Running head: SOUTHWEST AIRLINES

Case Analysis 2: Southwest Airlines

Liberty University
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Executive Summary

This case study will provide an in-depth analysis and evaluation of Southwest Airlines.

This report will decide if Southwest should continue to operate with its current mission to

operate in smaller cities with short flights instead of expanding in larger cities and adding longer

flights domestically and adding international flights. Southwest is pursuing ways to grow the

company’s revenue and profits. Southwest should continue to look at smaller markets where

there are airports that are underutilized so that the company can achieve their business strategy of

smaller airports and short flights

Problem

Southwest faces issues from competition from low cost carriers such as Jet Blue and

Spirit Airlines. Besides the competition from the other carries, Southwest has to find ways to

keep their operating cost down so that they can keep the cost of fares down. The competition and

the threat of new competition has led to pricing wars, the company not being the low-cost leader

in the industry anymore. In addition, labor negotiations that lead to new contracts with the unions

can led to increased operating cost. Southwest’s current business model can cut down on profits

as cost continue to rise with changes in fuel prices and taxes to go along with increased labor

costs and increase competition.

Methods

The methods used to support this case study are Internal and External Evaluation Matrices,

SWOT Bivariate Strategy Matrix, BCG Matrix, Competitive Forces Analysis, SWOT Analysis.

The other methods are CPM and Analysis, Financial Statement Analysis, Competitor’s Ratios
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and Analysis, NPV Analysis, and Pro-Forma Ratios. The matrices and calculations are located in

the appendices located at the end of this case study.

Findings

The findings that are in this case study will show that Southwest Airlines is an industry

leader within the domestic airline industry. Southwest even with its low-cost no-frills model has

been able to grow revenue consistent. For 45 years straight Southwest has been profitable

(Southwest, 2018). This study’s findings will determine that it is best for Southwest to continue

their low cost and no-frills model while looking to grow by entering new markets. The finding

will show that Southwest Airlines even with new competitors entering the market they can still

grow through expansion of cities they service, along with new partnerships and creating new

revenue streams through an upgraded inflight experience. This will help Southwest Airlines to

continue to be the low-cost carrier leader and gain competitive advantages over their

competition.

Recommendations

Recommendations for Southwest Airlines is to create new revenue through adding to

their customer’s inflight experience. Southwest can add more food and drink options for

passengers to purchase. In addition, Southwest will also upgrade their planes to add TVs and Wi-

Fi. These additions will allow for Southwest to capture new revenue by charging customers for

premium channels and movies which will be popular on flights over two hours.

Limitations

This study has limited access to financial data because of limited financial data on

competitors or the companies have yet to file the needed information with the United States
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Security and Exchange Commission. Additional searches through various databases produced

limited or no financial data. Because of the limited financial information group 4 had to make

adjustments to our research approach. This adjustment led to the group using the financial data

that was available to give us the best estimate of the companies within the airline industry.

Existing Mission Statement

Southwest mission statement is still effective high-quality customer service through

company spirt (Southwest, 2018). Southwest has kept this motto for over 45 years strong. While

Southwest is a no-frills airline without TVs on plane, first class seating and assigned seating. The

company is known for their customer service and the extra mile they take to keep their customers

happy before takeoff, during their flight and once they land. To keep their mission statement

effective, Southwest believes in the more employee engagement the company has leads to a more

efficient company.

By changing to the needs of its major stakeholder which lead to greater satisfaction of

their customers (Thomas, 2015). Before Southwest flew their first flight in 1971, the company’s

founder Herb Kelleher belief in employee’s leeway to make decisions without a bunch of red

tape and doing what is best to satisfy the customer. The company’s mission statement has been

used to retain customers and attract new customers because of how employees incorporated the

company’s mission statement and strategies in regard to their customers and customer service

overall. The current mission statement has helped the company to turn a profit each year in

business.

According to Min & Min (2015), “an airline passengers’ perceived service quality

influenced their choice of airlines.” An airlines customer service can play a critical part of a

company’s revenue and market share. Southwest mission can be looked at deeper as first-class
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customer service while offering low fares. Often when you hear something is cheap and no frills

then the customer service is in line with that. However, Southwest puts the customer first which

has helped them become the 4th largest carrier in the United States and an industry leader in

customer service.

Objectives

Southwest Airlines has both strategic and financial objectives that to help achieve their

mission statement. The objectives tie into the values and purpose of the company. The company

wants to have a fun-loving attitude, safety and reliability at low costs to the company and to

customers (Southwest, 2018). Southwest promotes ethically behavior through internal checks

and balances along with the regulations they face in the airline industry. The objectives of

Southwest promote growth of the company and the value of its employees.

The objectives of Southwest are to:

 Provide world class customer service

 Promote safety

 To continue to increase profits and look for ways to keep cost down

 Grow in markets and expand into smaller markets that are being underserved

Strategies

Southwest in its 45-year history has gone through different changes as the company has

grown from a small regional carrier in Texas to a large domestic carrier to now even having

international flights in the Caribbean. With age, growth and new competition the strategies of

company have to change to meet the objectives of the company. Southwest uses the strategy of
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conserving natural resources, let their workers be creative which leads to innovation and build

goodwill in their communities by giving back. Southwest business strategies consist of:

 Carrying the most passengers in the U.S

 Have the most daily departures in the world

 Low fares

 Hire the best people within the airline industry

 Exceptional Hospitality and Customer Service

Southwest uses this strategy to return value to their shareholders and continue its record of 45

years consecutively of being a profitable company (Asahi & Murakami, 2017). By giving their

employees leeway to be innovative this helps the company to continue to grow, improve

customer loyalty, finds ways to be more efficient and expand the company.

The Necessity for a New Mission Statement

Southwest has had the same mission statement since 1971 which has been successful

over the years. With the changes within the travel and airline industry from changes in regulation

to new competition. The company needs to make minor adjustments to its mission statement.

There is no need for a major change since the organization will continue to be a low-cost carrier

and in which this strategy has been profitable for over 45 years. With that there are new

opportunities to grow, become even more profitable and gain new customers. As Southwest

looks to create new revenue streams by entering new underserved small markets the company

will need to reestablish and adjust its mission statement.

New mission statement

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According to Alegre & Mas-Machuca (2018), a mission statement is a widely used strategic

tool that emphasizes an organization’s uniqueness and identity. Southwest’s new mission

statement that we propose is “The mission of Southwest Airlines is dedicated to the highest

quality of hospitality and customer service while providing comfort, care and value to our

customers. Southwest is committed to competitive low-cost fares for our customers. While still

having the highest standards of safety for our customers and staff” (p.457). To support this new

mission statement the company will continue to use sound business practices and financial

stability which provide the company growth and benefits to our stockholders and stakeholders.

The components of this new mission statement:

1. Customers: Southwest serves all customers that are looking to fly no matter for

personal travel or business travel. Southwest even though a low-cost carrier serves

markets that many carriers do not service or do not offer direct flights to. So, cost is

not always the deciding factor for every customer they serve.
2. Products or Services: Southwest provides air travel for customers. Southwest also

offers services such as mobile check-in and in-flight amenities such as Wi-Fi.

Southwest.
3. Markets: Southwest currently goes to 99 cities within the United States (Southwest,

2018). In addition to the 99 cities in the US Southwest serves 10 other countries

mostly in the Caribbean places such as Jamaica, Bahamas and Aruba.

4. Technology: Southwest was the first airline in the United States to use the internet for

booking reservations. On March 17, 1995 the company introduced its webpage

iflyswa.com (Southwest, 2018). The company looks to continue create new

technology for the company to better service customers and use all flight data to

improve on time and arrival metrics.

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5. Concern for survival, growth, and profitability: Southwest is committed to survival,

growth and profitability. Southwest uses their profits and cash flow to use that capital

to reinvest into the company. The company has modernized their airline fleet and

upgraded their technology (Southwest, 2018). Southwest (2018), indicates that the

company’s annual return on investment is 25.9 percent. Southwest’s biggest concerns

are with competitors such as Jet-Blue and Spirit Airlines. If those companies start a

price war and fuel cost which can increase at any time due to global turmoil.

Southwest is committed to survival, growth, and profitability by looking for new

markets to service.
6. Philosophy: Southwest as a company is committed to the highest level of customer

service. The highest level of safety for customers and employees. The company is

also committed to providing their employees a positive work environment where

employees can grow personally and professionally. While holding employees to the

highest level of integrity.

7. Self-concept: Southwest distinctive competence or major competitive advantage is its

cost for travel. Southwest prices are often cheap or affordable for customers than

regular carriers such as Delta or American Airlines. In addition to the low-cost

Southwest also serves locations that other carriers do not. This adds value to

customers because they have more access to locations, they want to go to instead of

adding more cost by having to rent a car in one city and have to drive to another

because they cannot get a flight into that city.

