ISSUES IN ACCOUNTING EDUCATION Vol. 24, No. 4 November 2009 pp.

539551

An Analysis of Southwest Airlines: Applying the Horngren, Datar, and Foster (2006) Strategic Protability Analysis Approach
Charles D. Bailey, Allison B. Collins, Denton L. Collins, and Kenneth R. Lambert
ABSTRACT: This case requires students to collect nancial and operational data from Southwest Airlines 20032006 annual reports and to use that data to conduct a strategic protability analysis of the rms changes in operating income. As described in Horngren et al. (2006), this analysis decomposes changes in a rms operating income into components related to growth, price recovery, and productivity. Similar to other studies (e.g., Dikolli and Sedatole 2004), this case uses publicly available data to link textbook concepts to real world applications. Linking strategy with protability allows students to see how rms manage inputs in order to compete, grow, and prot in output markets. Keywords: strategic protability analysis; Southwest Airlines; growth; price-recovery; productivity; Horngren et al. (2006); case analysis.

INTRODUCTION his paper presents an instructional case that requires students to collect and analyze nancial and operating data available in the 20032006 annual reports of Southwest Airlines. By applying the strategic prot analysis method described by Horngren et al. (2006, Ch. 13), students decompose the year-by-year change in Southwests operating income into components related to growth, price recovery, and productivity. Students are then required to interpret the resulting components as they relate to Southwests stated strategy and its competitive operating environment. The case is useful for a number of reasons. First, the case context provides a real world application of the Horngren et al. (2006) strategic prot analysis approach. By applying the methods to a publicly traded rm, students gain a perspective on the difcult strategic choices and competitive market realities that often cannot be conveyed in hypothetical exercises. Second, this case requires students to examine and explain how Southwests operating prots have changed over a very turbulent period in the economic life of the company and the airline industry. The analyses show that while the sharp increases

Charles D. Bailey is a Professor at The University of Memphis. Allison B. Collins is an Assistant Professor and Denton L. Collins is an Associate Professor, both at Texas Tech University. Kenneth R. Lambert is a Professor at The University of Memphis.
This case has beneted from the comments and feedback from students at The University of Memphis.

539

540

Bailey, Collins, Collins, and Lambert

in the price of jet fuel have hurt the companys bottom line, highly productive employees and the efcient use of aircraft, combined with growth in passenger loads, more than offset this impact. Given the low-cost strategy employed by Southwest, this case drives home the actual impact of input and output prices and productivity improvements on operating prots, and illustrates why Southwest focuses so intently on hiring good employees and deploying their aircraft as productively as possible. Third, the case fosters students critical business thinking skills by requiring them to explain their analyses and ndings in the context of Southwests stated strategy and competitive environment. These requirements thus aid in helping students develop some of the core competencies suggested by the AICPA.1 Finally, given that Southwest and other airline companies are relatively transparent with respect to operating statistics when compared to the universe of publicly traded rms, the case provides students with an enhanced opportunity to improve their skills at researching the disclosures of publicly traded rms. The case has been well received in a number of classes, using either of two approaches. Our most common approach has been as a group project that is developed over the semester with relatively brief increments of time devoted to discussion and computational issues. Students complete the project by collecting and analyzing the necessary data and preparing a written report, and then participating in a discussion of their ndings in a summary class session. The second approach has been to abbreviate the case to be presented in a single extended class period (e.g., 90 minutes), which could cover a single reporting period. However, as a single-class assignment, the case delivery is greatly facilitated by providing students with advance background coverage and with handouts that present summary calculations and results. CASE MATERIALS Background Southwest Airlines began ight operations in 1971, ying three Boeing B737 aircraft between Houston, Dallas, and San Antonio. Based at Dallas Love Field, the airline quickly made its presence known in the airline industry. Through scal 2007, the airline company enjoyed 35 years of continuous protability, a benchmark unmatched by any other domestic airline company and one that is all the more surprising given the current difculties faced by the domestic airline industry. As of the end of 2007, Southwest served 64 destinations in 32 states in the United States, with 520 Boeing B737 aircraft in operation and 34,378 employees. This eet of aircraft provides Southwest a total capacity of 70,865 aircraft seats, or an average of a little more than 136 available seats per aircraft. Given these sustained favorable operating results, Southwest Airlines has achieved nearlegendary status as the prototypical low cost air carrier. The rms value proposition is low-cost, safe, point-to-point air transportation with a minimum of frills. Southwest typically focuses on ying into under-served regional airports with sufcient passenger volume to be protable. Key aspects of this strategy are low airfares, fast turnaround of aircraft on airport tarmacs, use of a common aircraft model, tight control of costs, and highly motivated employees. This strategy has not been at the expense of customer satisfaction; according to the U.S. Department of Transportation, Southwest consistently has among the fewest customer complaints per passenger own.
1

