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Southwest Airlines_1_


									 Southwest Airlines        Emily Farr
                           Tyler Green
                           Nicole Veth
Business 499 – Capstone   Keigha St Clare

May 8, 2007
Table of Contents
•   Tyler
     • Facts & Flight Method
     • Porters 5 Forces
     • Looking Into The Future
•   Nicole
     • Mission Statement & Timeline
     • Industry Life Cycle
     • Financial Stability
•   Emily
     • In The Beginning
     • Value Chain
     • RBV –
          • Resources & capabilities
          • Competitive advantage
     • VRIO
•   Keigha
     • Leadership & SW cities
     • P.E.S.T.E.L
In The Beginning…

“As company legend goes,
the very first route map
was drawn on a cocktail napkin
during a meeting between
Herb Kelleher and Rollin King.”

 June 18, 1971
    Began airline service
    Flights to Houston, Dallas, and San Antonio
 1977
    SW stock listed on NYSE as "LUV"
 1982
    Appointed Herbert D. Kelleher
           President, CEO, & Chairman of the Board
 1984
    #1 in customer satisfaction (4 th year in a row)
 1990
    announce billion dollar revenue mark
    Officially declared a "Major" airline!
 May 2003
    Top ranked domestic passenger airliner
 2006
    Southwest’s 34th consecutive year of

           Facts / Milestones…
 Low-fare, high frequency
 Point-to-point carrier
 Largest domestic U.S. carrier
4th largest major airline in America
 More than 34,000 Employees
 Fly more than 64 mil. passengers a year
 58 destination cities (59 airports)
 More than 3,200 flights a day
Top competitors:
     AMR Corp.
     Continental Airlines
                       Flight Method

              Few amenities / no “frills”…
 No assigned seats              "point to point" (city to city)
 No meals                          NOT hub-and-spoke model
    Only snacks: peanuts        Domestic flights only
 No electronic entertainment    Quantity focused
 No fees to change same-fare    Flies only Boeing-737 aircrafts
Leadership / Structure:
  Herbert D. Kelleher    Executive Chairman of the Board

                             Vice Chairman of the Board
  Gary Kelly                            and
                               Chief Executive Officer
                                  President, Secretary,
  Colleen Barrett                    and Director

Map: SW Cities / Destinations
               POLITICAL                                    ECONOMIC
- Deregulation in 1978                     When economic conditions are unfavorable:
    - 1st big political win for airlines   - Airliners very susceptible / vulnerable
- Post 9/11:                               - Discount airlines see profits
    - Gov. helped 2 major airlines         - People look for cheaper travel options
    get out of financial trouble

Flying on planes to get
to where you need to be
has been the norm for the             TECHNOLOGICAL
last 30 years and will
                                   Some airlines have
continue to be the norm
                                    converted to e-tickets,
in to the foreseeable
                                    and have a self
                                    checking machine.
As more and more
                                   Many people use the
Spanish speakers come to
                                    internet to compare
live and travel in the US
                                    prices to find the best
there is more need for
                                    option for their trip.
airlines to be bi-lingual.
Airlines have cut          Legal issues have hindered
prices and offered           airlines from making a full
expensive frequent           “9/11 recovery.”
flyer programs just to
grab customers away         According to the Air
from other airlines.         Transportation Association:

The regular airlines         “Airlines constitute about 2/3 of
are starting to get away       FAA-controlled flights but pay
from the hub system             more than 90% of the bill. In
                             return, the airlines are stuck using
and switch to the point        a 1950s ground-based, radar-
to point system that SW      dependent navigation system with
uses.                         legacy facilities and processes.”
              Porter’s 5 Forces
• High cost of entry
• High competition
• Many other forms of                Industry
  transportation        Buyers                     Rivalry
• Many other airlines
• Suppliers
   • Food and drink      Suppliers              Substitutes
      • Coke products
   • Fuel Sources
Industry Life Cycle
             Customer Knowledge
                Increasingly sophisticated
                Over 50% ticket price in 25
             Expenses
                Drastic compression of airline
                  yield premium
                Exploring new ways to revenue
                Labor and fuel (largest costs)
                The first mover effect
             Security
                Carrier’s assets, personnel assets
                  and customers interest
                Regulations enforced by
                Anticipating, managing, paying
             Innovation will be key!
             Resources & Capabilities