8. Concern for public image: Southwest is committed to following all rules established

by the government and setting internal rules to a high level. Southwest also strives to

be a good corporate partner within their communities. Southwest donates money and
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time to different community causes such as scholarships and neighborhood cleanups.

The company has also reduced waste and increased recycling and using recyclables.
9. Concern for employees: Southwest believes that their employees are their most

valuable asset. The company works with employees on development but just not

professional development but personal development to make them more well-rounded

individuals. Southwest heavily invests in training and believes in diversity and

inclusion for all employees (Southwest, 2018).

Analysis of Existing Business Model

The current business model that Southwest uses focuses on being the leading low-cost

airlines in the United States. Their business model is customer focused to those that are looking

for a cheap flight that is quick, which normally means non-stop flights (Southwest, 2018). Other

airlines focus on passenger comfort with amenities in-flight, while Southwest focuses on cost

and benefits for the customer. Southwest continues to look for ways to be more efficient to make

the company better. Southwest utilizes their planes often in a manner that they are able to

maximize revenue. There are five components that make up the Southwest business model:

1. One plane model: Southwest only uses Boeing 737 model planes. By only using one

type of plane model made by one company Southwest is able save on upkeep of the

planes. The company also saves money because the aircraft can be used for any route

and no service has to be interrupted. The company also saves on training mechanics

since there is only one model to focus on.

2. Use Alternate Airport Hubs: Southwest saves money in larger cities by using smaller

airports in the areas. By doing this Southwest does not have to compete with other

airlines at the larger location. For example, in Dallas instead of being at the larger

airport Dallas Fort Worth they use the smaller Dallas Love Field (Southwest, 2018).
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3. Point to Point model: By using alternate hubs, Southwest flies into smaller airports

which helps the company to land and load planes quicker than at large airports. By

being able to land planes and take off planes quickly the company is able to more use

of their planes which means more revenue.

4. Fuel Hedging: Southwest saves money against rising fuel cost by using a method

called fuel hedging. This is when a company locks in a price for fuel in advance, so

they are not affected when fuel prices rise (Korkeamäki & Pfister, 2016). Southwest

in the first quarter of this Southwest paid $2.05 a gallon for fuel a savings of .90 cents

a gallon on average compared to other airlines (Sibdari & Pyke, 2018). Fuel hedging

has saved the company money and allowed the company to have more cash available

to reinvest in the company to do things like buy planes that are more fuel efficient.
5. No Frills: Southwest planes do not have TVs, first class or offer a different foods and

beverages for sale. There are no assigned seats and by doing this the company keeps

it simple. The company does not have all the fees like other companies such as

surcharges for fuel and fees to change tickets. According to Sibdari & Pyke (2018),

“by not having a complex fare structure Southwest saves money.” Complex fare

structures are costly to for companies to manage.

SWOT Analysis for Southwest Airlines

Strengths

There are many strengths that Southwest has going for the organization and its ability to

maintain a competitive advantage in a highly competitive market. The first strength is its

leadership and the culture it has been able to create over the years. Since its incorporation in

1967 by Herbert Kelleher and Rollin King, Southwest has established a strong leadership style

that is respected by all levels of employees (Southwest Airlines, 2018). Leaders at all levels stay
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actively involved with the day to day operations and at times lend a hand with frontline

employees. This style of leadership has built respect across the organization and can be seen in

the attitudes among all employees. Which highlights the second strength of employee culture.

The culture among employees of Southwest is consumer focused, where employees can

often be found going above and beyond to service Southwest’s customers. Uniforms are casual

and flight attendants are often witnessed creating fun with passengers and crew (Southwest

Airlines, 2018). Passengers from other airlines have even suggested that Southwest employees

seem different and more welcoming (“How corporate culture”, 2005). The culture has grown so

positive that employees took pay cuts over layoffs, as to not hinder the safety of flying (“How

corporate culture”, 2005). This culture remains strong at Southwest and is one of its strengths as

it moves into new competitive markets.

Southwest has benefited from large networks created through its growth stage and is

currently one of its strengths (Asahi & Murakami, 2017). Serving over 90 domestic cities, 10 of

which are large metropolitan airports, Southwest has a well-established network of operations

(Southwest Airlines, 2018). Southwest has the largest fleet of aircraft, with Boeing being one of

its major suppliers. This large network, coupled with the culture that has been created,

Southwest has a strong brand in the airline industry and is recognized everywhere. The company

prides itself on servicing smaller cities with shorter flights and minimal turnaround time.

The business model that was established back in the 1970s was created around low

operating expenses, high customer service, and low travel prices (Southwest Airlines, 2018).

One way that Southwest keeps its expenses down is by not offering fancy meals during flight and

not providing certain features that other companies offer. The short flights also save the

company on layover and turnaround cost associated with downtime and fuel expenditures
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(Inkpen, 2017). These low-cost operations have allowed Southwest to serve its customers at the

industry’s lowest price, capturing those customers who would typically travel by car (Southwest

Airlines, 2018). By continuing this business model, Southwest maintains its position as a low-

price leader, but challenges are on the horizon with other low-price competitors entering the

market—discussed later in this section.

One of the remaining strengths of Southwest, worth mentioning, is its ability to reach its

target market through effective advertising. Southwest utilizes social media, sporting ads, and

other popular vehicles to distribute content to its consumer base. The prevalent tagline of “Luv”

is synonymous with customer service and has become an iconic trademark within the airline

industry (Inkpen, 2017).

Weaknesses

Some of Southwest’s strength have also become its weaknesses. By operating in a low-

cost model and not offering new features, expanded leg room, and extravagant meals, Southwest

has limited its self on innovation. Although, Southwest has tried to compete with other airlines

by offering upgraded seats, it fails in comparison to other larger airlines and has made it

challenging for Southwest to compete on differentiation. By limiting its offerings to consumers,

Southwest also limits its ability to create additional revenue streams, placing too much reliance

on passenger fares as its main source of revenue—any small shift in consumer demand could

have implications on cashflows and profits.

Along the same lines as limited innovation, Southwest has not upgraded or changed its

product much over the years. Customers like to see updated seats and new features, making

them feel that the company is reinvesting in its product and the consumer (Kutlu & Sickles,
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2017). Even though such variables are not directly related to a weakness, they can have

implications on consumer perception and their views that a product is stale.

Much like all airline companies, Southwest is susceptible to fuel price changes. By

continuing with a low-cost model, Southwest could squeeze its profit margins when fuel prices

increase. This, coupled with limited revenue streams and set prices, could leave Southwest with

unfavorable financials.

There is no arguing that Southwest has been extremely successful at executing its

strategic plan over the last 40 plus years. However, Southwest’s success has also become one of

its biggest weaknesses. More customers are demanding Southwest prices and service, causing

Southwest to expand into larger hub-based airports located in metropolitan cities. Because

Southwest’s strength of low cost is contingent upon quick turnaround times, this puts a strain on

its cost structure and shrinks its profits even further. Southwest will have to decide whether to

compete with the larger operators such as Delta and United or stay in direct competition with the

smaller low-price airlines like Spirit or Jet Blue.

Opportunities

Some of the opportunities that Southwest has presented itself, may not align with the

strategy it should take regarding its low price and low-cost approach. Like many of its

competitors, Southwest can create new revenue streams by upgrading its cabin space with more

leg room, offer meals instead of snacks, and provide other features at additional cost to the

consumer (Goldberg & Weiss, 2018). Along the lines of increasing revenue streams, Southwest

can expand its freight and cargo services to domestic and global businesses.

Another opportunity for Southwest is to continue expanding into larger airport hubs and

international flights. As consumer demand for international travel increases, Southwest could
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capture this market by offering international flights out of smaller airports. Southwest has

already started expanding to international flights by its recent announcement with services to

Hawaii (Inkpen, 2017). However, expanding would impact its cost structure and move

Southwest out of the low-price airfare leader. By building global partnerships, Southwest could

maintain a lower cost structure and still provide services on an international scale.

One opportunity that Southwest has is leveraging its strong network. If Southwest

continues on its strategic plan to corner the market as a low-price leader, it could utilize its

established networks and saturate the small city market; keeping barriers high for new low-price

entries such as Spirit and Jet Blue. Having already expanded into larger airport hubs, Southwest

has gained a new consumer base that may benefit from smaller operations and lower prices.

Threats

Many of the threats that Southwest faces are associated with growing competition and

increases in consumer demands. Claussen, Essling, and Peukert (2018) note that the airline

industry has seen increases in competition and a growing consumer demand for a variety of

services. The challenge that Southwest faces with such threats is it will find it difficult to

compete on price and meet consumer demands (Goldberg & Weiss, 2018). Airlines such as

Spirit and Jet Blue have found ways to capture some of Southwest’s target market, while at the

same time offer add-on features such as seat selection, flight upgrades, and inflight services.