The AICPA Core Competency Framework emphasizes the need for students to develop, as part of their training, broad business thinking abilities, functional measurement and reporting expertise, and personal communication and problem-solving skills (AICPA 2007, available at: http: / / www.aicpa-eca.org / library / ccf / default.asp).

Issues in Accounting Education, November 2009

An Analysis of Southwest Airlines

541

Southwest typically reports relatively low operating expenses on a per available seatmile basis. Available seat-miles (ASM) is a standard input activity metric reported by most major airlines, and the operating expenses per available seat-mile can thus be compared across airlines. To illustrate, a 122-seat aircraft ying on a 1,000-mile route would represent 122,000 available seat-miles (even if there are no passengers on the aircraft). Southwest reported GAAP-basis operating expenses per ASM of $0.0880 in 2006, compared to $0.0805 in 2005; these measures are among the lowest reported by the major airlines. Southwest also reports its primary output measure, an operating statistic called revenue passenger-miles (RPM). For example, a ight carrying 100 fare-paying passengers on a 1,000-mile ight would represent 100,000 RPM. Revenue passenger-miles is a standard output measure disclosed in the airline industry and helps investors compare airline operation scale across different rms. The ratio of RPM to ASM represents an airline companys average load factor. As implied by Southwest in their management discussion and analysis and in their supplemental disclosures, the rm mixes three fundamental inputs in order to generate their revenue output. In their most basic form, these inputs are employees, ight departures (or trips), and aircraft seats. For example, Southwest places a great deal of importance on the quality of its workforce; in its January 17, 2007, Form 8-K (found at http://www. southwest.com), the CEO of the rm stated that:
We are delighted with our 2006 earnings performance, which represented our 34th consecutive year of protability ... With almost 50 percent higher jet fuel costs per gallon, and the security-related challenges we faced during the latter part of the year, our employees had to put forth a tremendous effort to achieve these outstanding results. And, they did. As a result of our peoples hard work, innovation, and Warrior Spirit, we continued to improve our efciency and solidify our position as the Low Cost Leader ... At the same time, our employees are more productive than they have been in three decades.

Southwest places similar importance on its use of a common type of aircraft for all its ight operations, and on its need to efciently utilize its aircraft. The management of the rm argues that these factors are critical to Southwests long-term success. A common aircraft type leads to a lower cost per seat of capacity, while the efcient utilization of aircraft allows the rm to y more trips with fewer aircraft. These factors facilitate the high productivity of Southwests workforce. Changes in how each of these inputs is used and the prices paid for each should inuence the observed changes in Southwests output market and, by extension, its operating income, which is the motivation of the analyses described in the next section. The changes in operating income attributable to the respective use or consumption of the inputs and the resulting output can then be interpreted within Southwests strategic/competitive context. Strategic Protability Analysis Horngren et al. (2006) approach strategic performance measurement by focusing on three drivers of income changes between reporting periods. Specically, they propose decomposing the change in operating income into three components (or variances). These are: 1. A growth component. 2. A price-recovery component. 3. A productivity component.

