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Southwest Airlines

Southwest Airlines. By: Aric Hall. Mission Statement. Dedication to highest quality of customer service, delivered with a sense of warmth, friendliness, individual pride, and company spirit.

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Southwest Airlines

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  1. Southwest Airlines By: Aric Hall

  2. Mission Statement • Dedication to highest quality of customer service, delivered with a sense of warmth, friendliness, individual pride, and company spirit. • To employees: commitment to provide a stable of work environment with equal opportunity for learning and growth. • Creativity and innovation are encouraged. • Employees are provided same concern, respect, and caring attitude that employees give to customers.

  3. History • Small upstart airline • Survived legal and congressional battles • Did war with major airlines • Strategy of being one step ahead • Survived Deregulation • Watches earlier competitors go bankrupt • 31+ years of profitability

  4. Southwest Today • No-frills carrier • No food, usually • No First Class • No Movies • Short-haul, direct flights only

  5. Distinctive Competencies • Offer low rates, to begin with, without change • Don’t get drawn into competition at major hubs • SW claims that goal is not profit maximization, but rather on making air travel available to those who could not afford it • The customer comes second • Fun-loving corporate culture • Slow, steady expansion and growth, financed from within

  6. Strategy • Functional: achieve competitive advantage • Offer the lowest fares • Dominate the market share in markets served • Attain efficiency, doing more with less • Win the rat race, by innovation

  7. Strategy, cont • Business-level: • Cost leadership • Keep expenses down and provide low prices to consumers • Differentiation • Market segmentation • Focus on limited market of cost-conscious business traveler • Distinctive competencies – derived from offering necessary services without any added costs

  8. Strategy, cont. • Corporate: • Strategic Alliances • Mostly limited to vendors • Has had one previous alliance with a small carrier • Has had one previous acquisition of a small carrier • Diversification • Limited to expansion into new markets

  9. Disaster Planning • After Sept 11 • Most airlines cut routes; • Most laid off workers; not SW • Most reported a financial loss, not SW • Most begged for government subsidies; SW used resources to expand further

  10. Future Planning • Southwest plans for the future and for bad days • Maintains a large cash balance • Carries little long-term debt • Purchases futures on fuel, to lock in prices • Purchases advance options on planes

  11. Ticker: LUV Exchange: NYSE Market Cap: $10.75bil P/E: 35.73 P/Book: 1.96 P/Sales: 1.70 Debt/Equity: 0.334 L-T Debt/Equity: 1.18 Profit Margin: 4.81% Operating Margin: 8.50% RoA: 2.84% RoE: 4.10% Current Ratio: 1.014 Book val per share: 7.06 Beta: 0.874 Profit: $ 5.9 billion Southwest Stats

  12. Financial Comments • The book value per share is similar to industry, but far higher than that of other industries • Current ratio and Debt-to-Equity ratios are low; Shows company finances activities with cash from profits and is preserving its lines of credit • Beta is less than 1, so stock is more volatile than market average. Southwest stock price growth is limited, being variable within a small range

  13. Cost of Capital • Cost of Capital = sum of costs of equity and debt • Cost of Debt = 1.87% • Cost of Equity = 0.28% • Cost of Capital = 0.7289% • The cost of capital seems erroneously low. But, this results from a lack of bonds, the use of only short-term debt payments, and an almost lack of dividend payments.

  14. Measuring Investment Returns • Return on Capital: 2.69% to 4.60% • RoC measures true return on capital when debt consists of a large amount of current liabilities • RoC is low due to costs of assets, airplanes, etc. • RoE: 8.749% • Airlines are not usually profitable, nor do they engage in profitable projects. • RoE is good for an airline • Economic Value Added: $ 410 mil • Southwest is making productive and profitable use of its financing resources and assets.

  15. Optimal Capital Structure • Capital choices at SW are a unique choice • They finance mostly with profits • They maintain cash • They set 50% as the goal for internal financing • They choose to pay little in dividends • They choose to avoid extreme expansion, and thus debt • They have the highest market capital in industry

  16. Future Growth • Southwest continues slow expansion into new markets. • Southwest might benefit from a new alliance or buyout of another small carrier. • Southwest currently is in an authorized buyback of stock that may increase stock price. • If expansion stopped, current profits and share price would likely increase.

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