Southwest Airlines Case Study

BAM 479-OC: Strategic Management

Siena Heights University

Nicole Cornstubble
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INTRODUCTION

Southwest Airlines began operation on March 9, 1967, which provided air transportation

in the United States and near-international markets. The company originally had a vision to fly to

three different cities, Dallas, Houston, and San Antonio. During this time the company offered

12 daily flights for tickets costing $20 one-way. The company had one moto, “No frills and

love.” During this time, the company had only four aircrafts but by the early 1980’s, the

company had expanded its service to multiple states. By the early 1990’s, the company had 94

aircrafts serving multiple states and cities across the United States. Today, Southwest airlines has

become the largest domestic airline in the United States by the number of the passengers that

they carry. Since Southwest began operation in 1967, the company has seen great success and

has been leading the industry one milestone at a time.

Table 1. Southwest Airlines Milestones

1971 Southwest begins flights to Dallas, Houston, and San Antonio from the idea of San Antonio’s lawyer, Herb
Kelleher.

1971 The “love airline” is born.

1972 Southwest sold one of its only four aircrafts to meet payroll deadlines. Employees made up for the lost aircraft by
starting the next flight within 10 minutes of landing.

1973 Southwest gains profitability over the next 36 straight years.

1979 Southwest begins service in New Orleans.

1982 Southwest begins service to California.

1985 Begins service to Chicago’s Midway Airport and acquires a competitor, Muse Air.

1989 Southwest’s annual revenue passes $1 billion.

1993 Expands service to the East Coast and into the Pacific Northwest.

1996 Expands service to Florida.

1996 Online booking site is launched

2002 Begins new rules that required boarding passes with passenger’s names.

2005 Begins selling travel to Hawaii and other places aboard

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The above milestones show that Southwest Airlines has had a long journey to become

what it is seen as today. These milestones were a success because of the time and effort put in to

create and uphold the vision and mission that the company had.

CASE STATEMENT

Southwest Airlines faces an extremely competitive market with fierce fuel prices, a high

demand for innovative technology, a shortage of differentiated aircrafts, and high customer

expectations.

MISSION STATEMENT EVALUATION

Southwest Airlines vision is, “To become the world’s most loved, most flown, and most

profitable airline.” The company’s purpose is, “To connect people to what’s important in their

lives through friendly, reliable, and low-cost air travel.” The company’s mission is, “The mission

of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a

sense of warmth, friendliness, individual pride, and Company Spirit.” Both the vision and

mission statements show what the company wants to become in the future and not what it

embodies currently. After doing the evaluation matrix on the mission statement itself, it is shown

that Southwest Airlines mission statement doesn’t meet all the requirements for a good

statement.

Table 2. Mission Statement Evaluation Matrix

Customers Products/Services Markets Technology Concern for Survival, Growth, Profitability

Yes No No No Yes
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Philosophy Self-Concept Concern for Public Image Concern for Employees

Yes Yes Yes No

Table 2 shows that Southwest Airlines doesn’t meet all the requirements for a strong

mission statement. The mission statement provides concern for their customers, for survival,

growth, and profitability of the company, philosophy, self-concept, and the concern for the

public image of the company. The concern for their customers is shown in the mission by

showing that they want to achieve the highest customer service. The concern for survival,

growth, and profitability of the company is shown within the company’s vision statement. The

company’s self-concept is that they want to satisfy their customers by providing a warm and

friendly atmosphere. Their concern for their public image is seen when they state in their vision

statement that they want to be the most loved, flown, and profitable airline. Southwest Airlines

mission statement doesn’t include their products and services, the markets, technology, or

concern for their employees. Southwest Airlines may have not included their products and

services because they only product one major product which is their airline. They may not have

included their market or technology because they use the same as the other airlines in the market.

The concern for their employees should have been included to show people who are interested in

working for the company that they truly have compassion for the employees that work for them.

FINANCIAL ANALYSIS

After reviewing Southwest Airline’s Income Statement, it shows that the company has

had annual revenues that have continuously grown in the past five years with the biggest climb in

revenue being between the past two years. The company’s net income has also increased

annually and is currently at 3.50 billion. The financial ratios shown below in Table 3 were taken
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from Southwest Airline’s 2017 Income Statement and Balance Sheet. These financial ratios tell a

story of how the company is doing regarding its financials.

Table 3. Analysis of Financial Ratios

Ratio 2014 2015 2016 2017 Industry Average

Current Ratio 0.66 0.54 0.66 0.70 0.51
Quick Ratio 0.74 0.54 0.65 0.69 0.36
Fixed Asset Turnover 2.43 2.29 1.93 1.88 N/A
Total Asset Turnover 0.94 0.93 0.87 0.84 N/A
Debt to Equity Ratio 0.44 0.45 0.46 0.49 1.09
Return on Sales 2.06 1.90 1.67 1.00 N/A
Return on Assets 5.76% 10.23% 9.64% 13.89% 6.91%
Return of Equity 16.77% 29.64% 26.58% 36.18% 32.45%
Earnings per share 1.55 1.43 1.54 1.87 6.04
P/E Ratio 25.14 12.95 13.90 11.28 10.49
Derived from MSN.Com, LUV Annual Reports, and Morningstar

Financial Strengths and Weaknesses

As shown in Table 3, Southwest Airlines ended the 2017 year with financial figures

being relatively good. The company did a well job staying above or close to the industry average

in almost all areas. The year 2017 was a continued strong year with regards to earnings. 2017

marked the company’s 45th consecutive year of profitability. Even with the numerous

environmental disasters like wildfires, hurricanes, and earthquakes, the company still managed to

increase the stock price of an approximate 30 percent and the net income was record setting with

$3.5 billion. The strong financial status was due to multiple factors like deploying a new

reservation system in May of 2017, launching service to several new destinations which includes

Cincinnati, Grand Cayman, and Turks and Caicos. Southwest Airlines also launched

international service to Belize, Cancun, Montego Bay, and San Jose (2017 Annual Report, p.82).