Issues in Accounting Education, November 2009

542

Bailey, Collins, Collins, and Lambert

In general, this analysis should inform users as to which component(s) caused the change in operating protability. For example, growth in a rms output during a period should have a favorable effect on operating income, holding everything else equal. Similarly, if the prices the rm charges for its output increase faster than its input prices, and/ or if the rm is able to use its inputs more efciently, then the price-recovery component and/or the productivity component should also favorably impact operating income (all else being equal). By extension, each of these components should inform observers as to how well Southwest is fullling its strategic mission. For the growth component and the pricerecovery component, there will be revenue effects and cost effects, while for the productivity component, there will be only cost effects. Data Sources Southwests nancial and operating data are easily located at the companys corporate website (http://www.southwest.com), which provides a link to its page dealing with investor relations. From this page, Southwests annual reports and Securities and Exchange Commission (SEC) lings can be accessed. These include the rms Forms 10-K, 10-Q, 8-K, and ARS lings from 1995 to date, as well as Southwests annual reports from 1994 to date. Table 1 reports an excerpt from Southwests 2006 Form 10-K led with the SEC. Panel A reports the excerpt from Southwests income statement for the years ended 2004, 2005, and 2006, and Panel B reports various operating statistics from the same periods. The income statement excerpt reveals that the following expense categories are reported by Southwest for each year: salaries, wages, and benets; fuel and oil; maintenance materials and repairs; aircraft rentals; landing fees and other rentals; depreciation and amortization; and other operating expenses.2 Panel A also reveals that, for example, Southwests operating income (operating revenue minus operating expenses) increased from $725 million in 2005 to $934 million in 2006, or an increase of $209 million. The objective of the Horngren et al. (2006) approach is to decompose the $209 million increase in operating income into components associated with growth, price-recovery, and productivity, and to perform this analysis for each of the inputs and outputs. Horngren et al. (2006) point out that the growth component captures the impact on Southwests operating income that is attributable solely to changes in the quantity of output sold by Southwest during the period examined. Regardless of the strategy adopted by management, an airline rms mission typically involves increasing its sales. The high xed costs of an airline company require the rm to ll its aircraft with fare-paying passengers in order to make money. Not surprisingly, industry watchers and analysts often focus on the average load factor for an airline companys aircraft (i.e., the proportion of seats lled by paying customers). If Southwest is growing and has a positive operating margin, then, holding everything else constant, the associated growth component of operating income should have a favorable effect on operating income. Based on Horngren et al. (2006, 467), the expression to compute the revenue effect of growth (REVEFFGROW) for period t is given by: REVEFFGROWt (ACTOUTPUTt1 ACTOUTPUTt) OUTPUTPRICEt
2

Southwest ceased reporting Agency Commissions as a separate expense category after 2004, since the rm elected to end commission payments to travel agents as of December 2003. This action essentially reduced the expense to zero. This implies that the 2003 and 2004 10-Ks must be accessed to obtain this information.

Issues in Accounting Education, November 2009

An Analysis of Southwest Airlines

543

TABLE 1 Excerpt from Southwests 2006 10-K Panel A: Income Statement Excerpts 2004 OPERATING REVENUES: Passenger Freight Other Total operating revenues OPERATING EXPENSES: Salaries, wages, and benets Fuel and oil Maintenance materials and repairs Aircraft rentals Landing fees and other rentals Depreciation and amortization Other operating expenses Total operating expenses OPERATING INCOME OTHER EXPENSES (INCOME): Interest expense Capitalized interest Interest income Other (gains) losses, net Total other expenses (income) INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME NET INCOME PER SHARE, BASIC NET INCOME PER SHARE, DILUTED Panel B: Operating Statistics Excerpt 2004 OPERATING DATA: Revenue passengers carried Enplaned passengers Revenue passenger miles (RPMs) (000s) Available seat miles (ASMs) (000s) Load factor Average length of passenger haul (miles) Average stage length (miles) Trips own Average passenger fare Passenger revenue yield per RPM Operating revenue yield per ASM Operating expenses per ASM Operating expenses per ASM (excluding fuel) Fuel cost per gallon (average) Number of employees at year-end Size of eet at year-end Years Ended December 31 2005 2006 77,693,875 88,379,900 60,223,100 85,172,795 70.7% 775 607 1,028,639 $93.68 12.09 8.90 8.05 6.48 $1.03 31,729 445 83,814,823 96,276,907 67,691,289 92,663,023 73.1% 808 622 1,092,331 $104.40 12.93 9.81 8.80 6.49 $1.53 32,664 481 Years Ended December 31 2005 2006