Southwest is slowing losing its low-price leadership in a competitive market.

One threat that Southwest, and the airline industry in general, faces is the instability of

fuel prices. Fuel cost makes up approximately 23% of Southwest’s fixed cost and has an overall

negative impact on profitability (Inkpen, 2017). With political turmoil in foreign regions and the
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war-torn Middle East, Southwest faces uncertainty when planning for its cost of fuel. Fuel prices

as well as other fixed cost are continually rising for the airline industry (Inkpen, 2017). Some

costs are associated with increased environmental and other governmental regulation; which is

another threat to Southwest and the industry as a whole.

Labor cost is another threat that Southwest is faced with. Wages for airline employees

have steadily gone up over that last decade and experts project that they will continue to raise in

the coming years. Southwest will have a challenge keeping its cost down in regards to labor and

will find it difficult to compete with other airline companies who may pay its employees at

higher wages. Southwest is currently in a labor dispute and is caught in a “no-win” situation. If

they when the dispute and wages remain, Southwest benefits from the cost savings but loses on

its reputation by putting profits over employee’s wellbeing.

As previously mentioned, Southwest struggles with innovation when it comes to

providing its customers with the latest and greatest features and services. This will become a

threat to Southwest as it looks to compete with some of the larger firms in the airline industry.

Such a blue ocean strategy of competing on both price and differentiation, puts Southwest in an

identity crisis with its target market. As Southwest looks to reestablish itself in the industry and

maintain a strong position among its competition, Southwest should maximize its strengths and

opportunity while minimizing its weaknesses and threats.

Internal Factor Evaluation Matrix

The internal factor evaluation (IFE) matrix is a tool to measure how Southwest is

positioned against its competitors and whether or not it can overcome its weaknesses and

maximize its strengths. After analyzing the various internal strengths and weaknesses of

Southwest Airlines, each factor was given a weight in relation to its level of importance to the
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success of the organization (see appendix). Once the weights are established, ratings from 1 to 4

are placed by each factor and a total score is calculated. Southwest scored a 2.69 on the IFE

matrix, which is above the average score of 2.5. This would suggest that Southwest has a strong

position to be successful among its competitors, based on its ability to capitalize on strengths and

eliminate or limit weaknesses.

External Factor Evaluation Matrix

The external factor evaluation (EFE) matrix measures those factors external to the

organization that may or may not be controllable (see appendix). Very similar to the IFE matrix,

the EFE factors are weighted and ranked. In the case of Southwest, it scored a 2.17 which is

below the average of 2.5 and suggest that Southwest’s current strategy does not align with or

create a path towards success—given the threats it faces and the limited opportunities. Inkpen

(2017) noted that Southwest is trying to compete against larger firms such as Delta and United,

while at the same time is executing on a low-cost business model that allows low price

competition. Based on both the IFE and EFE, Southwest would be best suited to stick with its

strengths and follow a business model that has gotten it to this success point and should choice to

not compete with larger airlines.

SWOT Bivariate Strategy Matrix

The Southwest SWOT analysis revealed many internal strengths that Southwest can

maximize. One in particular deals with its established network of operations. By leveraging its

current network, Southwest can strategize to compete with other low-cost providers such as

Spirit and Jet Blue. However, some of Southwest’s opportunities are in conflict with its business
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model and efforts should be made to better define a new business model. The threats that

Southwest faces is consistent among its competitors but by positioning itself properly, Southwest

can minimize its threats (see appendix).

BCG Matrix for Southwest, Spirit and Jet Blue Airlines

Southwest and its competitors, Spirit and Jet Blue, all provide similar products with

limited diversity of offerings. In conducting the BCG analysis market share is calculated for

each product being offered and compared with the level of growth within the market.

Southwest’s products can be broken down into three basic categories consisting of international

service, long range domestic service, and short range (small city) service. The international

market is somewhat new to Southwest, with its more recent expansion to serve Hawaii and the

acquisition of AirTran Airways in 2010 (Asahi & Murakami, 2017). Because of this, Southwest

does not capture but a small share of the market. The demand for international travel and global

operations is on the rise and is currently considered a high growth market. With the small market

share in a high growth market, Southwest’s international portion of services would be considered

a “question mark” on the BCG matrix. With other well-established competitors who have the

larger market share of this type of service, Southwest should reallocate its resources away from

this market or provide a new service by connecting smaller cities to international hubs.

The second market that Southwest serves is long range flights that require hub and spoke

operations at larger airports. As previously mentioned, this service requires a considerable

amount of additional resources and cost associated with lay overs and transfers (Inkpen, 2017).

However, Southwest has made a name for itself within this market, competes quite well with

other larger firms, and owns one of the larger shares of the market. Because this market is

extremely competitive, the growth is somewhat limited. Southwest’s portion of the long-range
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market would be positioned between a “cash cow” and a “dog” but closer to a “dog” on the BCG

matrix. Southwest should consider competing on low price within this market to grow its market

share but manage its cost as to not impact profits.

The final market that Southwest services is the short-range flights that consist of quick

turnarounds and keep operation expenses at a minimum. This is the market that made Southwest

the success it is today (Southwest Airlines Co., 2010). As domestic businesses look to expand

into smaller cities and population grows, the demand for air travel between smaller cities will

continue to rise (Jansen, 2016). Based on its annual revenue, Southwest holds the majority of the

market share within this type of service and places it in the “stars” category on the BCG matrix.

Southwest should allocate its resources and maximize its strengths by positioning itself as the

leader of low-cost providers. Results of the BCG matrix is located in the appendix of this paper.

Competitive Forces

There are many forces that Southwest has to consider when setting its new strategy to

compete in a low-cost market. According to Rothaermel (2017), Porter’s five force model would

provide a detailed understanding of all external forces that a firm has to consider when planning

for the future. The first force is that of the threat of new entry into the market.

Southwest is positioned in a highly competitive market where firms try to attract

customers through lower prices, ancillary services, added features, and service area. However,

the threat of entry has been somewhat of a debate. According to Inkpen (2017), the passing of

the Open Skies Agreement has increased international competition by allowing non-US airlines

service to the US. Although this has added competition, it has also brought new opportunities for

US airlines and opened up a new consumer base.

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The airline industry has been associated with a need of high capital with 80% of expenses

being a fixed cost (Inkpen, 2017). Assets in the form of airplanes are not cheap and come with a

lot of added expenses associated with maintenance and fuel cost. Inkpen (2017) noted that Jet

Blue’s 2009 facility had cost more than 800 million dollars and other airlines looking to

expanded into larger metropolitan areas could see similar cost. However, the airline service uses

very similar resources where firm’s find it difficult to compete on unique resource access.

Hannigan, Hamilton and Mudambi (2015) suggest that according to the resource-based view

(RBV), airline firms tend to compete on capabilities and not resource cost savings—all airline

cost are fairly similar as it pertains to valuable resources. According to Hannigan et al. (2015),

the airline industry has reached its maturity and is unlikely to see a large number of new entries

in to the market.

On the other hand, very similar to new market entry, Southwest should be aware of new

mergers and acquisitions of other firms (Inkpen, 2017). Such strategies have been utilized by all

types of organizations to gain a more favorable financial position or access to additional capital.

Another threat of market entry, pertaining to the airline industry, is diversified service providers.

Claussen et al. (2018) suggest that those firms who are more flexible in its services, pose the

biggest threat to market entry; new market entries are increasing as more firms are becoming

flexible to consumer demands.

The second external force that Southwest should evaluate is the power of the buyers. In

this case, the buyer would be considered the customer or passenger. The consumer has high

power when it comes to their buying behaviors (Rothaermel, 2017). Passengers are demanding

more added features and services in flight and in turn adding cost to the operation (Inkpen,

2017). Because of this high buying power, airline firms have used price discrimination to
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capture consumers who demand low prices in off-peak times such as weekdays, early morning or

late-night services (Kutlu & Sickles, 2017). Firms will drop prices and add additional features to

meet the high demands of its consumers, this cause a collective understanding that sustained

competitive advantage would have to be achieved through acquiring and developing firm

capabilities (Hannigan et al., 2015). Southwest has already built a highly capable advantage with

its culture that has been developed over the years.

A third external force that Southwest has to contend with is the power of suppliers.

Rothaermel (2017), noted that the power of the suppliers is high when there are limited suppliers

who provide a unique and much needed resource. Hannigan et al. (2015) note that airline

resources have limited heterogeneity, where suppliers compete among one another for business.

