Southwest Airlines is one of the leading transport corporations in the US operating as a low-cost carrier with its headquarters in Dallas, Texas. The company was launched in the year 1971 with the mission of becoming the leading Airline globally and to attain a loyal customer base to ensure success and profitability in the long term. One of the practices that have assisted the company in achieving its status and reputation over the years is the fact that it regularly publishes reports that enable the relevant stakeholders to assess the position of the company. Specifically, these reports outline the company’s market, economic, social, and financial position hence offering a clear image of the performance level. In the 2018 company report, the company indicated considerable progress as most of their profit targets were achieved while subsequently gaining a more significant presence in its market of operation.
Basic Information
Products/services
The products and services of Southwest Airlines are progressively becoming more prevalent as people continue preferring it as a suitable means of spanning the globe as seamlessly as they can. The basic services offered by the company include passenger transport and cargo transport at relatively affordable prices. According to the company reports, the Airline exclusively offers its products and services using the Boeing 737 jetliner model, an upgrade from the previously used Boeing 727-200s. Currently, Southwest Airlines runs the largest fleet of Boeing 737s, as well as runs on a schedule of an average of 4000 flights daily during peak seasons (Southwest, 2018). One of the key features of the company includes a point-to-point flying component that ensures that flights are on time and that no delays occur. It is recognized as the first company to offer online ticket booking as well as ticketless flights and satellite-based wireless internet services. Some of the additional useful features that the company uses to attract clients include no charges for flight changes, priority boarding, low-priced alternatives to select a preferred seat, and priority lane access (Southwest, 2018). The services offered depend on the ticket type since the business class customers are granted specialized services including additional reward points, priority booking of tickets, and premium inflight food and drink services (Southwest, 2018). Its cargo transport services are also the most reliable evidenced by the fact that they are covered by insurance companies that guarantee a refund for any loss or damage to goods.
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Target Market
Southwest Airlines has a business model that has assisted the corporation in singling out its target market better as well as undertake market segmentation. Segmentation primarily denotes the ascertainment of the potential subscribers in a given manner who are characterized by comparable needs and who exhibit matching trends in buying behavior. Running its operations as a low-cost carrier, Southwest Airlines has endeavored to target the price and value-cognizant client base, business executives who are not premium-minded, and individuals flying locally over short distances (Southwest, 2018). The second division of its target market is comprised of families who uphold getting value for their money as well as the senior citizens who are short of cash. The company has also segmented its market demographically with a considerable proportion of its market being in the Southwest (Southwest, 2018). The corporation accentuates strongly on upholding customer service, a construct that has assisted it in maintaining company loyalty. Through having a solid understanding of its target market, the company has maintained its clients for a period surpassing ten years.
Competition
One of Southwest's leading competitors is American Airlines which has a history exceeding 90 of service. The Airline competes with Southwest in all fronts of Airline products and services and generates an excess of $23B more revenues over the rival ( Claussen, Essling & Peukert, 2018 ). The second key competitor of Southwest Airlines is Delta airlines which has a history of 80 years of service. Recent statistics indicate that the competitors generate an excess of 200% of Southwest’s revenue annually ( Claussen, Essling & Peukert, 2018 ). The third leading competitor is United Airlines which is regarded as being a top tier competitor. It operates as a public company and has been in service for the past 80 years. In comparison to Southwest Airlines, the rival has employees surpassing 33,200 ( Claussen, Essling & Peukert, 2018 ). Reports also indicate that the revenues generated by Southwest Airlines rank 4 th among its leading ten rivals in the airline industry. On average, the top 10 competitors average an estimated $36.7b from the various products and services offered ( Claussen, Essling & Peukert, 2018 ). In spite of the strength of the competitors, Southwest Airlines has managed to maintain a considerable market share.
Key Findings
CEO’s Message
In his message, the CEO maintained a positive tone and indicated that the company was headed in the right direction. At the start, he reported that irrespective of the challenges and austere competition that the company encountered, reports indicate a 46 th consecutive year of profits (Southwest, 2018). In order to validate his assertions, the CEO pointed out several key statistics and ratios including the net income and after-tax returns on invested capital. In addition to the financial position of the company, the CEO also noted that the route network of operations had attained its highest level historically by serving an excess of 84 cities in the United States (Southwest, 2018). In line with this, the company also increased its overseas operations by exploring new routes in South America. A key point of achievement noted was the company’s success in securing authorization from the Federal Aviation Administration (FAA) to engage in protracted operations to California and Hawaii (Southwest, 2018). The expansion in routes of service led to a decline in operating expenses hence boosting revenues.
Future/strategic goals
The company has several strategic goals that are envisioned over the next ten years that will continue defining its operation. Specifically, the company is seeking to reinforce its contracts with leading regulating bodies to expand operations and subsequently boost its customer base and revenue stream (Southwest, 2018). Second, given the recent apprehension on the safety of airline transport, Southwest Airlines has also launched a collaboration with Boeing and the FAA to boost safety rankings and ensure that all the requirements as defined by the law are fulfilled.