Working Capital

When looking at the data from 2014, Southwest Airlines has a working capital of

Dividend Payouts
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Southwest Airlines has paid out dividends every year for the past four years. The

company has had a loss every year because they are paying out in dividends. In 2014 the

company paid $0.21 in dividends and in 2017 the company paid $0.49 in dividends which is

extremely high considering that is a quarter more than in 2014 (Southwest, 2017).

Investor and Stockholder Relations

Southwest Airlines and their investors and stockholders have a good relationship. The

company continues to make sure that they pay out dividends and keeps the relationships in tact

by giving them annual reports and communicating through emails.

Capital Budgeting

Southwest Airlines has decent capital budgeting procedures. The company tries very hard

to keep its ratios in good standings compared to their industry average. Southwest Airlines has

slowly continued to raise their debt to equity ratio that has helped to improve the company’s

capital budgeting issues throughout each year.

Raising Short-Term Capital

Southwest Airlines is able to and can keep pushing in the right direction and raise capital

through debt. The company is just upgraded their credit rating score from a triple-B to a triple-B-

plus within the past year which proves that Southwest Airlines is moving in the correct direction

to success within their business (Stone, 2017).

Raising Long-Term Capital

Southwest Airlines will need to use better debt financing to raise the necessary capital

that it needs to keep becoming more successful throughout the years to come.

Financial Managers
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Southwest Airlines has many great financial managers that are not only experienced but

have the proper training to be successful as leaders within the industry. Each of the following

people are publicly given on Southwest Airlines Investor Relations website. Gary Kelly is the

Chairman of the Board and Chief Executive Officer of Southwest Airlines. Gary has been with

the company for the past 31 years and has served numerous important roles. He has been

awarded many different awards and just recently in 2014 was named Fortune magazine’s Top 20

People in Business. Tom Nealon is the President of the company and during his role with

Southwest Airlines, he has been responsible for the Finance, Technology, Corporate Delivery,

Commercial, and Strategy & Innovation Departments. Tom has a BSBA and an MBA from the

University of Dallas and Villanova University. Mike Van de Ven is the company’s Chief

Operating Officer. He has been with Southwest Airlines since 1993 and has been in various roles

throughout his career. Mike has a BBA from the University of Texas and is a Certified Public

Accountant.

The company has many employees that are all highly qualified and have many years in

the industry in which they work. The executives have enough experience and qualifications to

lead the company to long-term success.

EXTERNAL FACTOR EVALUATION

There are many external factors that have a major impact on the success of Southwest

Airlines. The External Factor Evaluation Matrix below provides information regarding the key

opportunities and threats that hinder or help Southwest Airlines ability to improve and grow.

Table 4. EFE Matrix

Key External Factors Weight Rating Weighted Score

Opportunities
1. Growth of Hispanic and elderly markets 0.05 3 0.15
2. International markets 0.10 4 0.40
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3. Increases in air travel 0.03 2 0.06

4. Use of the Internet for services 0.07 3 0.14
5. Innovative technology 0.08 3 0.24
6. Offer business travel options 0.07 4 0.19
7. Potential employees with large skill sets 0.05 2 0.15
8. Increase travel experience 0.06 4 0.16
Threats
1. Airline taxes 0.04 3 0.12
2. Airline pollution 0.04 3 0.12
3. Increased competition 0.06 3 0.2
4. Market segmentation 0.03 3 0.1
5. New government regulations 0.05 2 0.1
6. Increases in fuel prices 0.10 4 0.4
7. No frills 0.02 1 0.0
8. Online ticket reservation systems from competitors 0.02 2 0.0
9. Decline of travel due to terrorism 0.10 4 0.4
10. Operations – booking services 0.03 1 0.0
TOTAL 1.00 2.99

The opportunity of growth within the Hispanic and elderly markets is a major key

external factor that could help Southwest Airlines regarding its potential growth. The factor

carries a weight of 0.05 because the Hispanic and elderly population is a huge market that

Southwest Airlines hasn’t focused on. This factor was given a rating of a 3 because it is a factor

that is important for the growth of the company. Management should interpret total weighted

score as being one factor to consider when looking for opportunities.

International markets are of major important when looking at Southwest’s potential for

success. Currently, Southwest hasn’t expanded their services internationally and by doing this

they would gain a lot of extra profit. This external factor carries a weight of 0.10 because of the

market size that it brings. The factor was given a rating of a 4 because it is a factor that is

important for the growth of the company. Management should interpret the total weighted score

as being a factor that is the most crucial to their success.

Increase in air travel are another key external opportunity because the more people that

are travelling, the more revenue the company is going to bring in. This factor carries a weight of

0.03 and a rating of a 2 because it is a factor to consider when looking at growth and opportunity
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for Southwest Airlines. Management should interpret the total weighted score as being a factor to

consider but not one of the highest factors to worry about currently.

The increase usage for airline services is a key external opportunity because people want

to shop for flights in a convenient manner. The potential for Southwest to gain more customers

by ramping up their online services is huge considering they have few currently. This factor

carries a weight of 0.07 and a rating of a 3 because it is a factor that needs to be considered when

looking at the different opportunities that the company has. Management should interpret the

total weighted score as being a factor that needs urgent attention to help their customers.