This would suggest that the supplier power is low. However, Inkpen (2017) notes that Southwest

has a limited supplier in that of Boeing provides Southwest’s fleet of aircraft. These places the

supplier power high in relation to Southwest.

Seeking other reputable suppliers, Southwest can utilize its bargaining power to drive

down cost as it relates to resource procurement. Even though one could suggest that there is no

substitute for flying in regard to Southwest’s target market of travelers who would typically

drive, there is a threat that if prices got too high this target market would go back to driving or

take a train rather than flying. As long as Southwest targets this market segment, there will

always be the threat of a substitute.

Inkpen (2017) made note of the fact is, the airline industry is comprised of a highly

competitive market; where some firms find it challenging to survive the smallest adversity.

Hannigan et al. (2015) suggests that with all the competition in the airline industry, it is quite

common to find firms who are competing on similar strategies, making it difficult to acquire
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resources that are unique and challenging to duplicate. Due to the level of existing firm rivalry,

competitive advantage is sought with product differentiation, price, and core capabilities.

Southwest’s ability to separate itself from the competition is becoming more taxing. The rivalry

among the airline industry is an external force that Southwest must take into account when

setting its future strategy.

Analyzing the Competition

When comparing Southwest with its closest competition, the competitive profile matrix

(CPM), (see appendix), is a viable tool that can place various weights of importance on each

critical success factor (CSF). Considering what would make a firm successful given the current

landscape of the industry, the heaviest weighted CSF selected are, customer service, location,

customer loyalty, market share, and price competitiveness. The first CSF, customer service,

Southwest scored the highest at 0.33, compared to Spirit and Jet Blue at 0.22 each. This suggest

that Southwest is known for its great customer service and rates high on the CPM, positioning

Southwest more favorable at achieving success.

Southwest has established itself firmly in many cities but is rated evenly with Spirit

Airlines with each obtaining a score of 0.27. This score could be higher for Southwest if it were

to continue its growth into larger metropolitan areas and international services. However,

competing in the short-range market, Southwest and Spirit are somewhat comparable in

favorability of success. Consumer loyalty is another CSF that could have implication on

obtaining a competitive advantage. Southwest scored a 0.24, eight points above both Spirit and

Jet Blue. The success that Southwest has implemented over the years, coupled with its high level

of customer service, has created an extremely loyal consumer base who continues to utilize
22
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Southwest for their flying needs. This loyalty has also driven Southwest high market share,

which is another CSF of the CPM.

Southwest scored a 0.36 in the market share CSF, which is even with Jet Blue. Both

airlines compete for those price sensitive customers and rate equally with each other when it

comes to the short-range market share. If the CPM were to consider the larger hub operations

and international services that Southwest provides, this rating may be more favorable to

Southwest. However, analyzing the strategy of Southwest, both firms are equally favorable in

market share.

The last CSF and probably the most important, is price competitiveness. Southwest and

Jet Blue rated the same on this CSF with a score of 0.51. The challenge that Southwest will have

moving forward is balancing the cost of added features (if implemented) with maintaining low-

cost operations and shrinking profits with staying price competitive. By utilizing its established

and loyal consumer base, Southwest could allocate more resources and expand locations to gain

a competitive advantage over both Spirit and Jet Blue.

Competitor Ratio Analysis

The liquidity and profitability or financial health of a firm can be measured by calculating

and analyzing various ratios with data obtained from the firms’ income statement and balance

sheet (Ittelson, 2009). Comparing Southwest against Spirit and Jet Blue, there are many ratios

that suggest Southwest is significantly more favorable financially. However, there are also a few

ratios that stand a bit less favorable among its competitors (See Appendix).

Southwest has a current ratio of 0.70 verses that of Spirit at 1.98, which suggest that

Spirit has more than enough assets to cover its current liabilities—almost two times as much.

Whereas, Southwest has enough assets to cover roughly 70% of its current liabilities. The
23
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current ratio is an easy way to determine a firms’ liquidity and ability to pay its bills (Ittelson,

2009). This means that Southwest would have to increase its revenue or collection of accounts

receivable to ensure it has more cash to pay debt.

Another less favorable ratio for Southwest is its gross profit margin, which is the cost

associated with providing its product and determines how much administrative expense the firm

can allocate and still make a profit (Ittelson, 2009). Southwest’s gross profit margin is 34%

compared to Sprint at 36% and Jet Blue’s 38% margin. However, the margins between all three

firms is not significant enough and could be considered quite even. This would also suggest that

Southwest spends a considerable amount less on administrative cost than Spirit and Jet Blue and

is still able to obtain a healthy operating profit at 16%; which is slightly higher than its

competitors.

A firm’s return on assets (ROA) and return on equity (ROE) are used to analyze a firms’

efficient use of assets and investments to generate a profit (Ittelson, 2009). Southwest is

extremely favorable in both ROA and ROE, with a ratio of 14% and 33% respectively. Having

such a favorable ratio in both asset usage and equity return, Southwest appears to be quite

appealing to investors and could seek additional capital, in the form of new shares, to expand

operations.

Analysis of Ratios

Southwest is an organization that has been very profitable over the many years that it has

serviced many different parts of the United States and in different countries internationally. The

financial ratios analyzed in this section gives a general overview of the organization’s financial

health and can help to predetermine whether or not the company can afford to implement a new

business model to create new profound value. In understanding the prevalence of each ratio, it is
24
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imperative to understand what the industry standard of good financial health looks like and what

the organization’s stance when compared to other competitors with like strategies within the

industry. Using the S&P 500 to capture the industry standard for each ratio section, we are able

to accurate assess the financial state of Southwest Airlines. The financial position of Southwest

Airlines in comparison to other low-cost advantage competitors within the airline industry is

favorable with total revenue from 2017 being that of $21,171 (million) (nasdaq.com, 2018).

Calculating ratios that measures profitability, activity, leverage, and liquidity shows that

Southwest is competitive, however other low-cost airlines like Jet Blue and Spirit can also

experience success due to both the cost offerings and size of the organization. The current ratios

for Southwest indicate a healthy organization, however with a strategy to increase revenue and to

lower operational cost, the health of the organization can be preserved for years to come. The

Limitations within this analysis which can be furthered reviewed in the appendix is that the

financial data is currently unavailable for the complete 2018 due to the fact that the organization

has not filed its annual 10-K form for the fiscal year.

Alternative Strategies

There are several different strategies that can be utilized to determine best methods of

Southwest achieving a competitive advantage in the midst of a business environment where

competition is stiff. One strategy that can be utilize in response to addressing the stiff

competition would be to increase the debt to finance other projects like adding the Wi-Fi

amenities and snack options. Increasing debt may seem like a bad idea but can be a good thing

for organizations that have the ability to pay it back. Increasing debt can mean more interest but

less taxes. Another strategy that can be utilized to navigate through stiff competition would be to
25
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increase revenue by adding ancillary fees like baggage fees, business priority fees, snack fees,

and internet fees. According to Shine (2018),

Airlines hauled in $4.6 billion in baggage fees last year, according to federal data released

Monday, the highest amount ever in a year that also saw record passenger traffic. That’s

$256 million more than what they collected in 2016.Those bag fees helped drive industry

profits to $15.5 billion — one of airlines’ most profitable years ever… (p. 1).

One other strategy that can be consider is to identify ways to reduce operating cost within

the organization. This can be a difficult task, especially within the airline industry where it has

been forecasted that operating cost are high. Bryan (2018) states that “Industry body IATA in

December flagged higher spending on labor and fuel - which make up about half of airlines’

operating expenses - as their members’ biggest challenge in 2018, especially after several years

of record profits” (p. 1). A way that cost can decrease for the organization is via the possibility of

jet fuel prices decreasing. Jet fuel prices have decreased over the last six years which can make a

difference in an organization’s operating cost (See Appendix). Another strategy that can be

consider if other strategies do not work for the organization would be the strategy of increasing

the payables which can result in more cash for other strategies and projects. An increase in

payable means that the company is giving back what it owes to vendors in a short period of time.

Finding ways to use the resources that the organization has as well as finding new strategies to

increase revenue and competitive advantage is a key in maintain the success at Southwest.

Analysis of Pro-Forma Financial Data

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The pro-forma financial data shows that Southwest has the potential to increase in

revenue over the next few years with current strategies set in place. However, the organization

has the potential to grow even more with the implementation of new strategies that will increase

profitability and potentially decrease cost. The pro-forma financial data indicates that there will

be an increase in cash and overall assets over the next 3 years (See Appendix). There is a

possibility of an increase in debt over the strategy planning period, however the goal is that the

strategy would help increase revenue and sustain competitive advantage. The pro-forma is only a

slight forecast of what can happen financially for this organization. With Southwest’s trend of

surviving during economic times and hardships the potential of a positive forecast of financial

data is possible with managing how finances are to be spent within the organization.

