FREE ESSAY ON SOUTHWESTAIRLINES

SOUTHWESTAIRLINES

HOW IT ALL STARTED
Southwest Airlines (SWA) begins in June 18, 1971, when SWA first operated a first airline
consul between Houston, Dallas and San Antonio. Rollin King and Herb Kelleher are the
founders of the company. The end of 1971 SWA immediately began to expand.
In 1972 all Houston service is transferred to Houston's Hobby Airport form Houston
Intercontinental, that is make more convenient for people to fly. During the first year
of operations the customers were the Southwest's first priority. Five years after the
first operated a twin-engine the SWA places its sixth Boeing 737 into service while
flying over one and a half million satisfied customers to their destinations. Also at the
same year SWA gets clearance to begin spreading to Austin, Corpus Christi, El Paso,
Lubbock, and Midland/Odessa. Also, SWA carries its five millionth passengers and SWA
becomes the public. SWA stock is listed on the New York Stock Exchange. In 1978, Herbert
Kelleher comes aboard as permanent President, CEO, and Chairman of the Board for SWA. In
1979, SWA introduced in ten cities to self-ticketing machines in ten cities to make it
even faster and more convenient for people to fly. 
Year later SWA added its 22nd Boeing 737 to the family and it was the first 737 to be
completely owned by SWA. Furthermore, in 1985 SWA take off with new service to St. Louis,
Missouri and Chicago. Moreover, in 1988, SWA becomes Sea World of Texas' official
airline, later in the year SWA again becomes the official airline of Sea World of
California. Also, SWA wins the first Triple Crown, a prize for airline companies that 
consist for Best On-Time Record, Best Baggage Handling, and Fewest Customer Complaints. A
year later, SWA wins the second Triple Crown. In addition, in 1994 for third, 1995 for
fourth, and 1996 for fifth annual Triple Crown. In 1997, SWA begins new service to Islip,
New York, and Connecticut. 
After past twenty-eight busy years SWA is became the fifth largest major airline in the
United States. SWA spans over fifty-six airports compare with 1971 only Dallas, Houston
and San Antonio. Also, SWA is known in the airlines industry as a quality flight and the
most modern fleet. SWA is a service business and it is continuing to improve its
services.
INDUSTRY OVERVIEW, TRANDS AND OPPORTUNITIES.
Air travel slowing industrywide.
According to Standard & Poors' Industry Survey, in 1998, air travel for the industry's
major carriers was projected to increase 2.9% to 590 billion revenue passenger miles
(RPMs). This is somewhat slower than the projected 3.5% gain for real gross domestic
product (GDP) in 1998. In 1999, RPMs would advance 2.5% to 605 billion, while real GDP is
seen growing 1.7%. The recently sluggish pace for air travel represents a break from the
normal pattern: since 1987, air travel has grown 1.8 times faster than real GDP.
Two elements are working against air travel at present. First, the industry is
experiencing a cyclical slowdown that has its origins in the Asian financial crisis.
Second, with the days of deeply discounted fares over, fewer first-time travelers are
entering the market.
The big swing factor for air travel in 1998 and 1999 will be the international market.
International travel accounts for some 27% of total Revenues per mile (RPM) and 22% of
revenues for the largest U.S. carriers. For the first eight months of 1998, international
RPMs climbed 3.7% over the year-earlier period. However, as capacity grew 5.8%, the load
factor deteriorated to 73.7% from 75.2%. Most of the international weakness is confined
to Asia, where traffic is off about 8%. 
While the economic slowdown that's underway may not deteriorate into a recession, it is
expected to take its toll on corporate profits. Historically, business travel reflects
changes in corporate profits, though sometimes with a lag. In 1997, the Travel Industry
Association of America reported that business travel increased 7.6%. Business travel,
which accounts for some 40% of enplanements, could lag overall air travel in the future
as soaring fares make videoconferencing an attractive alternative.
The outlook for vacation and personal travel in 1999 appeared positive. Strong consumer
sentiment and a strong dollar are supporting leisure travel, which accounts for about 60%
of enplanements.
The strength in the consumer sector is reflected in the sentiment readings calculated by
the Conference Board, a private research firm. In June 1998, consumer sentiment reached a
29-year high of 138.2. Though the measure subsequently backed off to 126.0 in September,
it remains significantly above the 47.3 nadir recorded in early 1992. With consumers in
fine spirits, more dollars will be allocated for leisure and travel.