(in millions, except per-share amounts) $6,280 117 133 6,530 2,578 1,000 472 179 408 431 1,058 6,126 404 888 (39) (21) 37 65 339 124 $215 $.27 $.27 $7,279 133 172 7,584 2,782 1,341 446 163 454 469 1,204 6,859 725 122 (39) (47) (90) (54) 779 295 $484 $.61 $.60 $8,750 134 202 9,086 3,052 2,138 468 158 495 515 1,326 8,152 934 128 (51) (84) 151 144 790 291 $499 $.63 $.61

70,902,773 81,066,038 53,418,353 76,861,296 69.5% 753 576 981,591 $88.57 11.76 8.50 7.97 6.67 $.83 31,011 417

Issues in Accounting Education, November 2009

544 where:

Bailey, Collins, Collins, and Lambert

ACTOUTPUTt(t1) the actual output for the specied period (either period t or t1); and OUTPUTPRICEt the selling price per unit of output in year t. Based on Horngren et al. (2006, 467), the expression used to compute the cost effect of growth (COSTEFFGROW) for period t can be stated as: COSTEFFGROWt (EXPINPUTt1,t ACTINPUTt) INPUTPRICEt where: EXPINPUTt1,t the input units that would have been required to produce year t1 output in year t; ACTINPUTt the actual units of input required to produce year t output in year t; and INPUTPRICEt the cost per unit of input in year t. EXPINPUTt1,t reects the amount of the input that the rm would have expected to consume in year t if: (1) its ratio of output to input remained constant during the period, and (2) its output in year t was ACTOUTPUTt1 instead of ACTOUTPUTt. EXPINPUTt1,t is therefore computed as [(ACTOUTPUTt1 / ACTOUTPUTt) ACTINPUTt]. The price-recovery component captures the effect on Southwests operating income attributable solely to changes in the prices Southwest charges for its outputs and the prices it pays for its inputs. A rm successfully competing on the basis of product differentiation should be able to increase its output price faster than any increase in the prices of its inputs. To the extent that Southwest can raise its fares on a percentage basis faster than the growth in input prices, this would impact favorably on operating income. On the other hand, given that Southwest competes on the basis of price, attempting to increase volume by offering lower fares could result in reduced earnings, holding everything else constant. A similar effect would occur if Southwest chose to forgo fare increases even as input prices increase. The expression used to compute the revenue effect of price-recovery (REVEFFP-R) for period t is given by Horngren et al. (2006) as: REVEFFP-Rt (OUTPUTPRICEt1 OUTPUTPRICEt) ACTOUTPUTt1 where OUTPUTPRICEt(t1) and ACTOUTPUTt1 are as previously dened and refer to the specied periods. The expression used to compute the cost effect of price-recovery (COSTEFFP-R) for a given input for a period t is given as: COSTEFFP-Rt (INPUTPRICEt1 INPUTPRICEt) EXPINPUTt1,t where INPUTPRICEt(t1) and EXPINPUTt1,t are as previously dened and refer to the specied periods. Finally, the productivity component captures the change in operating prot attributable to the productive use of inputs to lower costs. A rm successfully competing on the basis of cost leadership should be able to increase output, holding inputs constant, to use fewer inputs to achieve the same level of output, or some combination of the two. The expression
Issues in Accounting Education, November 2009