NPV Analysis of New Cash Flows

With Southwest possible looking into different strategies to breakthrough stiffing

competition, investing a potential $400,000 into Wi-Fi amenities’ and snack options, the

organization can see an increase in cash flow and revenue. Using the pro-forma cash flow

projections of $3,774 (in USD millions), $4,092 (in USD millions), and $ 4,435(in USD

millions) with a discount rate of 2.00%, the initial investment on this new venture calculates to a

negative net present value of $388,187.698 (See Appendix) (www.sec.org, 2018). This can be an

indicator to the organization to not pursue this project, however with increase revenue set for the

future of Southwest and increase in low-cost competition within the airline industry, denying this

project right away may not be in the best interest of the company. This add-on of amenities has

the potential of retaining loyal customers as well as reaching new customers which can lead to

increase of revenue and sustaining a competitive advantage.

Recommended Strategy and Reasoning for Southwest

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Southwest Airlines has weathered many changes in the airline industry related to

competition, regulations and pricing. Since the company began flying in 1971, it has maintained

success by not growing beyond its means. Southwest is currently facing competition from legacy

airline carriers that have expanded due to mergers as well as competition from smaller carriers.

One of Southwest’s major competitive advantages is the cost savings that it passes on to

its consumers. This advantage is what makes the airline and other low-cost airlines like, JetBlue

and Spirit, compete with major air carriers. Southwest should continue to operate in smaller

cities, avoiding the pressure to enact a hub-and-spoke network approach, like many of the major

airlines. Through the hub-and-spoke approach, airlines operate fly their customers out to various

locations, or hubs, through a central airport, also known as the central hub (Inkpen, 2017). In a

research paper comparing hub and spoke systems to point-to-point systems, hub and spoke

systems are described as “In the hub and spoke system, by contrast, all passengers except those

whose origin or destination is the hub, transfer at the hub for a second flight to their destination”

(Cook & Goodwin, 2008, p. 2). The method became popular after deregulation as it allowed

airlines to provide its customers with greater access to more geographic locations. Hub and

spoke networks also allow airlines to get their customers to their destinations in the few routes

possible (Cook & Goodwin, 2008). While the hub and spoke method can benefit airlines by

increasing passenger density and positively affecting supply and demand, it is also very costly.

Airlines must invest in a hub in a popular airport in order to engage in the hub and spoke method.

A hub in a major airport can average around $800 million dollars. Southwest is able to keep its

costs low by operating in smaller, less congested airports (IBISWorld, 2018). Southwest should

also avoid the hub and spoke method as it can also increase turnaround times (Inkpen, 2017).

Long-term Objectives
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For the company’s long-term objectives, Southwest should continue to focus on its

customer service levels. The airline industry currently faces a lot of challenges related to

customer service. These challenges include shrinking seat sizes, being kicked off overbooked

flights and unbundled ticket prices. Southwest is known for their high levels of customer service

however the company needs to ensure that their customer service levels are able to compete with

similar low-fare airliners, such as Spirit and JetBlue. JetBlue is one of Southwest’s biggest

competitors and is a company that is also known for its low costs and high levels of customer

service. In addition to a cost advantage over legacy carriers, JetBlue provides its passengers with

the most legroom in the coach class, DirecTV, satellite radio and snacks in its Core Experience

(Sebor, 2007). JetBlue also offers a Mint Experience which includes fully reclining seats, in-

flight meals, drink service and early onboarding (JetBlue, n.d.).

Practically, Southwest should focus on improving its in-flight experience and on-time

performance rate. Southwest’s current in-flight experience includes on-demand tv and movies,

DirecTV, pretzels and snacks on select flights. Southwest also gives passengers the opportunity

to purchase Wi-Fi and alcoholic drinks.

Cost to Implement New Strategy

Implementing the new strategy will likely be consistent as Southwest only flies Boeing

737’s (Southwest, n.d.). The chairs in Southwest’s planes already have tv screens built into the

back of their seats, so the new strategy would not require new hardware to be installed but for a

new partnership to be developed with the company’s Wi-Fi provider. Row44 powers Southwest’s

internet access providing its customers with an internet speed of 1.5 Mbps to 2 Mbps, if the

airspace is not too crowded (Fortune, n.d.). Southwest also charges its passengers $8 for a day of

Internet access while letting their frequent fliers to use the Wi-Fi for free. JetBlue, on the other
29
SOUTHWEST AIRLINES
hand, offers all of its passengers free Wi-Fi with speeds averaging between 10 and 15 Mbps

(Fortune, n.d.). Southwest should work to provide its passengers with faster internet options at a

cheaper, if not complimentary, price. Wi-Fi is seen as a revenue generator for large airline carrier

but for smaller carriers like JetBlue and Southwest, Wi-Fi is seen as a differentiation service

(Fortune, n.d.).

Internet access is likely not a large revenue generator for Southwest. Passengers are often

deterred from purchasing internet access because of the need to enter in credit card and personal

information in a public space (Solomon, 2017). Unfortunately, providing covering the cost of

free Wi-Fi for passengers will provide a new monthly expense (Solomon, 2017). Southwest

incurring the bill for Wi-Fi will likely cost the company between $300,000 and $400,000.

Southwest would also be responsible for the maintenance of Wi-Fi on its 700 Boeing 737s.

Southwest should also invest more money to developing a stronger partnership with

Nabisco, the company that provides some of the snacks for the airline. Each Southwest flight

provides complimentary pretzels, however only select flights provide Nabisco snacks such as

mini Ritz crackers, Oreos and Nutter Butter cookies. Southwest currently has an advantage as

Spirit airlines does not offer any snacks. JetBlue, however offers complimentary name brand

snacks including Cheez-It crackers, Rold Gold pretzels and TERRA Sweets & Blues potato

chips. JetBlue also offers Coke, Seagram’s, Dunkin’ Donuts and Ocean Spray beverages.

Southwest should invest in consistently providing Nabisco snacks across all of their flights.

Southwest saves money in food and beverage, as the company only provides snacks. Providing

name brand snacks for every customer will likely cost the company between $1.50 and $2.00 a

person.

New Revenue Produced

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JetBlue currently has a competitive advantage when it comes to their in-flight experience.

The company is known for being the only carrier that offers free in-flight Wi-Fi and for its in-

flight experience, however Southwest has stronger brand recognition as seen in its consistent

high rating of being one of the best airliners. By enhancing its in-flight experience, Southwest

will increase its market share of consumers who that want to pay low fares but have an enjoyable

experience. Southwest is a major player in the airline industry and currently holds 13.8% of the

industry’s market share (IBISWorld, 2018). While the other major players such as United

Continental and Delta Air, each hold closer to 20%, Southwest Airlines is the only non-legacy,

low-cost airliner. Consumers are turning to low-cost carriers as a substitute to legacy carriers.

Because of this, Southwest’s revenue is expected to increase 3% to $19.3 billion (IBISWorld,

2018).

Action Timetable

Goal: To Increase Southwest’s brand recognition and customer loyalty

Results/Accomplishments: Increased customer service levels, Increased on-time performance

levels

Action Steps Participants Resources Potential Barriers Outcomes

Step 1 CEO and Upper -Primary and -Resistance to change -understanding of

Environmental Management secondary -Inaccurate data Southwest’s position in
scan and strategic industry data the airline industry
planning -Historic -understanding of the
company company’s competitors
data and their strengths
-develop a plan for
increasing on-time
performance
Step 2 Department managers, -customer -Employee resistance to -customers are segmented
Customer marketing team data from change into groups
Segmentation sales -action plans are
developed for each group
-action plans for
employees are established
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Step 3 Southwest Account -past sales -Southwest being unable -ability to offer all
Relationship managers, Nabisco data to come to an agreement passengers with free Wi-
Development account manager, Row44 -exclusivity with Nabisco or Row44 Fi and in-flight Nabisco
account manager contract with snacks
Southwest
Step 4 Employees -new -cost of implementation -competitive business
Plan business -miscommunication model
Implementation model -increased revenue
Step 5 Employees and the -customer -incomplete or inaccurate -gather effective feedback
Follow Up executive team satisfaction feedback that will produce
surveys -lack of employee measurable follow up
-financial participation -continued increases in
statements revenue
-quarterly -new ideas and processes
“quality for change
control”
meeting

New Business Model for Southwest

The demand low-cost services have increased over the past five years and has become a

substitute for larger, legacy carriers (IBISWorld, 2018). Some airliners may see this as an

opportunity to cut back on all of its amenities and in order to provide the cheapest airline ticket.

Southwest Airlines will continue to be “a Customer Service company that happens to fly

airplanes” (Southwest Airlines, 2018, para 1).