The U.S. airline industry took in estimated revenues of $88 billion in 1997, of which
$79.5 billion (90%) was derived from passenger fares. Carrying mail and cargo and
in-flight sales delivered another $8.5 billion. Domestic travel accounted for 78% of
passenger revenues in 1997; international travel accounted for 22%.
The largest domestic airline in 1997, based on carrier revenues, was United Airlines, a
unit of UAL Corp. With the exception of Southwest, all major airlines today operate
through hub-and-spoke networks. In such a network, passengers are flown from surrounding
spoke cities to a central hub airport, where they transfer to the next leg of their
flight. Travelers, of course, prefer point-to-point service, and Southwest is able to
satisfy that need by primarily operating in short haul routes. 
The air travel industry is capital-, labor-, and technology-intensive. Airlines are
subject to intense competition, which produces falling yields and razor-thin margins. To
succeed, airlines must quickly employ any new process or procedure that can reduce
costs.
Internet and Airlines
The Internet has the potential to radically alter the way airline seats are priced and
distributed, it also promises to greatly enhance load factors (percentage of available
seating capacity that is filled with passengers) and profits. Today customers of major
airlines can book their ticket via the Internet. Cyberauction sites, such as
priceline.com, are greatly enhancing customers' bargaining power. So, Internet can hurt
airlines by making travelers too price-sensitive. Ticketless travel is becoming universal
in the industry. Southwest went ticketless in 1994. 
Labor
Labor is the industry's largest single expense, accounting for 34% of total costs in
1997. Employment can be divided into six broad craft positions: pilots, engineers, flight
attendants, dispatchers, machinists, and clerical workers. Most airline workers belong to
one of a dozen major unions. Strikes occur infrequently, because under the Railway Labor
Act of 1926 airline contracts don't expire, they just become amendable. 
Regulation
Regulation of domestic airline fares and markets ended with the Airline Deregulation Act
of 1978. However, the industry continues to be regulated with regard to safety, labor,
operating procedures, and aircraft fitness and emission levels by the Department of
Transportation and its affiliated agency, the Federal Aviation Administration (FAA).
Competitors
Southwest's top three rivals are America West, Delta, and United AirLines. 
America West Holdings is the holding company for America West Airlines (AWA), one of the
top 10 US airlines. AWA serves more than 55 North American destinations, including six in
Mexico and one in Canada. Its fleet includes about 110 aircraft, which fly from hubs in
Phoenix and Las Vegas and from a mini-hub in Columbus, Ohio. AWA serves additional
locations through code-sharing alliances with Continental (which owns a 9% stake in the
company) and other airlines, including Northwest and British Airways.
Delta Air Lines, the #3 US carrier (behind UAL's United and AMR's American), is expanding
its US regional operations while building a global alliance. With major hubs in Atlanta,
Dallas/Fort Worth, Cincinnati, New York City (Kennedy), and Salt Lake City, Delta flies
to 185 US cities and more than 40 foreign destinations.
United flies more than 570 jets to some 130 destinations in the US and 27 other
countries; it has hubs in Chicago, Denver, London, San Francisco, Tokyo, and Washington,
DC. UAL's United Express connects passengers from regional carriers to United's system.
UAL also operates United Shuttle, offering more than 460 short-haul flights daily to 21
western US cities.
STRATEGY OF SOUTHWEST AIRLINES
Southwest Airlines is a growing company from a fact of that it expanding its business all
over The United States.
Southwest Airlines employ two major price strategies, a Flexible - price strategy, (also
called a variable - price strategy ) and a low - price strategy, to compete against other
airlines. Passengers would not fly at high prices, and demand for air travel is highly
elastic. There are two segments exist, that are separated which are pleasure travelers
(in which demand tends to be elastic) and the segment of business travelers (in which
demand is typically inelastic). And they do that by placing some restrictions on lower
price tickets - requiring advanced purchase. And Southwest Airlines does offer lower
prices for children and senior citizens. Also there are low prices depending on
purchasing period of time, for example, you can purchase a ticket in an advance of three
weeks at lower price comparing to purchasing ticket within three or four days of flight.
So here we see that these examples clearly show us that Southwest Airlines employ both
flexible - price strategy and low - price strategy, even though pricing strategies change
over time. 
