Wk 5, ORG 535: Summative Assessment: Strategies

COMPANY PROFILE

Southwest Airlines Co

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Southwest Airlines Co TABLE OF CONTENTS

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TABLE OF CONTENTS

Company Overview ........................................................................................................ 3 Key Facts ......................................................................................................................... 3 SWOT Analysis ............................................................................................................... 4

Southwest Airlines Co Company Overview

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Company Overview

COMPANY OVERVIEW

Southwest Airlines Co (Southwest Airlines) is a provider of passenger airline services. The company provides point-to-point flight services that offer direct nonstop routing as compared to hub-and-spoke service. It also offers high-frequency short-haul routes supported with the long-haul nonstop service between markets such as Dallas Love Field and Houston Hobby, Denver Chicago Midway, Los Angeles International and Las Vegas, Phoenix and Denver, Los Angeles and Nashville, Los Angeles and Baltimore, and San Diego and Baltimore in the US. It also offers various ancillary services such as upgraded boarding, EarlyBird Check-In, and transportation of pets and unaccompanied minors. Southwest Airlines is headquartered in Dallas, Texas, the US.

The company reported revenues of (US Dollars) US$9,048 million for the fiscal year ended December 2020 (FY2020), a decrease of 59.7% over FY2019. The operating loss of the company was US$3,816 million in FY2020, compared to an operating profit of US$2,957 million in FY2019. The net loss of the company was US$3,074 million in FY2020, compared to a net profit of US$2,300 million in FY2019. The company reported revenues of US$2,052 million for the first quarter ended March 2021, an increase of 1.9% over the previous quarter.

Key Facts

KEY FACTS

Head Office Southwest Airlines Co 2702 Love Field Dr PO Box 36611 PO Box 36611 DALLAS Texas DALLAS Texas USA

Phone 1 214 7924000 Fax Web Address www.southwest.com Revenue / turnover (USD Mn) 9,048.0 Financial Year End December Employees 56,051 New York Stock Exchange Ticker LUV

Southwest Airlines Co SWOT Analysis

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SWOT Analysis

SWOT ANALYSIS

Southwest Airlines Co (Southwest Airlines) is a provider of passenger airline services. Strong liquidity position, fleet network and business expansion are the company’s key strengths, even as operating performance remains a cause for concern. Growth prospects for aviation industry, positive outlook for US T&T industry and growth initiatives could provide new opportunities to the company. However, fluctuations in fuel prices, increasing manpower costs in US, coronavirus (COVID-19) and stringent government regulations could affect the company’s performance.

Strength

Fleet Network Liquidity Position Business Expansion

Weakness

Operating Performance

Opportunity

Positive Outlook for US T&T Industry Growth Prospects: Aviation Industry Growth Initiatives

Threat

Coronavirus (COVID-19) Fluctuations in Fuel Prices Increasing Manpower Costs in US Stringent Government Regulations

Strength

Fleet Network

Southwest Airlines has a strong fleet network. Based on the US Department of Transportation's most recent data, the company is the US's largest carrier in terms of originating domestic passengers boarded. As of December 31, 2020, the company had 718 Boeing 737 aircraft of which 70 were finance leased and 67 was under operations. Out of 737 aircraft 470 are Boeing 737-700; 207 are Boeing 737-800; and 41 are Boeing 737 MAX 8. The company also has plans to add 380 aircrafts by 2026 comprising 219 MAX 8 Firm aircrafts, 115 Max 8 aircrafts and 30 Max 7 Firm aircrafts. It served 107 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos.

Liquidity Position

Adequate cash reserves and high liquidity place the company at an advantage when it attempts to fund any potential mergers and acquisitions, and expansions. Southwest Airlines' current ratio was 2.0 at the end of FY2020, as compared to 0.7 at the end of FY2019. A higher current ratio than the previous year indicates that the company has relatively high liquidity. At the end of FY2020, the company had total current assets of US$15,173 million, as compared to US$5,974 million at the end of FY2019, with cash

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and equivalents worth US$11,063 million. Its total current liabilities stood at US$7,506 million at the end of FY2020, which shows a decline of 16.2% over that in the previous year. Its current portfolio of long- term debt or capital leases also fell from US$819 million in FY2019 to US$220 million in FY2020.