A lot of airliners embrace an a la carte approach, requiring passengers to pay more for

“extras” such as extra leg room, checked luggage, early boarding and in-flight meals and

entertainment (AMA.org, 2018). This can be seen through Spirit Airlines, which charges for

checked and carry-on bags, beverages and early seat selection. Spirit only holds 1.1% of the

industry share, proving that this strategy is not a surefire plan (IBISWorld, 2018). Today it is also

becoming the norm for airliners to market the discomfort that their passengers can avoid by

flying with their airline rather than working to offer their consumers luxuries beyond the baseline

expectations. “It stands to reason that members of a flight can only be as happy as the least
32
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happy customer” (AMA.org, 2018). Because of this it is important for Southwest to focus on the

satisfaction of all their consumers not just the high-paying ones or rewards members.

The new business model will involve Southwest dedicating capital and resources to

enhancing their in-flight experience. Increased consumer disposable income and an increase in

domestic trips taken by US residents, are industry drivers that will increase Southwest’s revenue.

In order to maximize its generated revenue, Southwest will work to become the preferred airliner

in terms of price and experience. Southwest will begin working to offer free Wi-Fi for all of its

passengers and develop a partnership with Nabisco in order to offer complimentary snacks for

passengers on all of their flights longer than two hours.

Southwest will also spend time ensuring that every passenger’s needs and desires are

considered, and ultimately, met. Southwest will achieve this through customer segmentation.

This means looking at past data to understand consumer travel patterns, reviewing the extra

amenities that consumers typically purchase and reviewing customer feedback. Southwest will

implement a quarterly “quality control” meeting where issues and opportunities for growth are

presented. Employees will have the chance to submit their ideas and issues that they themselves

have experienced or that they have heard from passengers, to the executive team through an

online form. The executives will review their feedback and develop project teams in order to

effectively enact change.

References
33
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review of the literature. Journal of Management & Organization, 24(4), 456-473.

doi:10.1017/jmo.2017.82

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https://www.ama.org/publications/MarketingNews/Pages/how-airlines-get-customer-

experience-so-wrong-with-so-much-data.aspx

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Claussen, J., Essling, C., & Peukert, C. (2018). Demand variation, strategic flexibility and

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Cook, G. N., & Goodwin, J. (2008). Airline Networks: A Comparison of Hub-and-Spoke and

Point-to-Point Systems. Journal of Aviation/Aerospace Education & Research, 17(2), 1.

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http://fortune.com/2015/07/01/flight-wi-fi-travel/

Goldberg, R., & Weiss, E. (2018). Why Southwest Airlines’ competitive advantage

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competitive-advantage-might-be-saying-no/?noredirect=on&utm_term=.581b1ec2161e
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US airline industry. Competitiveness Review, 25(2), 134-155.

How corporate culture helped southwest airlines become the best: Employees are the no. 1

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cost-carrier-competition/92782630/

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Korkeamäki, T & Pfister, M. (2016). Airline fuel hedging and management ownership. The

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Information Today, Inc.

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airlines-make-bag-fees-2017

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Solomon, M. (2017, January 20). Free WiFi for all: two customer experience lessons from

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experience-lessons-from-jetblues-announcement/#6a024801341d

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action=view&cik=92380&accession_number=0000092380-18-000031&xbrl_type=v#
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Appendix A
SWOT Analysis

Strengths Weaknesses
- Strong leadership - Limited product & service
- Positive employee culture and innovation.
morale. - Sensitive to fuel prices
- Established networks - Legal implications
- Low cost business model - Limited or narrow supply
- Large fleet of aircraf channels.
- Brand recognition - Success has positioned SWA to
- Strong market share in larger compete with large firms.
hubs. - Limited revenue streams and
- Price competitive add-on features.
- Robust advertising campaign. - Stagnate product
- Quick turnaround - Difficult to maintain low-cost
business model.
- Quick turnaround

Opportunities Threats
- Leverage networks to compete - Entry of new competition, no
with LC airlines. longer low-price leader.
- Domestic expansion to other - Price wars with other airlines.
smaller cities. - Diminishing profits with low-
- Increase Global services cost model.
- Build Global partnerships. - Added cost with Government
- Create new revenue streams. regulation.
- Acquire or merge with other - Increased taxes.
carriers. - Labor negotiations, loss of
- Upgrade existing products or reputation and morale.
services. - Global and political turmoil,
- Diversify pricing model. unstable fuel prices.
- Seek additional suppliers. - Substitutes.
- Quick turnaround
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Appendix B
Internal Factor Evaluation Matrix
Strengths Weight Rating Weighted Score
1 Supportive Leadership with a history of employee engagement 0.06 3 0.18
2 Positive workplace culture with emotionally engaged employees 0.02 3 0.06
3 Well established networks 0.05 4 0.20
4 Quick turnaround time during flight transition 0.06 4 0.24
5 Large fleet of aircraft 0.07 3 0.21
6 Robust advertising strategy and customer outreach 0.08 4 0.32
7 Strong presence in large airport Hubs 0.08 4 0.32
8 Positive brand reputation 0.09 3 0.27
9 Low cost structure 0.04 3 0.12
1 Price competitive
0.12 3
0 0.36

Weaknesses Weight Rating Weighted Score

1 Limited product or service innovation 0.01 2 0.02
2 Sensitive to fuel price increases 0.10 1 0.10
3 Legal implications 0.04 2 0.08
4 Limited or narrow supply channels 0.02 1 0.02
5 Competing with too large of firms (success) 0.05 1 0.05
6 Limited add-on features (bag fees, leg room, priority boarding,
0.03 1
etc. limited revenue streams 0.03
7 Stagnate product 0.03 2 0.06
8 Difficult to maintain low-cost model 0.05 1 0.05
9 0.00 0 0.00
1
0.00 0
0 0.00
Total IFE Score 1.00 2.69
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Appendix C
External Factor Evaluation Matrix
Opportunities Weight Rating Weighted Score
1 Leverage networks to compete with low-cost (LC) airlines 0.07 2 0.14
2 Expand into other domestic, smaller cities 0.12 1 0.12
3 Increase Global travel 0.07 3 0.21
4 Expand freight transportation 0.03 2 0.06
5 Global partnerships 0.02 2 0.04
6 New revenue streams with upgrades and added features 0.08 1 0.08
7 Acquire or merge with other competitors 0.09 1 0.09
8 Upgrade existing products and services 0.05 2 0.10
9 Diversify pricing model to meet various consumer demands 0.02 3 0.06
1 Seek additional suppliers to low the supplier power
0.03 2
0 0.06

Threats Weight Rating Weighted Score

1 Competition entry, no longer the low-price leader 0.08 3 0.24
2 Price wars with larger airlines 0.07 3 0.21
3 Diminishing profits with low cost model 0.06 4 0.24
4 Government regulation adding additional cost 0.02 2 0.04
5 Increased taxes 0.03 2 0.06
6 Labor negotiations decreasing culture and morale 0.06 3 0.18
7 Global turmoil and unstable fuel prices 0.05 2 0.10
8 Substitutes with those choosing to drive instead of fly 0.07 2 0.14
9 0.00 0 0.00
1
0.00 0
0 0.00
Total EFE Score 1.00 2.17
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Appendix D
BCG matrix Southwest Airlines

Relative Market Share

Position
Hi L
Hi g Stars Questio o
g h n Marks w
Industry Sales Growth Rate

L Cash Dogs
o Cows
w

Long range domestic flights

Short range domestic flights
International flights
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Appendix E
SWOT Bivariate Strategy Matrix

SO Strategies – Using the Organization’s Strengths to take advantage of Opportunities

1.Southwest can utilize its strong brand recognition to leverage partnerships across domestic cities.
2.The strong market share that Southwest has allows it to leverage its high revenue potential to expand its
networks and compete with other existing low-cost airlines.
3.Having a large fleet of Boeing aircraft positions Southwest favorably to handle international flights out of
smaller cities, creating a competitive advantage over its competition.
4.Southwest’s healthy balance sheet is appealing to investors, allowing it to raise more capital and offer
upgrades and features to compete with other LC airlines, without impacting its bottom-line.
ST Strategies-Using the Organization’s Strengths to Mitigate Threats
1.The organization should use its positive cultural reputation and overcome its employee litigation threats.
2.Using its established networks and implementing addition features or services, Southwest can corner the
market and compete better against price wars.
3.After setting a new course, Southwest can use its advertising presence and strong marketing campaigns to
re-identify itself in the industry.
4.Allocating more resources towards its short-range operations, Southwest can reestablish itself as a low-
price leader.
WO Strategies-Using the Organization’s Opportunities to Overcome Weaknesses
1.By expanding its services to other smaller cities, Southwest can overcome its weakness of a stagnate
product.
2.Southwest can leverage its existing networks to partner with other suppliers and decrease Boeing’s
supplier power by procuring other suppliers with competitive prices.
3.Expanding into additional international services from smaller cities, the organization can create new
revenue, enhancing its financial situation to be more competitive.
4.Global expansion, with a LC leader strategy, would allow Southwest to compete with other LC airlines
and expand its reputation and brand image.
WT Strategies – Minimizing Weaknesses to avoid Threats