In order to offer low prices and earn healthy profits, Southwest Airlines works
especially hard to control its costs. At the beginning they reduced their employee
training cost and spare-parts inventories, by using only a single type of aircraft. But
mostly, Southwest Airlines focus on their low cost measured by available-seat-miles (
ASMs), which positioned them to maintain its price leadership. Also, Southwest introduced
its ticketless travel by reducing their service cost, saving the company twenty five
million, and many other major airlines did. There is a low employee turnover at
Southwest, and the reason to that is a high employee morale, which also helps to maintain
low costs, and it is important to them to maintain that morale.
To fend off the competition posed by new airlines that imitate its low-price strategy,
Southwest Airlines should focus more, as they did before, on lower costs. And by focusing
on and controlling the lower costs, they can offer lower prices, which is the major
attraction for the customers. 
Southwest Airlines' main strength is that it low-fare carrier. Despite the fact that
Southwest is flying from coast to coast, it doesn't serve meals. Passengers get peanuts,
pretzels and cookies on flights up to three hours long. On trips longer than five hours
passengers get snack bars including a fruit bar, cheese wedge, crackers and sausages.
Nevertheless, Southwest receives few complaints about the lack of food on flight.
Moreover, Southwest Airlines recommends customers to bring their own food to flight. 
To keep the cost low Southwest flies only Boeing jets. That keeps costs low down because
Southwest's pilots are certified to fly any plane in the fleet. It's also cheaper to keep
parts and spares for a single aircraft model. In a year 2000, more 32 Boeing 737 aircraft
will join to serve Southwest Airlines. Nowadays, airline has 306 planes, all Boeing 737s,
and they planning to increase this number to 500 airplanes by 2005.
The major strength of the Southwest Airlines is the people that working there. The
Southwest Airline has a workforce of 29,000 and almost two-thirds of the employees have
been with the company for less than five years, in fact, airline adds 5,000 employees per
year. From the beginning, the employees of the Southwest Airlines created a family
atmosphere that motivated to creativity, independence and friendliness between employees.
The company even set up a culture committee about a decade ago. The responsibilities of
the culture committee are: arranging Hokey Days, when some committees clean up a airplane
to give flight attendants a break, select a candidate for employee of the month. Also,
the members of committee discuss the ways to improve workforce, service, and customer's
complaints. Southwest Airlines has a culture inside the company, and this culture is a
spirit of the company. 
Southwest Airlines is a high-quality service, high employee moral and low operating costs
carrier. The external factors that affect Southwest's strategy would be different kinds
of laws and restrictions like safety and training regulations. In fact, recently the
government regulation of non-smoking flights came out and Southwest Airlines had to
follow that. On top of that, traveling in and out of Dallas Love Field is a subject to
the limitations of the Wright Amendment. Federal law prohibits Southwest Airlines from
offering for sale tickets or providing transportation between Dallas Love Field and any
destination beyond the territory of Texas, Louisiana, Arkansas, Oklahoma, New Mexico,
Mississippi, and Alabama. Currently, Southwest Airlines is debating this restriction in
Supreme Court.
There are several airports in the area of New York that not congested such as Newburgh,
Trenton, New Jersey, and Allentown, Pa., that afford Southwest with low airport costs.
The only impediment on the carrier's growth last year has been rising fuel prices, which
were up 34 percent and are causing earnings to be flat on a year to year basis. As a
result, if price of fuel will continually rise, the company would lose money or it would
have to increase price of fares.
Nowadays, Southwest Airlines conquered the market niche of low-fare airline industry in
the United States. Moreover, this market has a potential to grow and Southwest Airlines
will play the major role in its future. 
SUCCESS FROM A SIMPLE STRATEGY
How has Southwest achieved such phenomenal success in the face of stiff competition?
Basically, Southwest offers no-frills service at low fares on relatively short flights.
Additional benefits the airline provides include simple scheduling, ticketless travel,
and point-to-point service.
The core of Southwest's marketing strategy is the short-haul domestic route. An average
trip of 394 miles that last about an hour allows airline to be at or near top in periodic
measures of on-time performance. Southwest serves airports that are readily accessible,
rather than large, crowded international airports.