An Analysis of Southwest Airlines

545

used to compute the cost effect of productivity (COSTEFFPROD) for period t is given in Horngren et al. (2006, 469) as: COSTEFFPRODt (ACTINPUTt1 EXPINPUTt1,t) INPUTPRICEt1 where ACTINPUTt1, EXPINPUTt1,t, and INPUTPRICEt1 are as previously dened. Consistent with Horngren et al. (2006), there is no revenue effect of productivity. Panel B of Table 1 reports some of Southwests operating statistics; these include number of employees, number of ight departures, fuel consumption (in gallons), average fuel price paid (per gallon), various passenger statistics (revenue passengers own, revenue passenger miles, average length of passenger haul), and various capacity statistics (available seat-miles own, size of aircraft eet). These operating statistics provide users with measures of the inputs used by Southwest in providing its air travel services, while the income statement reports the expenses generated in airline operations. For the purposes of the following analyses, salaries, wages, and benets expenses, and fuel/oil expenses, landing fees, and other rental expenses can be considered variable costs. Specically, these costs are expected to vary with either the number of employees (salaries, wages, and benets expense), or the number of trips own (fuel/oil expense, landing fees, and other rentals expense). On the other hand, the costs associated with owning and maintaining the eet of aircraft (maintenance materials and repairs expense, aircraft rentals expense, depreciation and amortization expense), and all other reported expenses (other operating expenses) can be considered xed capacity costs (either discretionary or committed) of the airline. Case Requirements 1. Similar to those provided by Southwest Airlines management, prepare common-size income statements for Southwest for the periods from 2003 through 2006. Specically, scale revenues and each category of operating expense by available seat-miles (ASM). Create a table to report both the dollar amount of these expenses, the per-ASM amount, and the per-sales dollar amount of these expenses. 2. Considering Southwests three fundamental inputs (employees, trips own, and aircraft seats) and outputs (revenue passenger miles, or RPM) and using the approach described above, perform a strategic protability analysis of the changes in Southwests operating income for the period from 2003 through 2006. For each annual change in operating income, you will compute growth-effect components for revenues and expenses, price-recovery components for revenues and expenses, and productivity components for expenses. These components can be aggregated/summarized in a manner similar to Table 2. Note that the personnel-related expense components for 20052006 are included in the table. 3. Prepare a written report that summarizes the results of the analyses described in Requirements 1 and 2 above and discusses these results as they relate to Southwests strategic context. Plan to address, at a minimum, the following questions: a. With respect to the common-size analyses, how have the revenues and expenses per available seat-mile and per dollar of sales changed over time? b. With respect to the strategic protability analyses for each year, discuss how the growth, price recovery, and productivity components explain the changes in revenues and changes in each expense category. c. Explain how overall operating income has changed from year to year as indicated by the growth, price recovery, and productivity components.
Issues in Accounting Education, November 2009

546

Issues in Accounting Education, November 2009

TABLE 2 Decomposition of Change in Operating Income 20052006 Revenue/ Cost Effects of Growth Components U or F Revenue/ Cost Effects of Price-Recovery Components U or F Cost Effects of Productivity Components $344,992,234 U $205,285,752 U $(280,277,986) F U or F

2005 Operating Income Operating revenues Operating expensesa: Variable expenses: Personnel-related expenseb Trip-related expense Fixed capacity-related expenses: Aircraft-related expensesc Other operating expenses Total operating expenses: Operating income
a

2006 Operating Income $9,086,000,000 $3,052,000,000 $2,633,000,000 $1,141,000,000 $1,326,000,000 $8,152,000,000 $934,000,000

$7,584,000,000 $2,782,000,000 $1,795,000,000 $1,078,000,000 $1,204,000,000 $6,859,000,000 $725,000,000