Innovative technology is a key external factor to consider because Southwest Airlines

could change the airline industry by developing different tools, software, and equipment to help

gain more attention to their company and brand. This factor carries a weight of 0.08 and a rating

of a 3 because the company has a lot of potential to create different ideas. Management should

interpret the total weighted score as being a factor that needs urgent attention because of the

potential growth that the company could gain from development of new services and products.

Offering business travel options is another external factor to consider because the airline

could gain more people that travel frequently. This would help the company because these

travelers would use their company frequently and thus help Southwest Airlines. The key external

factor carries a weight of 0.07 and a rating of a 4 because business travelers bring in huge

revenue to the airlines. Management should interpret the total weighted score for this factor as

being a factor that needs attention due to the potential revenue that the company could gain by

offering these services.

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Having employees with large skill sets is very important when looking at key external

factors within a company because the company wants to have well-rounded individuals

supporting it. This factor carries a weight of 0.05 and a rating of a 2 because having a dedicated

team of good working employees can make or break a company. Management should interpret

the total weighted score for this factor as being important regarding customer service

expectations and high-quality service.

Lastly, increased travel experience is a key external factor because the more places that

Southwest Airlines can service, the more travel experience the company can gain. The factor

carries a weight of 0.06 and a rating of a 4 because of the importance when looking at expanding

the company to different areas of the world. Management should interpret the total weighted

score for this factor as a higher priority due to potential growth.

Airline taxes are a major key external threat because they are high. Recently, there have

been proposals to raise taxes to reduce the federal deficit, improve immigration, improve

airports, and reduce the wait time for processing. The threat carries a weight of 0.04 and a rating

of a 3 because this is a key threat, but it isn’t as important as the others and there isn’t anything

that can be done about it. Management should consider the total weighted score for this factor as

a low priority.

Airline pollution is another key external threat because reducing the jet fuel usage causes

higher spending on greenhouse gases. This factor carries a weight of 0.04 and a rating of a 3

because this factor is one that needs to be considered when trying to eliminate costs.

Management should consider the total weighted score for this factor to be a lower priority but

one to consider when looking at cutting costs.

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Increased competition is a key factor because airlines have long commitments and the

more of them that are around, the less customers will use Southwest Airlines. This factor carries

a weight of 0.06 and a rating of a 3 because this is a factor to consider when looking at the

growth of the company. The company must make sure that it is doing everything to beat out its

other competitors within the market. Management should interpret the total weighted score as a

higher priority because the more the company can do to make their brand more appealing and

popular, the more revenue it will bring in.

Market segmentation is an external threat because currently Southwest Airlines doesn’t

have market segmentation on its aircrafts. Market segmentation is classified as coach, first class,

and business class. The weight for this factor is 0.03 and the rating is a 3 because this is a key

factor to consider but not as important to the success of the company as others. Management

should interpret the total weighted score of this factor to be important but not a big enough factor

to consider first.

New government regulations is a key threat because they are always changing and can

hinder what exactly the airlines can and can’t do. This key external factor carries a weight of

0.05 and a rating of a 2 because it is a very important factor to consider but there is nothing that

Southwest can do to change the regulations. Management should interpret the total weighted

score for this factor to be a priority when looking at different options for the company but know

that it is one that the company can’t change.

Increases in fuel prices are a key external threat because the higher the fuel costs are, the

more money it is going to cost the company and the more revenue the company will have to

bring in. The factor carries a weight of 0.10 and a rating of a 4 because this is crucial to the

success of the company. The company will have to have a very specific budget to make sure they
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have enough money for fluctuating fuel prices. Management should interpret the total weighted

score as being a high priority when looking at the success of the company.

Having no frills is a key factor to consider because many passengers like having the

added frills when flying. Southwest doesn’t currently have any frills like movies to watch on the

aircraft. This is very dissatisfying for customers when they are travelling a longer distance. The

factor carries a weight of 0.02 and a rating of a 1 because the frills are something that would help

generate more profits but gaining more customers, but they also would cost the company.

Management should interpret the total weighted score for this factor to be a low priority when

looking at various factors to change.

Online ticket reservations from competitors is a key external threat because many of

Southwest Airlines competitors have a system for this. Southwest doesn’t have a system to

reserve tickets which creates a hassle for its customers when looking to book a flight with the

company. The factor carries a weight of 0.02 and a rating of a 2 because although it is an

important factor to consider, it is not on the top of the list. Management should interpret the total

weighted score for this factor to be a lower priority than most.

The declines in travel due to terrorism is a major external threat to consider when looking

at the success of Southwest Airlines because many people are nervous to travel anymore which

makes it difficult to gain profits. The factor carries a weight of 0.10 and a rating of a 4 because

this should be a very high priority to consider when looking at revenue and growth for the

company. Management should interpret the total weighted score for this factor to be at the top of

their list when it comes to priorities.

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Lastly, Southwest’s operations should be considered when looking at the key external

factors because the online booking system for the company is nonexistent. Customers can only

book their flights through Southwest Airlines website. The factor carries a weight of 0.03 and a

rating of a 1 because this is a factor to consider when looking at the growth of the company, but

it isn’t a major factor. Management should interpret the total weighted score for this factor to be

a low priority.

Overall, the EFE Matrix shows that Southwest Airlines is doing well with balancing both

the opportunities and the threats of the industry. Southwest Airlines scored 2.99 out of a total

possible score of 4.0, which means that they are doing a very good job with the different external

factors that they have to deal with. Another way to analyze external factors is to use Porter’s Five

Forces Model of Competition.

Porter’s Five Forces Model of Competition

Porter’s model is used to look at the five forces that are affecting or that can affect the

competition in the industry. Below are the five forces that are affecting or that can affect the

competition in the industry.

