1,403,678,250

EAT
# OF
SHARES

213,500,000

610,000,000

2,196,000,000

212,996,750

609,496,750

2,195,496,750

674,978,933.0

674,978,933.0

674,978,933.0

638,000,000

638,000,000

638,000,000

0.32

0.90

3.25

0.33

0.96

3.44

EPS

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SOUTHWEST AIRLINES
70% Stock -30% Debt
Recession
Normal
350,000,000 1,000,000,000

EBIT

70% Debt - 30% Stock

Boom
Recession
Normal
Boom
3,600,000,000 350,000,000 1,000,000,000 3,600,000,000

INTEREST 24,750,000

24,750,000

24,750,000

EBT

325,250,000

975,250,000

TAXES

126,847,500

EAT
# OF
SHARES

198,402,500

EPS

0.30

663885253

57,750,000

57,750,000

3,575,250,000 292,250,000

942,250,000

3,542,250,000

380,347,500

1,394,347,500 113,977,500

367,477,500

1,381,477,500

594,902,500

2,180,902,500 178,272,500

574,772,500

2,160,772,500

663885253
0.90

663885253
3.29

57,750,000

649093680
0.27

649093680
0.89

649093680
3.33

Looking at the result of the analysis of all four of the financing choices through the
varying economical conditions, Debt financing will allow for the maximum EPS.

Projected Financial Statement

Projected Income
Statement
Value in
Millions
2014
Total Revenue
Cost of Revenue
Gross Profit
Selling, General & Admin
EXP
Research and
Development
Special income changes

2015

2016

18,605

19,820 21,108

7,677

6,025 6,396

10,928

13,795 14,712

5,434

6,383 7,468

Increased same as previous

year
same % of Rev as last
year

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SOUTHWEST AIRLINES
-

Increased same as previous

year

Operating Expenses

8,703

9,679 10,744

operating Income

2,225

4,116 7,573

Net Interest Income

Other Income/Expense,
Net

(100)

(81) (66)

(309)

(556) (1,001)

Pre-Tax Income

1,816

3,479 6,506

680

1,298 2,319

1,136

2,181 4,187

Dividend Per Share

0.22

0.29 0.38

Tax Rate

0.37

0.37

0.37

Basic EPS

1.65

3.30

3.30

Diluted EPS

1.64

3.27

3.27

Provision for Income Tax

Net Income

Increased same as previous

year

Increased same as previous

year

Projected Balance
Sheet
2014
Assets
Cash, Equiv & Short Term
Investments

2015

2016

2,988

3,051

3112

Receivables

365

474

616

Inventories

342

311

283

Deferred Current Assets

Deferred Taxes, Current
Assets

Other Current Assets

3,927

4,024

Total Current Assets

Net Property, Plant and
Equipment
Goodwill and Other intangible
Assets
Investments and Advances

Increased same as previous

year

decreased same% as previous

year

4011

14,292

15,601 18,605

1,333

1,434 1,534

1.6B in New
Planes
Increased same as previous
year
46

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SOUTHWEST AIRLINES

Other Non-Current Assets

Total Non-Current Assets
Total Assets
Liabilities and Shareholders
Equity
Payables
Accrued Expenses, Current

35

40

136

213

15,796
19,723

1,284

334

17,288 20,519
21,312 24,530

1,250

1213

1,484

2,529

4299

258

637

1573

Other Current Liabilities

2,897

2,990

3095

Total Current Liabilities

LT Debt and Capital Lease
Obligation
Deferred Liabilities, Non
Current
Other Non-current Liabilities
and MI
Total Non-current Liabilities
and MI

5,923

7,406

10180

2,627

2,706

2787

3,009

2,712

4091

598

855

1223

7,025

6,548

8101

12,948

13,954

18281

808

808

808

Current Debt
Deferred Liabilities,
Current

Total Liabilities
Capital Stock
Retained Earnings
Acum Gains/Losses Not
Affecting RE

5,768

6,431

1.6B in New
Planes

10,618

Total Equity

6,775

7,358

6249

Total Liabilities and Equity

Ordinary Shares
Outstanding

9,209

9,899

10641

675.6

647.6

647.6

Increase same % as previous

year
plus 1.65B in
loans

plus 1.65 loan

accumulative

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SOUTHWEST AIRLINES
Conclusion
Southwest Airlines is in a highly competitive market and to remain successful must seek
to expand its market. Southwests leadership if confident that we have a very viable strategy that
will allow the company to capitalize on its strengths, eliminate a weakness, with minimal
exposure to recognized threat. By forming an alliance with a foreign airline Southwest will be
able to increase our international flights and expand the companys brand without worry of brand
dilution.

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SOUTHWEST AIRLINES
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Boeing. (n.d.). Retrieved April 01, 2016, from http://www.boeing.com/company/aboutbca/index.page#/prices#/prices

David, F.R. (2013). Strategic management concepts and cases: a competitive advantage approach. (14th
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Global airline alliances: Where low-cost carriers fit into the picture Part 3. (n.d.). Retrieved April 02,
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Schmalbruch, S. (2015). The 10 most popular international destinations for American travelers.
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SOUTHWEST AIRLINES
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