    Reputation,%20Business%20Plan/Develop%20or%20validate%20the%20St rategic%20Plan.asp#ii._ Value_Chain
Value Chain Model

  Resources                           Costly     Exploited
     and         Valuable?   Rare?      to           by
 Capabilities                        Imitate?   Organization?

  Financial         Yes       Yes      Yes           Yes

  Physical          Yes       Yes      Yes           Yes

Technological       Yes       Yes      Yes           Yes

Organizational      Yes       No       Yes           Yes

   Human            No        Yes      Yes           No

 Innovation         No        Yes      Yes           Yes

 Reputation         No        No       Yes           Yes
                       Financial Ratios
                                    Short Term Liquidity

Financial Ratio                          Numerator          Denominator
Current Ratio               Current Assets                  Current Liabilities
Quick Ratio                 Cash + Cash Equivalents +       Current Liabilities
                               Accounts Receivable
Average collection period   Average Accounts Receivable x   Sales
   in days                     365

                                     Long Term Solvency

    Financial Ratio                     Numerator           Denominator
Debt-to-Total Assets        Total Liabilities               Total Assets
Debt-to-Equity              Total Liabilities               Total Shareholder’s
Long-Term-Debt-to-          Total Long-Term Debt            Total Shareholder’s
   Total-Capital                                               Equity + Total Long-
                                                               Term Debt
                 Financial Ratios Cont.

    Financial Ratio               Numerator                     Denominator
Return on Sales           Net Income                   Sales Revenue
Return on Stockholder’s   Net Income                   Average Stockholder’s Equity
Asset Turnover            Sales                        Average Total Assets Available
Pretax Return on          Operating Income             Average Total Assets Available
   Operating Assets
Earnings Per Share        Net Income – Dividends on    Average Common Shares
                             preferred stock, if any      Outstanding

                           Dividend & Market Price
    Financial Ratios              Numerator                     Denominator
Price-Earnings            Market price of common       Earnings per Share
Dividend-Yield            Dividends per common share   Market price of common share
Dividend-Payout           Dividends per common share   Earnings per share
                                    Financial Stability
                       Short Term Liquidity Ratios
Current ratio                                        0.90
Quick ratio                                          0.56
Average collection period in days                    10.05
                       Long Term Solvency Ratios
Debt-to-total assets                                 21%
Debt-to-equity                                       45%
Long-term-debt-to-total-capital                      20%
                                                                       (EVA) Economic Value Added (in millions)
                           Profitability Ratios
Return on sales                                      5.5%     NOPAT                                               857

Return on stockholder's equity                       7.7%     Operating Income                                    725
Asset turnover                                       0.65
                                                              WACC                                                8.6%
Pretax return on operating assets                    6.9%
                                                              EVA                                             53,306
Earnings per share                                   (1.28)
                                                              Air Transport Industry Average EVA              15,032
                  Market Price and Dividend Ratios
Price earnings                                       163.9    Southwest above average by                      38,275

Dividend yield                                       0.02%
Dividend payout                                      3.0%
                In The News…

 “Airlines are constantly in search of new revenue sources.
Travelers have gotten used to paying for food on board. But it's
going to be harder to adjust to fees for services that used to be
                                                                ~ Chris McGinnis
                                                  The Ticket editor (travel newsletter)

Future Plan…
 Follow-up system
 Entire meal served
 Seat classes
 Differentiate strategies
    Other services (shuttle)
    Consider amenity change
 Expand internationally?
 Penetrate more domestically


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