1. New competitors

2. Competition among each airline

3. Supplier Power

4. Buyer Power

5. Threat of Substitutes and Complementarities

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The possibility of new competitors is not a threat to Southwest Airlines currently. The

possibility of new competitors isn’t much of a threat because of the existing companies in the

airline industry being so huge already and the costs of starting a new airline are tremendous.

The competition among each airline makes each airline must work extremely hard to

keep customers coming in and maintaining a profit. The competition among each airline may be

tough but because Southwest Airlines is already the largest and best airline in the United States,

the company’s other competition isn’t going to create much of a hassle for them.

The power of suppliers in the airline industry huge due to the fact that the airlines are

always needing three things, fuel, labor, and aircrafts. The prices of all three of these factors are

quite large and these suppliers are always going to be in demand for the industry (MSG, n.d.).

The power of buyers is at an all-time high due to the fact that the entry of low cost

carries, and the prices have helped the customers fly in an easier way. The buyers can use

different ways to find the best prices in the industry which means that they don’t need to do a

whole lot to find the best prices due to the multiple different channels that they have to find

tickets (MSG, n.d.).

Lastly, the threat of substitutes and complementarities to the airline industry is not

actually a threat at all. Customers don’t take the train or bus to get to places anymore. People

would rather get to their destinations quicker which means that they would rather fly. This is

good for the airline industry because that means that more people will choose to fly and more

profits will be brought in for growth (MSG, n.d.). Doing an internal assessment will show if the

company is successful in other areas.

INTERNAL FACTOR EVALUATION

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There are many internal factors that have a major impact on the success of Southwest

Airlines. The Internal Factor Evaluation Matrix below provides information regarding the key

strengths and weaknesses that hinder or help Southwest Airlines ability to improve and grow.

Table 5. IFE Matrix

Key Internal Factors Weight Rating Weighted Score
Strengths
1. High capacity usage 0.05 3 0.15
2. More departures than any other US airline 0.10 4 0.40
3. Profitability 0.06 4 0.24
4. Low-cost, efficient operation 0.10 4 0.40
5. One basic type of aircraft – Boeing 737 0.08 4 0.32
6. Diverse, upper management 0.05 3 0.15
7. Very high safety record 0.05 4 0.20
8. Introduce higher priced options 0.05 3 0.15
9. Good relationship with its unions 0.02 4 0.08
10. Encourage a fun atmosphere 0.03 3 0.09
Total 2.18
Weaknesses
11. Most employees are union 0.02 2 0.04
12. Only one seat class is offered 0.02 2 0.04
13. Can carry a small amount of cargo 0.03 1 0.03
14. Few morning flights offered 0.03 3 0.04
15. No flights to international destinations 0.10 1 0.10
16. Booking flights is only available through Southwest Airlines 0.10 1 0.10
17. No videos on plane, lounges, etc. 0.03 3 0.05
18. Dependent on one type of aircraft – Boeing 737 0.08 1 0.08
0.47
TOTAL 1.00 2.42

Southwest Airlines has a very high capacity usage which is a key internal factor because

for the company to continue to gain revenue, the company needs to have aircrafts that have filled

seats. This key internal factor carries a weight of 0.05 and a rating of a 3 because the importance

of getting more customers on the aircrafts is huge when looking at profitability. Management

should interpret the total weighted score for this factor to be important and one to keep looking at

periodically.

Having more departures than any other United States airline is a key factor because it

shows people that the company is thriving and that the company is growing rapidly. This factor

carries a weight of 0.10 and a rating of a 4 because it is very important to keep this alive.
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Management should interpret the total weighted score for this factor to be a major factor to

consider when looking at the growth and well-being of the company.

Profitability is a key internal factor because the more profits that the company generates,

the best the company will do and the easier it will be to surpass the competitors. The factor

carries a weight of 0.06 and a rating of a 4 because it is a major factor to check when

determining the next steps for the company. Management should interpret the total weighted

score for this factor as being highly important for the success of the company.

Having a low-cost, efficient operation is a key internal factor for Southwest Airlines

because this means that the company is focused on saving money and not just spending money.

The factor carries a weight of 0.10 and a rating of a 4 because this is the most important factor

when looking at the success of the company. Management should interpret the total weighted

score for this factor as being the highest priority.

Having just one basic type of aircraft which is the Boeing 737 is a key internal factor

because it means that the employees are getting easy training and it isn’t costing the company as

much to train them. The factor carries a weight of 0.08 and a rating of a 4 because this is an

important factor to consider when looking at costs. Management should interpret the total

weighted score as being high because it is key to the success of the company and key to spending

and saving methods.

Having diverse, upper management is another key internal factor for Southwest Airlines

because it shows that the company has good people working for it. The factor carries a weight of

0.05 and a rating of a 3 because it is important but currently the company doesn’t need to

investigate it because everything is running smoothly. Management should interpret the total
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weighted score for this factor to be of importance but not a factor that should be considered

currently.

Southwest Airlines has a high safety record which is another key internal factor because

customers want to know that the aircrafts that they are travelling on are safe. More customers are

drawn to airlines that have a high safety rating than companies with a low safety rating. The

factor carries a weight of 0.05 and a rating of a 4 because it is very important to customer

satisfaction and to its employees travelling on the aircraft as well. Management should interpret

the total weighted score for this factor to be one of the highest priorities.

Introducing higher priced options is a key internal factor for Southwest Airlines because

it is an opportunity to generate more revenue. Higher priced items can carry a major benefit to a

company when looking at gaining more profits. The factor carries a weight of 0.05 and a rating

of a 3 because although it is important, the factor isn’t a major priority. Management should

interpret the total weighted score for this factor as lower due to customer satisfaction.