Bailey, Collins, Collins, and Lambert

The expenses are as reported in the respective Form 10-K led with the Securities and Exchange Commission. Personnel-related expense is Southwests reported Salaries, Wages, and Benets; these are assumed to be incurred on a per employee basis. c Aircraft-related expenses represent the sum of Maintenance Materials and Repairs, Aircraft Rental, and Depreciation and Amortization, and are assumed to be incurred on a per seat of aircraft capacity basis (even though seat capacity is acquired in discrete chunks whenever an additional aircraft is acquired). Note that the above analysis is to be generated for 20032004, 20042005, and 20052006.
b

An Analysis of Southwest Airlines

547

d. Discuss the changes in the airfares charged and input prices paid by Southwest during each year and over the 20032006 period. e. How have macroeconomic and geopolitical events (e.g., terrorist attacks, spikes in fuel costs, etc.) impacted Southwests operating results? f. Given that most of Southwests employees work under collective bargaining agreements, how has the productivity of Southwests people and aircraft changed over the period examined? g. Does the favorability or unfavorability of the various components (growth, price recovery, and productivity) appear to be consistent with Southwests low-cost strategy?

Issues in Accounting Education, November 2009

548

Bailey, Collins, Collins, and Lambert

CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Intended Audience and Case Learning Objectives This case is designed for graduate and advanced undergraduate students taking cost accounting, management accounting, or cost management courses. The case will facilitate students exploration of the intersection of a rms protability with its strategy. Typical preparation for the assignment requires coverage of strategic analysis of operating income as presented by Horngren et al. (2006), either from the textbook itself or from supplemental materials. These supplemental materials can include Banker et al. (1989) or Sopariwala (2003).3 However, if the instructor uses a textbook that does not cover the protability analysis framework, then appropriate coverage of the material through hypothetical examples can be presented using the general equations presented in the body of the case. Depending on how the case is implemented, students are expected to collect the necessary nancial and operating data, develop a spreadsheet that maps the raw data into tables conveying the appropriate common-size income statements and protability analyses, and then discuss and interpret the resulting metrics as they pertain to Southwests stated cost leadership strategy. As such, students will need to have appropriate training in using spreadsheets and the Internet for research. Upon completion of the case, students should be able to: 1. Research and collect nancial and operating data of a publicly traded rm using online sources. 2. Prepare and interpret common-size income statements for a publicly traded airline company. 3. Prepare strategic protability analyses and interpret the results based on the rms strategy. The case is also designed to foster students development of broad business thinking skills, functional measurement and reporting expertise, and personal communication and problem solving skills, all of which are part of the AICPAs stated core competency requirements for accounting students (AICPA 2007). Implementation Guidance and Student Interaction Our typical approach is to assign this case as a semester project for groups of three to ve students. Another version of the case, examining only the 20032004 period, and with some advance preparation, was used in a 90-minute, single-class, lecture/discussion setting involving MS-Accounting students enrolled in a controllership course. When assigned as a semester project, students are usually asked to participate in class discussions that frame the issues and results in the case and to prepare written reports addressing those issues. Prior to or concurrent with assigning the case, we usually rst cover material related to the balanced scorecard, which is consistent with the presentation in Horngren et al. (2006). If the Horngren et al. (2006) textbook is used for the course, then the assignment is relatively seamless for students and requires relatively little advance coverage beyond some discussion of the airline industry in general and Southwest Airlines in particular. Hypothetical examples using the general equations in the case can be useful for presenting the material without requiring references to the Horngren et al. (2006) text. For graduate
3

Sopariwala (2003) extends the protability analysis by modifying the Horngren et al. (2006) technique to deal with relatively large increases in capacity that may or may not be completely utilized in a given reporting period. We make no such adjustments in our approach because Southwest increases capacity in relatively small chunks. Specically, their new Boeing 737 Series 800 aircraft have capacities of only 137 seats per aircraft.