Low fare airlines compete in the segment of market that accounts for approximately 40
percent of the passenger traffic in the United States. Southwest selects new markets
where there are too few flights and high fares. When it enters the market, fares drop by
as much as 70 percent. This action often triggers a price war, which in turn benefits
customers and increases traffic in that area.
Before starting service to a new city, Southwest launches an extended public relations
program that emphasizes community relations, special events, and direct marketing. The
intent is to build awareness of Southwest Airlines and make it a part of community even
before service starts to the city. For example, in 1993, Southwest Airlines used baseball
theme to enter the Baltimore market, because the city was hosting the All-Star game that
year.
Although other airlines have implemented a marketing strategy emphasizing low prices and
modest services, few have achieved stable success. ValuJet, Western Pacific and Kiwi
Airlines have tried to copy Southwest's approach. For example, ValuJet also offers
ticketless system, no meal or assigned seats are offered, and only short hauls are
flown.
Some large airlines also have decided to supplement their regular service with low fare,
low cost service. In the past 5 years, Delta Airlines, USAir and several other major
airlines announced the launch of their low-fare, short haul, divisions. However,
Southwest stayed strong. Continental Airlines abandoned its Continental Lite unit, when
it could no longer finance its half-price fare sale long enough to capture the market.
FINANCIAL OVERVIEW
Southwest Airlines (LUV - NYSE symbol) belongs to the transportation industry,
specializing in the transportation airline sector. Precisely, the company provides short
haul, high frequency, point-to-point, low fare air transportation services. Southwest
Airlines' fleet consists of 280 aircrafts all of which are Boeing 737, which simplifies
scheduling, maintenance, flight operations and training activities. Of the total fleet,
99 and 13 were under operating and capital leases, respectively; the remaining 168
aircraft were owned. Southwest leases terminal passenger service facilities at each of
the airports it serves. Recently the company was ranked number 7 in the sector. Its major
competitors are Skywest Airlines (ranked number 1), KLM Royal Dutch Airlines (ranked
number 4). The company is to be compared to Skywest Airlines (ranked number one) and
Delta Airlines (ranked number fourteen) to show advantages and disadvantages.
Starting in 1971, with President Lamar Muse at the helm, the company was performing
increasingly well surpassing S&P 500 and the sector/industry averages.
Net Revenue Growth
Increase 1999 Increase 1998 Increase 1997 1996
Skywest (SKYW) 23.2% 351,680 26.5% 285,443 26.5% 225,683 210,093
SouthWest (LUV) 13.7% 4,735,587 9.1% 4,163,980 12.1% 3,816,821 3,406,000
Delta Air (DAL) N/A N/A 11,4% 2,554,000 19,4% 2,292,000 1,926,000
SKYW - 5-yr Net Revenue Growth Rate - 15.63%
LUV - 5-yr Net Revenue Growth Rate - 12.81%
DAL - 5-yr Net Revenue Growth Rate - 4.03%
Data demonstrates that although the volume is superior to the leader the moment is low,
which causes LUV to lag behind. Nevertheless, averaged five-year growth potential rate
exceeds the sector and industry rates, which are 8.52% and 9.34% respectively. 
Net Profit Growth
Increase 1999 Increase 1998 Increase 1997 1996
Skywest (SKYW) 59.7% 13,618 Unordinary 8,525 38.6% 43,143 31,120
SouthWest (LUV) 9.5% 474,378 36.4% 433,431 53.3% 317,772 207,337
Delta Air (DAL) N/A N/A 17.2% 990,000 Unordinary 845,000 74,000
SKYW - 5-yr EBITD Growth Rate - 15.81%
LUV - 5-yr EBITD Growth Rate - 18.9%
DAL - 5-yr EBITD Growth Rate - 14.63%
Data demonstrates that although 1998 to 1999 year transition was not the most successful
for the company, the overall prediction about the level of Net Profit Growth is
optimistic, and promising to pass the industry and sector rates, which are 14.54% and
17.28%, respectively. But, the industry will under perform the S&P500, where the growth
is predicted to be 21.39%
Current Ratio
1999 1998
Skywest (SKYW) 3.104 4.067
SouthWest (LUV) 0.62 0.997
Delta Air (DAL) 0.71 0.67
Current ratio for the LUV is certainly pushed below the industry average of 0.82, sector
average of 1.68, and S&P500 average of 1.59. This is due to the expansion policy that the
company is pursuing. It expands the fleet by adding 32 new aircrafts and also having 62
ordered for the consecutive years. Low current ratio limits their borrowing power
substantially, where is on the other hand, expansion will surely add overall value to the
current operations. What the company may do is shift some of its current liabilities to
long-term debt and/or equity.