Having a good relationship with its unions is a key factor for the company because the

union is where many of the employees work out of. Making sure there is a good working

relationship is crucial to the success of the business because without employees the company

can’t thrive. The factor carries a weight of 0.02 and a rating of a 4 because it is crucial to the

success of the business. Management should interpret the total weighted score for this factor to

be a higher priority than most.

Lastly, encouraging a fun atmosphere for both its employees and customers is a key

internal factor because it shows that the airline cares about customer and employee satisfaction.

The factor carries a weight of 0.03 and a rating of a 3 because it is important when looking at
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gaining more employees and customers. Management should interpret the total weighted score

for the factor to be a higher priority than most but not one to consider currently.

Having many employees that are in a union is a key internal weakness for Southwest

Airlines because the company must have a good relationship with the union and must obey all of

the laws and rules that the union has. This factor carries a weight of 0.02 and a rating of a 2

because it is key, but it isn’t a high priority. Management should interpret the total weighted

score to be a factor to consider but not a high priority.

Southwest Airlines only offers one seat classification which is another key internal

weakness. Having only one seat classification can hinder the success of the company because

some people want to travel as a business class which means that they want the perks of doing so.

This factor carries a weight of 0.02 and a rating of a 2 because although it is important,

Southwest hasn’t been hindered by this. Management should interpret the total weighted score

for this factor to be of importance but not one to consider currently.

Southwest’s aircrafts can only carry a small amount of cargo and freight which is a

concern for most people travelling throughout the country. Having a small amount of space

means that customers must travel lightly, and most people aren’t accustoming to doing so. This

factor carries a weight of 0.03 and a rating of a 1 because it is not a huge priority when looking at

the different key factors to consider. Management should interpret the total weighted score for

this factor as being slightly important when looking at creating bigger aircrafts.

Southwest Airlines only offers a few morning flights which a key internal weakness is

because many people like to travel in the morning. People like to travel in the morning because it

gets them to their destinations faster and creates less stress throughout the day. The factor carries
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a weight of 0.03 and a rating of a 3 because it is a factor to consider when looking at changing

flights and offering more times to make travelling more convenient for the company’s customers.

Management should interpret the total weighted score for this factor to be higher than most.

Having no flights available to international destinations is a major internal weakness for

Southwest Airlines because many people travel to international destinations and it is becoming

more popular. Not having this option reducing the company’s market by almost half of what it

could be if they offered this option. The factor carries a weight of 0.10 and a rating of a 3

because it is very important that the company start doing this or they will lose revenue in the

future. Management should interpret the total weighted score for this factor to be the highest

priority due to the revenue that they could gain.

The only way to book a flight is through Southwest Airlines which is a internal weakness

because travel agents are becoming more popular and not having this option hinders the amount

of customers that the company could receive. The factor carries a weight of 0.10 and a rating of a

1 because this is a high priority that is crucial to the success of the company. Management should

interpret the total weighted score as a high priority that needs attention.

Having no options for videos, lounges within the airports, etc. is a key internal factor

because many people like an airline that has convenience and relaxing ways to help with

satisfaction. The factor carries a weight of 0.03 and a rating of a 1 because it is important to the

company, but it hasn’t hindered their profits currently. Management should interpret the total

weighted score for this factor as being important but could be looked at later.

Lastly, being dependent on only one type of aircraft which is the Boeing 737 is a key

internal weakness because there is only one option available for all customers and employees.
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Having only one option isn’t ideal when looking at trying to fill seats and gain the most customer

that the company can get. The factor carries a weight of 0.08 and a rating of a 1 because it is very

important for the company to experience new aircrafts and get more options. Management

should interpret the total weighted score for this factor to be important when looking at the

growth of the company.

Overall, the IFE Matrix shows that Southwest Airlines is doing well with balancing both

the opportunities and the threats of the industry. Southwest Airlines scored 2.42 out of a total

possible score of 4.0, which means that they are doing a very good job with the different external

factors that they have to deal with.

SWOT ANALYSIS

Southwest Airlines has become the largest domestic airline within the United States

today. The company’s main opportunities are growth to international markets, innovative

technology, and use of the Internet for services. The airlines major threats are the decline in

travel due to terrorism, increases in fuel prices, and increased competition. Southwest Airlines

key internal strengths are more departures than any other United States airline, low-cost, efficient

operations, and high capacity usage. The airlines major weaknesses are having no flights to

international destinations, booking flights is only available through Southwest Airlines, and

dependent on only one type of aircraft which is the Boeing 737.

MATCHING STRATEGY TO INTERNAL AND EXTERNAL CONDITIONS

Table 6. SWOT Matrix

STRENGTHS – S WEAKNESSES – W

1. High capacity usage 1. Most employees are union

2. Only one seat class is offered
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2. More departures than any 3. Can carry a small amount of

other US airline cargo
3. Profitability 4. Few morning flights offered
4. Low cost, efficient operation 5. No flights to international
5. One basic type of aircraft – destinations
Boeing 737 6. Booking flights is only
6. Diverse, upper management available through Southwest
7. Very high safety record Airlines
8. Introduce higher priced 7. No videos on plane, lounges,
options etc.
9. Good relationship with its 8. Dependent on one type of
unions aircraft – Boeing 737
10. Encourage a fun atmosphere