Issues in Accounting Education, November 2009

An Analysis of Southwest Airlines

549

students, this approach can be supplemented by assigning Banker et al. (1989) as background reading if the instructor believes it necessary. Regardless of the approach used to provide background, we have also found it useful to walk the students through the required calculations. This can be done for a single cost category (we typically use personnel-related expenses to illustrate the calculations and interpretations). Alternatively, the instructor can perform all of the calculations and interpretations for a single year, and allow the students to complete the analyses for subsequent periods. With respect to how the case is developed over the semester, we have typically devoted around 30 to 45 minutes of initial discussion in setting up and reviewing the case requirements, and then spent additional small increments of time during subsequent class periods to answer students questions and offer additional guidance. Our approach has been to treat this as an ongoing project for discussion during the semester, with the written report accompanying the case typically due in the last class period of the semester.4 Some instructors may choose to treat the case as a semester project and then discuss the result when the completed report is turned in, while others may choose to abbreviate the case to a shorter single-period assignment. In our experience, discussion is usually highly interactive with a great deal of student participation. The shorter, in-class version of the case examining a single year was completed in a single 90-minute block of class time, although this was rushed, and the facilitating author prepared handouts that (1) provided the required nancial and operating data, (2) presented example calculations, and (3) summarized results. However, if the in-class version of the case is assigned to be completed in a 2.5 hour period, then, with appropriate preparation and delegation of tasks, and depending on the number of inputs analyzed, groups of students should be able to collect online the necessary data (assuming student laptop and classroom Internet availability), perform the necessary calculations, and still have time to enable an in-depth discussion of the components and their implications. Student responses to the case are typically positive. Five sections of M.B.A. students over three semesters, including two sections involving executive M.B.A. students, have completed similar versions of the case. The versions differed primarily in the company analyzed, the recency of the data, and the degree of coverage. The current version of the case using 20032006 data from Southwest Airlines was completed by 60 graduate students in the spring of 2007. A voluntary and anonymous questionnaire soliciting student responses to six questions pertaining to this case was completed by 51 of these students (19 executive M.B.A. students and 32 part-time M.B.A. students, representing a response rate of 82.6 percent of the E.M.B.A. students and 86.5 percent for the part-time M.B.A. students). Five of the questions related to the usefulness of the case in furthering student understanding of strategic protability analysis and of the need to incorporate strategic considerations in performance evaluation, while the sixth question asked students to indicate how likely they were to recommend the case for use by other management accounting instructors. To each

When the case is assigned as a semester project, it is unclear how much time is actually used by the students in preparing their solutions and accompanying reports, as we did not query the students on time requirements. The author developing a spreadsheet to perform the calculations required approximately two hours to write and debug the required equations and another hour (or so) to develop an appropriate reporting format for the results. However, the faculty member was very familiar with the computational details, having performed them by hand for each component of earnings, and was competent with the use of Excel. The time required to write up the report in presentable form likely varies signicantly by group. The data collection requirements took around two to three hours because of some restatement issues that were disclosed by Southwest, and because of the difculty of tracking the Agency Commissions item that Southwest stopped disclosing.