Business Expansion

Southwest Airlines has strengthened its business operations by expanding the existing businesses that complement its operations. An inorganic growth strategy enhances the company’s depth of expertise, broadens its product and service portfolio, and increases its shareholder value. The company launched six new destinations in 2020, which are Hilo International Airport, Cozumel International Airport, Miami International Airport, Palm Spring International Airport, Montrose Regional Airport and Yampa Valley Regional Airport. The company has plans to add other new destinations in 2021, which are Chicago O’Hare International Airport, Sarasota Bradenton International Airport, Colorado Springs Municipal Airport, Savannah/Hilton Head International Airport, Houston’s George Bush Intercontinental Airport, Santa Barbara Airport, Fresno Yosemite International Airport and Jackson-Medgar Wiley Evers International Airport in Mississippi.

Weakness

Operating Performance

Poor operating performance may reduce investor confidence and impact its ability to pursue growth plans. Southwest Airlines recorded poor operating performance in FY2020 during which it recorded revenues of US$9,048 million, with an annual decline of 63.1%, representative of a negative CAGR of 18.3% during 2016-2020. In FY2020, the company reported an operating loss of US$3,816 million, as compared to operating income of US$2,957 million in FY2019. This was caused by 63.1% decline in passenger revenue to US$7,665 million in FY2020, as compared to US$20,776 million in FY2019. Decline in passenger revenue was due to reductions in capacity and a decline in passenger demand and bookings during 2020. Its freight revenue was declined by 6.4% to US$161 million in FY2020, as compared to US$172 million in FY2019 due to lower trips flown and disruptions in supply chain. Moreover, the company recorded 17.4% decline in other revenue to US$1,222 million in FY2020, as compared to US$1,480 million in FY2019 due to decrease in income from business partners. The company’s operating margin was negative 42.2% in FY2020, as compared to 13.2% in FY2019. The company also reported a negative ROE of 34.6%, as compared to 23.4% in FY2019.

Opportunity

Positive Outlook for US T&T Industry

The company is likely to benefit from the positive outlook for the US Travel and Tourism (T&T) industry. In spite of being affected by the COVID-19 pandemic, the Travel and Tourism (T&T) sector is optimistic about growth as vaccine distribution across the world gains momentum and economic activities return to pre-Covid levels. According to the World Travel & Tourism Council (WT&TC), in 2028, the direct contribution of the US T&T industry to the country’s GDP is expected to reach US$673.9 billion, while the

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industry's contribution to the US economy is expected to reach US$1,954.1 billion. Visitor exports are expected to reach US$291.7 billion in 2028. The increase in investments to US$246.2 billion in 2028 is likely to spur growth in the US T&T industry.

Growth Prospects: Aviation Industry

Southwest Airlines could benefit from the positive outlook for the global aviation industry, which could drive the demand for its services in the aviation market space. According to the Airports Council International (ACI) report, the global passenger volume is projected to reach 20.9 billion by 2040, with an annual growth of 4.1%. China is forecasted to be the largest air passenger market with 4.0 billion passengers, a 19% share of the global air passenger traffic. The US and India are expected to be second and third largest air passenger traffic markets with 3.1 billion and 1.3 billion passengers, respectively. Emerging economies including Indonesia, Turkey and Vietnam are expected to play significant roles in the global passenger traffic market. The global air cargo volume is also expected to reach 203.4 million tonnes by 2040. It is also expected that over 20% of all air cargo could be handled in the US alone by 2040, while China and the UAE could be considered as the second and third largest air cargo markets. The US, China and India are estimated to be the primary markets for global aircraft movements by 2040, representing 21%, 16% and 4% of aircraft movements, respectively.