OPPORTUNITIES – O SO STRATEGIES WO STRATEGIES

1. Growth of Hispanic and 1. Develop different aircrafts for 1. Offer better travel options.
elderly markets travel. (O3, O5, O8, S5, S3) (W2, W3, W4, W5, W6, O2,
2. International markets O3, O4, O5, O6, O8)
3. Increases in air travel 2. Explore aircraft options that
4. Use of the Internet for hold cargo. (W3, W8, O3,
services O5, O7, O8)
5. Innovative technology
6. Offer business travel options
7. Potential employees with
large skill sets
8. Increase travel experience

THREATS – T ST STRATEGIES WT STRATEGIES

1. Airline taxes 1. Hire and train people to be 1. Explore competition airline

2. Airline pollution innovative and creative. (S6, frills. (W7, T3, T7)
3. Increased competition S9, S10, T3) 2. Provide tools for companies
4. Market segmentation 2. Use technologic employees to to develop better booking
5. New government regulations produce cost competitive services. (W2, W4, W6, T3,
6. Increases in fuel prices aircrafts. (S1, S2, S3, S4, T3, T8, T10)
7. No frills T4)
8. Online ticket reservation
systems from competitors
9. Decline of travel due to
terrorism
10. Operations – booking
services

SO

Southwest Airlines has had a very successful operation with having to worry about only

one type of aircraft. Southwest Airlines hasn’t had to worry about creating any new aircrafts or

train any of their employees on building and maintaining any other aircrafts. The problem with

having only one type of aircraft is that there is no room for the company to grow. The company
 Southwest Airlines 22

needs to have other options to create innovative employees who have a strong skill set for future

growth.

WO

So far, Southwest Airlines has very little travel options for its customers. Southwest

Airlines offers very few morning flights, they offer no international flight options, and the

company offers only one seat class option. Southwest Airlines would benefit from having more

options to travel to create more profits and growth for the business. The company could increase

their international market which is none existent. The company could also increase their air

travel and air travel experience by offering more options as well. This increase will help all

customers involved with the company.

Currently, Southwest Airlines only has the Boeing 737 aircraft which doesn’t hold very

much cargo. Not having a lot of space for much cargo creates difficulty for many customers and

makes it difficult to transport other goods to and from their destinations. Southwest Airlines will

have better options for increased air travel and by having strong skilled employees will make it

easier to create other aircrafts that can carry more cargo.

ST

Southwest Airlines has always had many employees that have been working for them for

a very long time. These employees are part of the union which has a very strong and good

relationship with the airline company. Southwest Airlines has always encouraged a strong

atmosphere. Due to the company’s increased competition, the company needs to come up with

ways to hire new all-around employees who are creative and innovative to help with growth and

creation of new products and services.

 Southwest Airlines 23

Southwest Airlines has never had to worry about having many different diverse

employees because the company has always only had one aircraft to create. The employees that

are newly brought into the company need to be more technological efficient so that they can

create and produce cost efficient aircrafts. These cost-efficient aircrafts will be able to save the

company a lot of money and help with business growth.

WT

Southwest Airlines has never had any perks that the other airlines have like for instance,

lounges in their airports or televisions on their aircrafts. This company doesn’t offer any frills

with their company like these listed and due to this the company is suffering from their increased

competition. Southwest Airlines should explore other airlines that have these perks and do

research on what these could do for their customer’s experience.

Lastly, the company has only ever had one way to book their flights which has been to go

onto Southwest Airlines website and book them this way. In order for the company to grow and

compete with its competition, the company will need to create better booking services by using

innovative strategies.

Table 7. QSPM Matrix

STRATEGIC ALTERNATIVES
Better Increase Produce
Booking Customer Other
System Frills Aircrafts
KEY FACTORS Weight AS TAS AS TAS AS TAS
Opportunities
Growth of Hispanic and elderly markets 0.05 3 0.15 3 0.15 - -
International markets 0.10 4 0.40 - - 2 0.20
Increases in air travel 0.03 2 0.06 4 0.12 4 0.12
Use of the Internet for services 0.07 3 0.21 4 0.28 - -
Innovative technology 0.08 3 0.24 3 0.24 4 0.32
Offer business travel options 0.07 4 0.28 3 0.21 3 0.21
Potential employees with large skill sets 0.10 - - - - 4 0.20
Increase travel experience 0.06 4 0.18 4 0.24 3 0.18
Threats
Airline taxes - - - - - - -
Airline pollution 0.04 - - - - 3 0.12
 Southwest Airlines 24

Increased competition 0.06 3 0.18 4 0.24 4 0.24

Market segmentation 0.03 3 0.09 4 0.12 3 0.09
New government regulations 0.05 - - - - 4 0.20
Increases in fuel prices 0.10 - - 2 0.20 4 0.40
Online ticket reservation systems from competitors 0.02 2 0.04 4 0.08 - -
Decline of travel due to terrorism 0.10 4 0.40 - - - -
1.00

Strengths
High capacity usage 0.08 4 0.32 4 0.32 - -
More departures than any other US airline 0.10 4 0.40 4 0.40 - -
Profitability 0.10 4 0.40 4 0.40 3 0.30
Low-cost, efficient operation 0.08 4 0.32 4 0.32 4 0.32
One basic type of aircraft-Boeing 737 0.07 - - - - 4 0.28
Diverse, upper management 0.02 3 0.06 3 0.06 4 0.08
Very high safety record 0.06 - - - - 4 0.24
Introduce higher priced options 0.07 2 0.14 3 0.21 2 0.14
Good relationship with its unions 0.02 - - 3 0.06 - -
Encourage a fun atmosphere 0.06 2 0.12 4 0.24 - -
Weaknesses
Most employees are union 0.02 - - - - - -
Only one seat class is offered 0.10 4 0.40 3 0.30 2 0.20
Can carry a small amount of cargo 0.08 - - 3 0.24 4 0.32
Few morning flights offered 0.08 4 0.32 3 0.24 2 0.32
No flights to international destinations 0.08 4 0.32 3 0.24 2 0.32
Booking flights is only available through website 0.08 4 0.32 3 0.24 2 0.32
No videos on plane, lounges, etc. 0.10 - - 4 0.40 2 0.20
Dependent on one type of aircraft 0.05 - - 2 0.10 4 0.20
1.00 5.35 5.65 5.52