1.The organization can minimize its innovation weakness by leveraging its investment appeal, raise
additional capital to upgrade its product and services.
2.Southwest can minimize its weakness of supplier power and avoid the rising cost threat by expanding its
revenue and building a cushion of assets.
3.The organization can minimize its weakness of maintaining a low-cost business model and avoid growing
competition by limiting its growth in larger hub airports and utilizing those resources to compete in smaller
cities.
4.By expanding its LC operations into additional cities, Southwest can minimize its weakness and avoid
threats by creating new networks and increasing its buying power to leverage fuel and other resource
suppliers.
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Appendix F
Competitive Profile Matrix: Southwest, Spirit and Jet Blue
Southwest Spirit Jet Blue

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.09 3 0.27 2 0.18 2 0.18
Market Penetration 0.07 2 0.14 2 0.14 1 0.07
Customer Service 0.11 3 0.33 2 0.22 2 0.22
Store Locations 0.09 3 0.27 3 0.27 2 0.18
R&D 0.02 1 0.02 2 0.04 3 0.06
Employee Dedication 0.07 3 0.21 2 0.14 1 0.07
Financial Profit 0.06 4 0.24 3 0.18 2 0.12
Customer Loyalty 0.08 3 0.24 2 0.16 2 0.16
Market Share 0.12 3 0.36 2 0.24 3 0.36
Product Quality 0.07 2 0.14 2 0.14 2 0.14
Top Management 0.05 3 0.15 2 0.10 2 0.10
Price Competitiveness 0.17 3 0.51 2 0.34 3 0.51
Totals 1.00 2.88 2.15 2.17
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Appendix G
Competitor Ratio Analysis*

Southwest Spirit Jet Blue

Current Ratio 0.70 1.98 0.50
Quick Ratio 0.64 1.98** 0.48
Total Debt to Total Assets 0.58 0.57 0.51
Total Debt to Equity 2.13 3.66 2.07
Times-Interest Earned Ratio -53.15 -9.32 -11.76
Inventory Turnover 50.41 0.00** 125.55
Fixed Asset Turnover 1.20 1.18 0.89
Total Assets Turnover 0.84 0.64 0.72
Accounts Receivable Turnover 31.98 22.22 28.63
Average Collection Period 11.41 16.43 12.75
Gross Profit Margin 0.34 0.36 0.38
Operating Profit Margin 0.16 0.15 0.14
Return on Assets (ROA) 0.14 0.10 0.12
Return on Equity (ROE) 0.33 0.24 0.24
*data collected from yahoofinance.com for fourth quarter 2017, method of calculations obtained from Ittelson
(2009).
**no data available for inventory cost.
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Appendix H
Southwest Income Statement with Deltas
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Appendix I
Southwest Airlines Balance Sheet with Deltas
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Appendix J
Southwest Airlines Statement of Cash Flow with Deltas
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Appendix K
Financial Ratios with Deltas
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Appendix L
Pro-Forma Ratios
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Appendix M
Pro-Forma Balance Sheet for Southwest
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Appendix N
Pro-Forma Income Statement for Southwest
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Pro-FormaStatement ofCashFlowfor Southwest Airlines Current Year Pro-Forma Year 1 Pro-Forma Year 2 Pro- Forma Year 3 Change from Changefrom Changefrom
USD($)$inMillions Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020 2017-2018 2018-2019 2019-2020
CASHFLOWSFROM OPERATINGACTIVITIES:
Net income $ 3,488 $ 3,774 $ 4,092 $ 4,435 8.20% 8.43% 8.38%
Adjustmentstoreconcile netincometocashprovidedby (usedin)
operatingactivities:
Appendix O
Depreciation and amortization 1,218 1,194 1,170 1,146 -1.97% -2.01% -2.05%
Pro-Forma Cash0Flow Statement for Southwest
Impairment of Intangible Assets, Indefinite-lived (Excluding
Goodwill) 0 0 0 0.00% 0.00% 0.00%
Aircraft grounding charge 63 64 67 69 1.59% 4.69% 2.99%
Unrealized Gain (Loss) on Derivatives (50) 60 110 105 -220.00% 83.33% -4.55%
Increase (Decrease) in Deferred Income Taxes (1,212) 510 556 625 -142.08% 9.02% 12.41%
Changesincertainassetsandliabilities:
Accounts and other receivables (102) 20 20 21 -119.61% 0.00% 5.00%
Other assets (262) 16 16 16 -106.00% 2.00% 2.00%
Accounts payable and accrued liabilities 246 248 251 255 0.81% 1.21% 1.59%
Air traffic liability 345 104 107 110 -69.91% 3.00% 3.00%
Cash collateral received from (provided to) derivative 316
counterparties 320 324 331 1.27% 1.25% 2.16%
Other, net (121) (115) -106 (114) -4.96% -7.83% 7.55%
Net cash provided by operating activities 3,929 3,543 3,862 4210 -9.82% 9.00% 9.01%
Net cashusedininvestingactivities
Capital expenditures (2,123) -2208 -2296 -2411 4.00% 4.00% 5.00%
Assets constructed for others (126) -141 -155 -174 12.00% 10.00% 12.00%
Purchases of short-term investments (2,380) -2451 -2525 -2601 3.00% 3.00% 3.00%
Proceeds from sale of short-term investments 2,221 2345 2452 2496 5.58% 4.56% 1.79%
Other, net 0 0 0 0 0.00% 0.00% 0.00%
Net cash used in investing activities (2,408) (2,500) (2,630) (2,710) 3.82% 5.20% 3.04%
Net cashusedinfinancingactivities
Proceeds from issuance of long-term debt 600 615 625 634 2.50% 1.63% 1.44%
Proceeds from Employee stock plans 29 32 40 46 10.34% 25.00% 15.00%
Reimbursement for assets constructed for others 126 135 143 151 7.14% 5.93% 5.59%
Proceeds from termination of interest rate derivative 0
instrument 0 0 0 0.00% 0.00% 0.00%
Payments of long-term debt and capital lease obligations (592) (607) (617) (630) 2.53% 1.65% 2.11%
Payments of convertible debt 0 0 0 0 0.00% 0.00% 0.00%
Payments of cash dividends (274) (280) -286 -291 2.19% 2.00% 2.00%
Repayment of construction obligation (10) (10) (10) (10) 0.00% 0.00% 0.00%
Repurchase of common stock (1,600) (1,625) (1,640) -1,591 1.56% 0.92% -2.99%
Other, net 15 17 22 30 13.33% 29.41% 36.36%
Net cash used in financing activities (1,706) (1,617) (1,591) -1,580 -5.22% -1.61% -0.69%
NET CHANGE IN CASH AND CASH EQUIVALENTS (185) (210) $ (274) $ (287) 13.51% 30.48% 4.74%
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,680 1750 1860 1920 4.17% 6.29% 3.23%
CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,495 $ 1,540 $ 1,586 $ 1,633 3.01% 2.99% 2.96%
CASHPAYMENTSFOR:
Interest, net of amount capitalized 81 72 61 55 -11.11% -15.28% -9.84%
Income taxes 992 1012 1002 982 2.02% -0.99% -2.00%
SUPPLEMENTALDISCLOSUREOFNONCASHTRANSACTIONS:
Flight equipment acquired through the assumption of debt 0 0 0 0 0.00% 0.00% 0.00%
Flight equipment under capital leases 233 234 240 242 0.43% 2.56% 0.83%
Assets constructed for others $ 197 $ 200 $ 215 $ 225 1.52% 7.50% 4.65%
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Appendix P
Fuel Price Analysis Charts
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*Chart of Fuel Prices retrieved from www.iata.org

The investment has a net present value of 997.84 million dollars. It is recommended to pursue
the second strategy for the company success in the following three years.