Growth Initiatives

Southwest Airlines taking various initiatives to drive growth. The initiatives are expected to strengthen the company’s operations and increase its returns. In March 2021, the company announced to buy advanced CFM International LEAP-1B engines to power 100 Boeing 737 MAX 7 aircraft. In November 2020, the company launched a new nonstop flight from the Memphis International Airport to Phoneix, Arizona. In October 2020, the company and Amadeus announced to expand their partnership to offer for business travel through the Amadeus Travel Platform. In October 2020, the company launched its nonstop service from Phoenix to Cabo San Lucas and Puerto Vallarta. In October 2020, the company announced the expansion of its services in Chicago and Houston at Midway International Airport and William P. Hobby Airport. In May 2020, the company signed a purchase-and-leaseback agreement with BOC Aviation Limited for ten Boeing 737 MAX 8 aircraft equipped with CFM LEAP-1B engines. In January 2020, the company opened its new maintenance facility at William P. Hobby International Airport in Houston, Texas.

Threat

Coronavirus (COVID-19)

The impact of Covid-19 on airline industry is expected to be very severe due to the curtailment of international and domestic air travel in 2020. Country-specific regulations on international flights, long- distance travel bans, and cancellation of trips affected the global airline industry and resulted in huge losses to the aviation industry. Governments in various countries imposed several restrictions to contain the spread of the virus such as US-Canada border closure for non-essential traffic, EU’s 30-day ban on non-essential travel to about 26 countries in Europe from the rest of the world, the US’s 30-day ban on Schengen travelers, and lockdown in Italy, the UK, Australia, India and other countries. As a result of these travel restrictions, the global air traffic declined in the short-term. According to International Air

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Transport Association’s (IATA) projection on March 24, 2020, the global airline industry is predicted to report a passenger revenue loss of US$252 billion in 2020. Asia Pacific, Europe, North America, the Middle East, Latin America, and Africa are expected to report passenger revenue loss of US$88 billion, US$76 billion, US$50 billion, US$19 billion, US$15 billion and US$4 billion, respectively, in 2020.

Fluctuations in Fuel Prices

The company’s business is highly dependent on the price and availability of jet fuel, and its performance could be adversely affected by high volatility in fuel costs, increased fuel prices and disruptions in the supply of jet fuel. The fuel market is volatile and changes according to market, political and economic movements. Therefore, a modest decline or increase in prices could have a significant impact on the company's business operations. Several factors are responsible for such changes including domestic and foreign supply of oil, global economic conditions, price and availability of alternative fuels, governmental regulations, weather conditions and technological advances, among others. According to the International Air Transport Association, jet fuel price was US$182.85 per barrel as of April 9, 2020, as compared to US$182.9 as of April 01, 2020, which increased 0.5% one week ago. Such increase in jet fuel price could affect the company’s overall profitability.

Increasing Manpower Costs in US

Increasing manpower costs could increase the company’s operating costs and hamper its profits. The tight labor markets, government-mandated increases in minimum wages and a higher proportion of full- time employees are increasing labor costs. Effective January 2021, 21 states in the US increased their minimum wages. Alaska, Florida, Minnesota, Montana, Ohio, South Dakota, and Vermont increased their hourly minimum wage based on the cost of living to US$10.34, US$8.65, US$10, US$8.8, US$9.45 and US$11.7, respectively. Arizona, Arkansas, California, Colorado, Illinois, Maine, Maryland and Massachusetts increased their hourly minimum wages to US$12.15, US$11, US$13, US$12.32, US$11, US$12.15, US$11.75 and US$13.5, respectively. Whereas states such as Michigan, Missouri, New Jersey, New Mexico, New York, and Washington increased their hourly minimum wages due to previously approved legislation to US$9.65, US$10.3, US$12, US$10.5, US$12.5 and $13.69, respectively.

Stringent Government Regulations

Airlines are subject to extensive regulatory and legal compliance requirements that result in significant expenditures. For instance, the Federal Aviation Authority (FAA) is an authority body, which regulates all safety issues in civil aviation operations. FAA’s safety jurisdiction includes aircraft maintenance and operations such as equipment, ground facilities, dispatch, communications, flight training personnel, and other matters affecting air safety. These will increase the aircraft operations cost significantly. The company expects to continue incur expenses to fulfill the FAA's regulations. These authorization laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase operating expenses or reduce profit margins. As a result, complying with such laws, regulations and actions increases the operating costs of Southwest Airlines which could have a significant effect on its profitability and margins.

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