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Southwest Airlines case analysis

Case Analysis
by

Justin Wilson

on 20 November 2012

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Transcript of Southwest Airlines case analysis

Tyler, Ashlee, Carley, and Justin Southwest Airlines: Case Analysis A Quick Look... Southwest's Mission "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 Spirit." Feeling Nostalgic... Strategy is Everything Success Drivers Success Drivers, cont. “Hire Great people, and treat ‘em like family.”
-Management by Walking Around

“Care for our Customers warmly and personally, like they’re guests in our home.”

“Keep fares and operating costs lower than anybody else by being safe, efficient, and operationally excellent.”

“Stay prepared for bad times with a strong balance sheet, lots of cash, and a stout fuel hedge.” Kelly’s Keys to Success Founded in 1967
Rollin King and Herb Kelleher

Fought numerous legal battles from 1967 to 1972

Established Southwest's "Combative Can-Do Culture" Leading low-cost carrier in the United States

46,048 employees

Headquartered in Dallas, Texas -Be the best place to work.
-Be the safest, most efficient, and most reliable airline in the world.
-Offer customers a convenient flight schedule with lots of flights to lots of places they want to go.
-Offer customers the best overall travel experience.
-Do all of these things in a way that maintains a low cost structure and the ability to offer low fares. Gary Kelly's strategic objectives Good customer service
Good attitudes
Quirky, fun-loving employees
Seek out people who are a “good fit”

Utilizing price elasticity

Fuel price hedging

Efficiency
Loading/unloading
Pre-flight checks
Maintenance Customer perks
Standard Awards
Companion Passes
Nonstop flights
Low fares
“Bags Fly Free”

Route planning
No “hub-and-spoke” route systems
Cities 150 to 700 miles apart
Nonstop flights
Most flights last no longer than 90 minutes- very few are longer
No service at airports where there would be less than 8 flights a day originating there Only one model of aircraft used- Boeing 737
Boeing’s launch customer

Booking only through company website
Avoid fees of travel agencies
Reduce staffing at reservation centers

Focus on airports with less congestion
Less costly landing fees
Less fuel used- taxiing and holding patterns
More efficient and easier for passengers
Some congested airports serviced for revenue growth Southwest's Low-Cost Strategy How they do it Point-to-point flight schedules
Avoid daily swings in demand
Less idle time
At the gate for 25 minutes or less
Less staffing necessary

No seat assignments

No cleaning crews
Other airlines have since followed suit

No first-class section

No frequent flyer clubs Southwest’s Low Cost Strategy More on how they do it No baggage transfer service to other carriers
Southwest only books their own flights, and cannot be found on travel sites

Leather seats
More durable than cloth
Easier/faster to service/maintain

Fuel hedging
Saved roughly $4 billion from 1998 to 2008
Double-edged sword

Emphasis on safety
Less maintenance costs
Avoid customer perceptions of “lower cost, less value”
Reduces staffing requirements Southwest’s Low Cost Strategy Keep pinching pennies Winglets
Reduce drag
Increase stability
Reduce fuel consumption

Management information systems
Always on the cutting edge
More efficient data transfer
Translates to:
Less mistakes
Fewer staffing needs
More efficient travel
More efficient resource planning Southwest’s Low Cost Strategy even more pennies Hire the right people

“Employees come first, customers come second”

Happy employees = Happy customers

Employee retention
More knowledgeable employees
More effective/efficient employees
Less training costs
Employees who are passionate about their jobs Southwest’s Employment Strategy Ticker symbol: LUV Muse Air- June 25, 1985
$60.5 million paid in cash and bonds
1986- Muse Air’s name changed to TranStar

Morris Air Corporation- December 31, 1993
3.6 million shares of common stock
Has been called “one of the smartest airline moves ever” Southwest’s Acquisitions AirTran
Founded in 1992 as ValuJet
1996- safety investigation started due to plane crash in Florida Everglades, crash kills all 110 passengers

Closed the deal May 2, 2011

Valued at $3.4 billion when including AirTran's leases and debt Acquisition of AirTran Strategic Advantages of acquiring AirTran Extended Southwest Network into new key markets
Including Atlanta and Washington D.C.

February 12, 2012- began service to Hartsfield-Jackson Atlanta International
Gained 2 million more customers per year
Put Southwest in direct competition with Delta Does the AirTran Acquisition make good strategic sense? YES:
AirTran and Southwest both emphasize on outstanding customer service

High quality, low-cost operations
All Boeing fleet with a solid, low-fare brand

Enabled Southwest to work its way into New York LaGuardia and Ronald Reagan Washington National What this means for Employees Job Security

Better compensation and benefits

Enable them to grow the AirTran route system

Combined, over 43,000 employees Other Implications Southwest customers now have the option for international travel
Mexico, The Carribean, Aruba, The Bahamas, Bermuda, The Dominican Republic, Jamaica, Puerto Rico, other parts of Central America, and South America

Goal: Complete integration of the two airlines by 2014

Merger will make Southwest the nation's 4th largest airline According to Southwest, culture is defined as the development, improvement, and refinement of the originality, individuality, identity, and personality of a given people. Key Aspects of Southwest’s Culture Employees come first in Southwest's Culture. The company promotes a happy work environment through company-wide events and parties. The company supports their employees and agrees that they are the companies greatest assets. Happy Employees = Happy Customers Work Hard
Desire to be the best in the industry
Be courageous
Display a sense of urgency
Persevere
Innovate The Warrior Spirit Follow the Golden Rule
Adhere to the Basic Principles
Treat others with respect
Put others first
Be egalitarian
Demonstrate proactive in Customer Service
Embrace the SWA Family A Servant’s Heart Have FUN
Don’t take yourself too seriously
Maintain perspective and balance
Celebrate successes
Enjoy your work
Be a passionate team player The Fun-LUVing Attitude Weaknesses/Threats for Southwest Fuel prices are a constant threat

Little international travel

Small margins offer little "breathing room" for demand

Price/Quality hard to balance Profitability Ratios Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Net Return on Assets
Return on Invested Capital
Return on Equity
Earnings per Share 49.8%
4.4%
1.1%
.99%
1.8%
2.6%
24 cents Other Financial Ratios Current Ratio

Working Capital

P/E Ratio .96

(188,000,000)

13.48 Leverage Ratios Debt-to-Assets ratio

Long-term debt to capital ratio

Debt-to-Equity ratio .62

.31

1.63 The Bad News...
Fuel prices are on the rise

Economic conditions are not ideal

Strategy has shifted from second-tier airports and point-to-point service

Will Southwest still support a "no-layoff" policy with rising costs and increased staff? The Bottom Line Would I invest in this company?

Would I work for this company? ...And the Good News Holiday Season approaching

AirTran Acquisition should produce growth

Revenues on the uptrend

Wright Amendment What Would You Suggest? Layoffs?
Marketing?
Price Increases?
What else? (taken from MSN money) (including AirTran)
Full transcript