RECCOMENDED SOLUTION

The first strategy is to propose a better system with regard to booking. Currently

Southwest Airlines has a booking system that isn’t user friendly to say the least. Southwest

recently received a $500 million upgrade of its outdated reservations system and it still has bugs

to be worked out. Southwest has seen at least five different technical outages since August of

2017 where it has blocked passengers and customers from accessing the company’s website to

check in or make a reservation (2018). This has created an extreme problem with customers and

booking flights. Even though this is a major problem, Southwest is already doing things to help

combat this issue and it isn’t the most effective option for long term success and growth

according to the QSPM Matrix.

 Southwest Airlines 25

The second strategy is to propose frills for their customers. With no meals, no TV’s, no

first class, and no presence on the Internet, Southwest Airlines has been doing a great job with

keeping their customers loyal. Southwest has always had to focus on the issues other than

amenities like keeping their employees happy which also snowballs down to keeping their

customers happy. Southwest has put in place many different perks that catch customer’s eyes

like for instance they don’t charge their customers to change a flight. Another perk to Southwest

Airlines is that your first two pieces of luggage are free. These two examples are just a glimpse

of what Southwest offers their customers as opposed to the other airlines but with every

company there are issues that could always help their success. Southwest could impose adding

frills for their customers like lounges, TV’s on their aircrafts amongst other amenities and I think

that it could make their company even more successful in the long run. Southwest could start

small and add different frills for their customers at a slow enough pace where they wouldn’t have

to hurt financially to do so. According to the QSPM Matrix this is the best option when looking

for long term success and growth for the company.

Southwest has always put their best business practices forward which is what keeps their

business looking so great. They continue to own every plane they have and they have continued

to do well with only one type of aircraft – the Boeing 737. Southwest has done great with having

only one aircraft because it has in turn reduced their maintenance costs with better purchasing

power for the parts and they also don’t have to train their staff on multiple different kinds of

aircrafts. This has reduced costs greatly and is a reason as to why it isn’t the most effective

option for long term success and growth.

Overall, all three of these potential strategies poses a great way for the company to

advance as opposed to its competitors but it also poses a great risk as well. Southwest Airlines
 Southwest Airlines 26

will have to be very careful to not spend their money in only one place if it is looking for long

term success and growth.

IMPLEMENTATION PLAN

There are many different things that Southwest Airlines needs to work through to

implement their strategy successfully. Southwest Airlines will have to look into strategies

regarding marketing, research, human resources, and financing in order to implement their

strategy of offering frills to their customers.

To be successful in implementing their strategy, Southwest Airlines will have to

successfully complete the following tasks:

Marketing

 Market the frills of Southwest Airlines so that potential customers see the efforts that the

company is making.

 Market frills by having sales on tickets so that customers can try out the frills

Research

 Research other airlines to gain ideas on what Southwest should offer their customers

Human Resources

 Ensure there are enough employees involved in the implementation plan

Financing

 Obtain the funding to market the frills to customers

 Obtain the funding to approve the frills

The biggest and hardest part of the implementation plan will be the marketing aspect of the

plan. The company has to first create a strategy on how they will market the new and upcoming

frills that Southwest Airlines is going to offer. There are many frills that the other airlines
 Southwest Airlines 27

already offer to their customers so Southwest Airlines will have to show their customers why

they should choose their company instead. The marketing of the numerous frills should be

carried out at a level where the employees are involved and involving the customers as well.

Visits from upper management and the executive team should occur to facilities to show the

ability and professionalism of the company when implementing different projects. This step of

the marketing strategy will cost around $150 million.

Once Southwest Airlines has decided on which frills they will offer and use, the company

will have to persuade their customers and potential customers to choose their company over the

competition.

The managers and the executive team who have visited the other competition within the

airline industry will have to come back and gather their ideas on what types of frills they want to

offer for the best prices through their extensive research. Southwest Airlines has always been

able to be successful without the frills, but the airline industry is ever changing, and the

importance of these frills is at an all time high now. The research will cost $200 million.

To ensure that the marketing and research phases of the implementation plan go well, the

right personnel will have to be involved in each phase. This phase will cost Southwest Airlines

$200 million.

Financing

To finance this strategy, Southwest Airlines can sell stock to raise the necessary capital;

take on more debt by borrowing; raise the majority by selling their shares. The EPS/EBIT

analysis shown in Table 8 below has been compiled using the following assumptions:

 Amount Required - $1 billion

 EBIT Range - $1.8 billion to $2.8 billion

 Southwest Airlines 28

 Interest Rate – 7%

 Tax Rate – 30%

 Stock Price - $70

Table 8. EPS/EBIT Analysis

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom
EBIT 1,800 2,300 2,800 1,800 2,300 2,800
Interest 0.00 0.00 0.00 0.07 0.07 0.07
EBT 1,800 2,300 2,800 1,674 2,148 2,625
Taxes 530 670 840 500 632 784
EAT 1,260 1,620 1,932 1,171 1,497 1,852
# of Shares 461 451 451 437 437 437
EPS 2.79 3.57 4.34 2.68 3.46 4.17

70% Stock – 30% Debt 70% Debt – 30% Stock

Recession Normal Boom Recession Normal Boom
EBIT 1,800 2,300 2,800 1,800 2,300 2,800
Interest 0.02 0.02 0.02 0.05 0.05 0.05
EBT 1,762 2,252 2,741 1,725 2,187 2,663
Taxes 529 676 822 514 676 785
EAT 1,234 1,576 1,925 1,192 1,526 1,852
# of Shares 447 447 447 441 441 441
EPS 2.76 3.53 4.29 2.72 3.47 4.22

After doing the analysis, it shows that Southwest Airlines should raise capital by

common stock financing.