Issues in Accounting Education, November 2009

550

Bailey, Collins, Collins, and Lambert

of these questions, students were asked to respond on a scale of 1 to 10, with 10 representing most helpful or most likely. These six questions and the means and standard deviations of the responses partitioned by section are reported in Table 3. The average response across sections exceeded 7 for every question. Students responded most favorably to the question asking about the usefulness of the case in helping the students understand the concept of strategic protability analysis. Students responded least favorably to the question asking about their likelihood to recommend the case be used by other management accounting instructors. A one-way analysis of variance across questions was not signicant at the 0.05 level, and even though the mean E.M.B.A. student response to each question was greater than the corresponding mean response for the part-time M.B.A. students, none of these differences was signicant at the 0.05 level. Discussion and Conclusion In sum, we have found the case described above to be a exible and effective teaching tool for integrating a discussion of rm strategy with protability analysis. Using the approach described in Horngren et al. (2006), students are required to analyze the inputs and outputs, and the respective expenses and revenues, of a publicly traded rm, using the
TABLE 3 Student FeedbackSpring 2007 Semester Executive M.B.A. Students (n 19) 8.17 (1.00) 8.33 (0.80) 8.24 (0.92) 8.30 (1.10) 7.95 (1.35) 7.68 (1.95) Part-Time M.B.A. Students (n 32) 8.03 (1.73) 7.88 (1.76) 7.64 (1.64) 8.02 (1.83) 7.56 (2.37) 6.96 (2.41) Test of Differences E.M.B.A. versus P.T.M.B.A. t 0.37 t 1.26 t 1.67

Question: How well did the case help you to understand the year-over-year changes in Southwests operating performance? How well did this case help you understand Southwests low-cost leadership strategy? How well did this case help you understand how changes in Southwests performance are explained by its low-cost leadership strategy? How well did this case help you understand the concept of strategic protability analysis? How well did this case help you understand the computations involved in this version of strategic protability analysis? How likely would you be to recommend this case to other instructors in management accounting?

Overall (n 51) 8.08 (1.49) 8.04 (1.48) 7.86 (1.43) 8.12 (1.59) 7.71 (2.04) 7.23 (2.26)

t 0.70 t 0.74 t 1.17

Students responded to the rst ve questions on a scale from 1 to 10, with 10 representing most helpful. Students responded to the last question on a scale from 1 to 10, with 10 representing most likely. The cell amounts represent the mean response, with the standard deviation of the responses in parentheses. A one-way analysis of variance testing for differences in mean response across questions was not signicant at the 0.05 level. The far-right column represents the t-test of differences in mean response by question between the executive M.B.A. students (E.M.B.A.) and the part-time M.B.A. students (P.T.M.B.A.). The t-statistics are computed assuming unequal variances. None of these differences between student groups were signicant at the 0.05 level.

Issues in Accounting Education, November 2009

An Analysis of Southwest Airlines

551

disclosures provided in the rms 10-Ks/annual reports. As such, the case should be useful in fostering favorable student learning outcomes in business thinking, accounting measurement, reporting and communication, and problem solving. Consistent with this conjecture, we nd that the case is well received by M.B.A./E.M.B.A./MS-Accountancy students, especially those who are simultaneously completing course work in strategic management. TEACHING NOTES Teaching Notes are available only to full-member subscribers to Issues in Accounting Education through the American Accounting Associations electronic publications system at http://aaapubs.aip.org/tnae/. Full-member subscribers should use their usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. If you are a full member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters ofce at ofce@aaahq.org or (941) 921-7747.

REFERENCES
American Institute of Certied Public Accountants. 2007. Core Competency Framework. Available at: http: / / ceae.aicpa.org/ Resources/ EducationandCurriculumDevelopment / CoreCompetencyFrameworkandEducationalCompetencyAssessmentWebSite/ . Banker, R. D., S. Datar, and R. Kaplan. 1989. Productivity measurement and management accounting. Journal of Accounting, Auditing and Finance 4 (4): 528554. Dikolli, S. S., and K. L. Sedatole. 2004. Deltas new song: A case of cost estimation in the airline industry. Issues in Accounting Education 19 (3): 345358. Horngren, C. T., S. M. Datar, and G. Foster. 2006. Cost Accounting. 12th edition. Upper Saddle River, NJ: Pearson Education. Sopariwala, P. R. 2003. Strategic analysis of operating income: An extension to Horngren, Foster, and Datar. Journal of Accounting Education 21 (1): 2542. Southwest Airlines. 20032007. Form 10-K Annual Reports to shareholders; Form 8-K Current Reports. Available at: http: / / www.southwest.com / investor relations / fs sec lings.html.

Issues in Accounting Education, November 2009

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.