Industry Reports
In the year 2018, the company revenues were slightly affected by the “Ultra-Low-Cost Carriers” which endeavor to offer “unbundled” products and services enabling them to be more appealing to the clients that are conscious of the price ( Reynolds-Feighan, 2018 ). With regard to revenue passenger miles, the company commands an estimated 20% of the total domestic market, trailing closely behind American and Delta Airlines.
Analysis Questions
Some of the possible analysis questions include:
What is the prospect of growth in the number of price-conscious customers to uphold the company’s business model?
What is the position of individual competitors in the Airline industry?
How will government regulations affect company operations?
Ratio Analysis
Profitability margin
A profitability margin is expressed as Net Income after tax/Net sales
| Year | Net Income | Net sales | Profitability margin |
| 2016 | 2,183 | 20,289 | 0.107595 |
| 2017 | 3,357 | 21,146 | 0.158753 |
| 2018 | 2,465 | 21,965 | 0.112224 |
The profit margin is a measure of how much the establishment retains earnings compared to the total sales made in a financial year. For the South- West Airlines, there is evidence of low fluctuating profit margin between 2016- 2018 (Southwest, 2018). It shows that the corporation is not able to achieve the expected performance and potential. This outcome may be due to unfavorable competition with other companies or macro-economic factors such as inflation or recession.
Earnings per share
The return on equity is a profitability measure that reveals the returns generated from the shareholders’ equity investment. It is calculated as:
Earnings per share = Net income after tax/ weighted average number of commons shares outstanding
| Year | Net Income | Weighted average | Earnings per share |
| 2016 | 2,183,000,000 | 627,000,000. | 3.48 |
| 2017 | 3,357,000,000 | 601,000,000 | 5.58 |
| 2018 | 2,465,000,000 | 573,000,000 | 4.30 |
Despite the fluctuation in the Earnings Per share, Southwest Airlines reveals an inherent capability to maximize profitability in order to earn a return on the shareholder’s equity. It also reveals a potential rise in stock prices.
Current Ratio
It is a measure of liquidity that reveals the number of times that the short term resources can cover the short term liabilities, and thus the capability to meet short term responsibilities.
Current ratio = Current assets / current liabilities
| Year | Current Assets | Current liabilities | Current Ratio |
| 2017 | 4,815 | 6,863 | 0.701588 |
| 2018 | 5,028 | 7,905 | 0.63605 |
Over the two past years, the current ratio of less than one reveals a risk in Southwest Airlines because it shows higher financial obligations than the Corporate’s assets, and thus no working capital. It reveals a failure to meet the short-term commitments, and other strategic macroeconomic threats such as competition and no innovation.
Assets Turnover
This efficiency ratio reveals the ability of the company’s assets to generate revenues. A higher ratio reveals that the corporation, through quality management and culture, is able to earn revenues through maximum utilization of its assets.
Assets turnover = net sales / total assets
| Year | Net sales/ Operating revenues | Total Assets | Assets turnover |
| 2016 | 20,289 | ||
| 2017 | 21,146 | 25,110 | 0.842135 |
| 2018 | 21,965 | 26,243 | 0.836985 |
The corporation has a small Asset turnover, with a slight decrease between 2017 and 2018. This decline reveals inefficiency in the utilization of the Corporate’s assets to generate revenues and thus for investors, this is a less profitable organization (Southwest, 2018). For the potential creditors, this risk shows that the corporation may lack the capability to meet any debt obligations.
Sales to Working Capital
Sales to working capital = Sales / (current assets - current liabilities)
| Year | Net sales /Operating revenues | Current Assets – current liabilities | Sales to working capital |
| 2016 | 20,289 | ||
| 2017 | 21,146 | -2,048 | -10.325 |
| 2018 | 21,965 | -2,877 | -7.683 |
The Sales to working capital ratio of South-West Airlines is meager between the two years, which shows reduced effectiveness in its operations. This trend could mean that the level of sales made does not match the current potential level of the corporation. Other macroeconomic factors include imperfect competition and Inflation.
Conclusion on valuation/viability
Southwest Airlines is one of the leading airlines in the US, and reports indicated that conditions in the local market would continue favoring its operations. Specifically, the decline in gas prices, as well as an increase in price-conscious customers, will translate to increased profit margins. Nevertheless, the company should be considerate of competition as it has the capacity to cause a decline in the firm’s market share.
References
Claussen, J., Essling, C., & Peukert, C. (2018). Demand variation, strategic flexibility and market entry: Evidence from the US airline industry. Strategic Management Journal , 39 (11), 2877-2898.
Reynolds-Feighan, A. (2018). US feeder airlines: Industry structure, networks and performance. Transportation Research Part A: Policy and Practice , 117 , 142-157.
Southwest., (2018). Southwest Airlines Co. 2018 Annual Report to Shareholders. Retrieved from < http://www.annualreports.com/Company/southwest-airlines-co >