The second strategy with a total investment of 300 million USD will reduce the cost of revenue
to a 40% of the total revenues (from a 60% average) and in the other hand an increase in total
sales due to an improvement of the channel sales. The total investment is 300 million dollars
executed 100% in the year. Table 10, Table 11 and Table 12 show the financial results of the
investment strategy.
Table 10 Income statement Proforma with investment strategy and deltas
USD in millions except per share
data. 2019-04 2020-04 2021-04 2017/2016 2018/2017
Revenue 1980 2475 3713 25% 50%
Cost of revenue 792 990 1485 25% 50%
Gross profit 1188 1485 2228 25% 50%
Operating expenses
Sales, General and administrative 502 520 539 4% 4%
Restructuring, merger and
acquisition 1 1 1
Other operating expenses 1 1 1
Total operating expenses 504 522 541 4% 4%
Operating income 684 963 1687 41% 75%
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Interest Expense 1 1 1
Other income (expense) 2 2 2 0% 0%
Income before taxes 687 966 1690 41% 75%
Provision for income taxes 234 328 575 41% 75%
Net income from continuing
operations 454 637 1115 41% 75%
Net income from discontinuing
ops
Other 3 3 3 0% 0%
Net income 457 640 1118 40% 75%
Preferred dividend 0 0 0
Net income available to common
shareholders 457 640 1118 40% 75%
Earnings per share
Basic 9,51 13,34 23,30 40% 75%
Diluted 9,32 13,07 22,82 40% 75%
Weighted average shares
outstanding
Basic 48 48 48 0% 0%
Diluted 49 49 49 0% 0%

Table 11 Balance sheet Proforma with investment strategy and deltas

USD in millions except per share
data. 2019-04 2020-04 2021-04 2020/2019 2021/2020
Assets
Current assets
Cash
Cash and cash equivalents 176 193 212 10% 10%
Total cash 176 193 212 10% 10%
Receivables 250 261 247 4% -5%
Inventories 201 205 210 2% 2%
Deferred income taxes
Other current assets 50 70 90 40% 29%
Total current assets 852 922 972 8% 5%
Non-current assets
Property, plant and equipment
Gross property, plant and
equipment 580 590 600 2% 2%
Accumulated Depreciation -390 -400 -420 3% 5%
Net property, plant and
equipment 190 190 180 0% -5%
Goodwill 140 150 160 7% 7%
Intangible assets 40 45 49 13% 9%
Deferred income taxes 15 2 19 -87% 850%
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Other long-term assets 120 150 160 25% 7%
Total non-current assets 505 537 568 6% 6%
Total assets 1357 1459 1540 8% 6%
Liabilities and stockholders'
equity
Liabilities
Current liabilities
Short-term debt
Capital leases 0 0 0
Accounts payable 90 100 110 11% 10%
Accrued liabilities 16 18 20 13% 11%
Deferred revenues 50 55 75 10% 36%
Other current liabilities 78 75 77 -4% 3%
Total current liabilities 234 248 282 6% 14%
Non-current liabilities
Long-term debt
Capital leases -3 -3 -3 0%
Minority interest 18 19 20 6% 5%
Other long-term liabilities 458 512 524 12% 2%
Total non-current liabilities 473 528 541 12% 2%
Total liabilities 707 776 823 10% 6%
Stockholders' equity
Common stock 46 45 44 -2% -2%
Additional paid-in capital 309 319 329 3% 3%
Retained earnings 316 336 356 6% 6%
Accumulated other
comprehensive income -22 -17 -13 -21% -26%
Total stockholders' equity 650 683 717 5% 5%
Total liabilities and stockholders'
equity 1357 1460 1540 8% 6%

Table 12 Cash flow statement Proforma with investment strategy

Fiscal year ends in April. USD in
millions except per share data. 2019-04 2020-04 2021-04 2020/2019 2021/2020
Cash Flows From Operating
Activities
Net income 454 637 1115 41% 75%
Depreciation & amortization 40 50 60 25% 20%
Investment/asset impairment
charges
Investments losses (gains) 0 0 -3
Deferred income taxes 5 1 17 -80% 1600%
Stock based compensation 8 9 9 13% 0%
Change in working capital -1 24 -18 -2500% -175%
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Accounts receivable 11 -8 -3 -173% -63%
Inventory -15 13 -8 -187% -162%
Accounts payable -1 5 7 -600% 40%
Other working capital 4 15 -13 275% -187%
Other non-cash items -7 -3 -4 -57% 33%
Net cash provided by operating
activities 498 743 1159 49% 56%
Cash Flows From Investing
Activities
Investments in property, plant,
and equipment -25 -20 -36 -20% 80%
Acquisitions, net -23 -36 -16 57% -56%
Purchases of investments -21 -30 -29 43% -3%
Sales/Maturities of investments 29 20 23 -31% 15%
Other investing activities 4 1 4 -75% 300%
Net cash used for investing
activities -36 -65 -54 81% -17%
Cash Flows From Financing
Activities
Debt repayment -1 0 0 -100%
Common stock repurchased -44 -36 -57 -18% 58%
Dividend paid -18 -21 -22 17% 5%
Other financing activities 2 5 3 150% -40%
Net cash provided by (used for)
financing activities -61 -52 -76 -15% 46%
Effect of exchange rate changes -1 0 2 -100%
Net change in cash 400 626 1031 57% 65%
Cash at beginning of period 98 498 1124 408% 126%
Cash at end of period 498 1124 2155 126% 92%
Free Cash Flow
Operating cash flow 498 743 1159 49% 56%
Capital expenditure -25 -20 -36 -20% 80%
Free cash flow 473 723 1123 53% 55%

Table 13 Financial ratios of investment strategy with deltas

Financial ratios 2021-04 2020-04 2018-04 2020/2019 2021/2019
Liquidity ratios
Current ratio 3,64 3,72 3,45 2% -7%
Acid test ratio 2,78 2,89 2,70 4% -7%
Cash ratio 0,75 0,78 0,75 4% -3%
Operating cash flow ratio 2,13 3,00 4,11 41% 37%
Leverage ratios
Debt ratio 0,52 0,53 0,53 2% 1%
Debt-to-equity ratio 1,09 1,14 1,15 4% 1%
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Interest coverage ratio 962,862 1686,79 75%
Debt service coverage ratio 0,97 1,24 2,05 28% 65%
Activity ratios
Asset turnover ratio 1,46 1,70 2,41 16% 42%
Inventory turnover ratio 3,94 4,83 7,07 23% 46%
Receivables turnover ratio 7,92 9,48 15,03 20% 59%
Days sales in inventory ratio 92,63 75,58 51,62 -18% -32%
Profitability ratios
Gross margin ratio 0,60 0,60 0,60 0% 0%
Operating margin ratio 0,35 0,39 0,45 13% 17%
Return on Assets (ROA) ratio 0,34 0,44 0,73 30% 65%
Return on Equity (ROE) ratio 0,70 0,94 1,56 33% 66%
Book value per share ratio 13,27 13,95 14,63 5% 5%
Dividend yield ratio 0,02 0,02 0,02 2% 12%
Price-Earnings ratio 2,78 2,13 1,26 -23% -41%

The evaluation of the investment strategy will be developed considering the difference between
the free cash flow between the two strategies, that is, the investment strategy and the 3% natural
growth. The difference of the free cash flow will be considered for the calculation of the net
present value of the investment. The discount rate of the calculation will be the Weighted
Average Cost of Capital of the company, that is, 8.65% (Guru Focus, 2018).
Table 14 Calculation of Net Present Value
Concept 2019 2020 2021
Free cash flow difference 298 445 940
Initial investment (2018) -300
Discount rate (WACC) 8,65%
Net Present Value 997,84

Analysis of Pro-Forma Financial Data

The pro-forma financial data shows that Southwest has the potential to increase in

revenue over the next few years with current strategies set in place. However, the organization

has the potential to grow even more with the implementation of new strategies that will increase

profitability and potentially decrease cost. The pro-forma financial data indicates that there will
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be an increase in cash and overall assets over the next 3 years (See Appendix). There is a

possibility of an increase in debt over the strategy planning period, however the goal is that the

strategy would help increase revenue and sustain competitive advantage. The pro-forma is only a

slight forecast of what can happen financially for this organization. With Southwest’s trend of

surviving during economic times and hardships the potential of a positive forecast of financial

data is possible with managing how finances are to be spent within the organization.

NPV Analysis of New Cash Flows

With Southwest possible looking into different strategies to breakthrough stiffing

competition, investing a potential $400,000 into Wi-Fi amenities’ and snack options, the

organization can see an increase in cash flow and revenue. Using the pro-forma cash flow

projections of $3,774 (in USD millions), $4,092 (in USD millions), and $ 4,435(in USD

millions) with a discount rate of 2.00%, the initial investment on this new venture calculates to a

negative net present value of $388,187.698 (See Appendix) (www.sec.org, 2018). This can be an

indicator to the organization to not pursue this project, however with increase revenue set for the

future of Southwest and increase in low-cost competition within the airline industry, denying this

project right away may not be in the best interest of the company. This add-on of amenities has

the potential of retaining loyal customers as well as reaching new customers which can lead to

increase of revenue.