Total Debt to Asset Ratio
1999 1998 1997
Skywest (SKYW) N/A 13.47% N/A
SouthWest (LUV) 49.5% 49.2% 52%
Delta Air (DAL) N/A 19.74 N/A
Since the ratio is constant for the company, it shows the ability to maintain a certain
level of debt confidently. Compared to the other companies, Southwest Airlines has a high
Total Debt ratio, which it might want to reduce. A potential investor might be pleased or
displeased depending on his/her level of risk tolerance and outlook for the future.
Company shows a financial risk above average, which is once again triggered by the
expansion of the fleet.
Accounts receivables
1999 1998 1997 1996
Skywest (SKYW) N/A 29 N/A N/A
SouthWest (LUV) N/A 8 8 8
Delta Air (DAL) N/A N/A N/A N/A
The length of the collection period is short, since almost 100 percent of the sales are
targeted at passenger transportation rather than cargo. Southwest airlines are saving
money by not extending its credit terms, unlike Skywest, which has a collection period of
29 days. Unfortunately market data is unavailable to compare and contrast.
Return on Equity
Company's Return on equity is measured as following, 17.95% in 1999, 13% in 1998, 12,6%
in 1997. Comparatively to the industry it is well below the mark, but the company has
just broken out of the sector average of 14.42%. The company will deliver about average
to the investor, and certainly below an average S&P500 company where the rate is 24.11%
As the conclusion of the ratio analysis we'll use the Du Pont analysis for the two
companies.
Net Profit Margin Asset Turn-Over 1-Debt to Asset Ratio R.O.E.
SkyWest Airlines 11.94% 1.06 1-0.611 20.7%
SouthWest Airlines 10.2% 0.91 1-0.517 17.95%
As the data suggests, we have a higher R.O.E. for SkyWest Airlines due to several
circumstances:
? SKYW has a higher profit margin than LUV
? SKYW has a higher Asset-Turnover than LUV
In order to increase performance and thus strengthen company's position, LUV should
reevaluate its projects and decrease the number of those that don't meet the net-profit
margin criteria. Also, asset-turnover can be increased through the resources utilization
policy restructuring.
Stock
In the past 28 years, company stock was on the constant rise. It did experience its lows
and highs, but the strong position of the company helped to maintain a constant growth.
Even the accident with the plane in the late March, 2000, did not affect the stock price
much, since the stability and strength is well trusted. It is hard to evaluate the stock
based on the Gordon's Growth Model since the company is decreasing its dividend pay-out
and does that in a constant manner. Free Cash Flow to Equity (FCFE) model was applied to
the case. It did not yield satisfactory results, due to the fact that the large portion
of the fleet is already taken of the books, and the left portion yields stock price which
doesn't reflect the current state of nature.
The stock is covered by Goldman Sachs and Co., Merrill Lynch and Co., Morgan Stanley Dean
Witter and Co., Paine Webber Inc., and Salomon Smith Barney Inc. For the last five month
nine of the sixteen analysts have suggested a strong buy.
Financial Conclusion
Southwest Airlines is in a very strong position and all its activities suggest that it
will stay in this state for the time to come. It has several issues, that management
would probably want to address:
Net Revenue growth - the expansion of the fleet and addition of the destinations
addresses it. Changes in financial statements can be assessed by the time company issues
its financial data for the years 2000 and 2001.
Current and Long Term liabilities are pressuring company's ratios. Once the expansion
completed and the debt shifted from current to long term, ratios will look in the favor
of the company.
Return on equity is below its main competitor, Skywest Airlines, due to the comparatively
low asset turnover and profit margin.
FLYING INTO THE FUTURE
Although the airline has scaled back its market expansion plans, Southwest thinks it can
expend capacity about 15 to 20percent annually. However, in fiercely competitive world of
low-fare service, Southwest differentiates itself by the way it plans the future. Herb
Kelleher, the CEO, said, Southwest does not prepare strategic plans in the traditional
sense. We do not even do one-year plans. We bump up against some benchmark that requires
us to make a major decision we review our strategic definition of the airline and decide
whether we depart from it.