Projected Financial Statements

Table 9 shows the projected Income Statement for the year 2019 which shows the

strategy of adding frills to Southwest Airlines.

Table 9. Pro-Forma Income Statement

Southwest Airlines 2019 Projected Income Statement

Financial data in U.S. dollars Dec-18 Dec-17 Dec-16
Annual Income Statement (Values in Millions)
Sales $23,421 $21,171 $20,425
Cost of Sales $14,239 $13,750 $12,930
Gross Operating Profit $7,426 $7,421 $7,495
EBITDA $4,628 $4,733 $4,981
Depreciation & Amortization -2,351 -2,688 -2,514
EBIT $3,164 $3,515 $3,760
Other Income, Net - - -
Total Income Avail for Interest Exp. - - -
Pre-tax Income $3,316 $3,251 $3,547
 Southwest Airlines 29

Income Taxes $2,735 $3,488 $2,244

Net Income from Cont. Operations $2,735 $3,488 $2,244
Net Income from Total Operations $2,735 $3,488 $2,244
Normalized Income $2,735 $3,488 $2,244
Total Net Income $2,735 $3,488 $2,244
Dividends Paid per Share 615 601 627
Basic EPS from Cont. Operations 4.35 5.80 3.58
Basic EPS from Total Operations 4.35 5.80 3.58
Diluted EPS from Cont. Operations 4.27 5.79 3.55
Diluted EPS from Total Operations 4.27 5.79 3.55
Source – MSN.com

Table 10, below, shows the impact of the strategy to add frills to Southwest

Airlines on the 2019 Balance Sheet.

Table 10. Pro-Forma Balance Sheet

Southwest Airlines 2019 Projected Balance Sheet

Financial data in U.S. dollars Dec-18 Dec-17 Dec-16
Annual Balance Sheet (Values in Millions)
Assets
Current Assets
Cash and Equivalents $3,273 $3,305 $3,551
Receivables - - -
Inventories 560 420 337
Other Current Assets - - -
Total Current Assets $4,981 $4,815 $4,498
Property, Plant, & Equipment, Gross $20,589 $18,539 $17,044
Accum. Depreciation & Depletion $16,526 $14,621 $11,418
Property, Plant & Equipment, Net - - -
Intangibles 970 970 970
Other Non-Current Assets 790 786 774
Total Non-Current Assets $22,152 $20,295 $18,788
Total Assets $27,352 $25,110 $23,286
Liabilities & Shareholder’s Equity
Current Liabilities
Accounts Payable - - -
Short Term Debt - - -
Other Current Liabilities $7,126 $6,905 $6,844
Total Current Liabilities $4,905 $4,710 $3,899
Long Term Debt 0 0 0
Deferred Income Taxes $710 $707 $728
Other Non-Current Liabilities - - -
Total Non-Current Liabilities $14,986 $14,680 $14,845
Total Liabilities $808 $808 $808
Shareholder’s Equity $808 $808 $808
Common Stock Equity $27,257 $25,110 $23,286
Total Equity
Total Liabilities & Stock Equity
Total Common Shares Outstanding
Source –
 Southwest Airlines 30

The projected statements look decent for Southwest Airlines. There are many parts of the

statements that have increased, and the expenses have decreased. Southwest Airlines ratios are

projected to also improve with this strategy. Table 11 shows the projected 2019 ratios.

Table 11. Pro-Forma Financial Ratios

Ratio 2018 2017 2016 2015 Industry Average

Current Ratio 0.75 0.70 0.66 0.54 0.51
Quick Ratio 0.72 0.69 0.65 0.54 0.36
Fixed Asset Turnover 1.83 1.88 1.93 2.29 N/A
Total Asset Turnover 0.82 0.84 0.87 0.93 N/A
Debt to Equity Ratio 0.51 0.49 0.46 0.45 1.09
Return on Sales 0.87 1.00 1.67 1.90 N/A
Return on Assets 15.85% 13.89% 9.64% 10.23% 6.91%
Return of Equity 39.28% 36.18% 26.58% 29.64% 32.45%
Earnings per share 1.93 1.87 1.54 1.43 6.04
P/E Ratio 10.78 11.28 13.90 12.95 10.49
Derived from MSN.Com, LUV Annual Reports, and Morningstar

The ratios have all stayed relatively the same with their patterns from year to year. The

Quick Ratio has steadily risen over the years along with the Debt to Equity Ratio. The ratios are

all within or below the industry average which is very good. Overall, the future projected ratios

look good for Southwest Airlines.

CONCLUSION

In conclusion, Southwest Airlines can be successful with implementing their strategy of

offering frills to their customers, but it will take a lot of challenging work, excellent marketing

strategies, and great financing to be successful. Creating frills for their customers is something

that Southwest Airlines addresses in their case statement by wanting to go above and beyond for

their customers. The higher costs are going to be a hurdle that they will have to jump over but

overall everything should be able to go as planned. With the right planning, marketing, and

financing, Southwest Airlines will be able to continue to be the top airline in the industry.

References
 Southwest Airlines 31

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Southwest Airlines 32