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Southwest Airline, based in States. Market Analysis 2009
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Southwest Airlines(2009)
Outstanding Service at the Lowest Fares
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Mission Statement (actual) 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.
Vision Statement (Proposed) At Southwest, we strive to be the new
generation of flight transportation while providing luxury at a price anyone can afford.
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Mission Statement (expanded)We are committed to quality service for the everyday person (1). Southwest provides air transportation to cities all around the United States (2, 3). We fly the most luxurious planes on the market with the latest technology money can buy (4). We competitively provide the lowest airfare price in search for the greatest advantage in today’s busy world (5). We provide the highest standards of safety for all our customers while still offering a reasonable price (6, 7). A portion of our proceeds are donated to various charities throughout the United States (8). Since our first flight in 1971, our employees have been the vital asset in making Southwest the most recognized airline today (9).
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Mission Statement Components
1. Customer
2. Product or services
3. Markets
4. Technology
5. Concern for survival, growth, profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees
5
Competitive Profile Matrix SouthWest
American United
Critical Success Factors Weight Rating Weighted Scor
e
Rating Weighted Score
Rating Weighted Score
Market SharePrice competitivenessFinancial PositionConsumer LoyaltyAdvertisingManagementSecurity PrecautionsOrganizational StructureCustomer Service
0.130.100.120.100.150.100.090.060.15
243444334
0.260.400.360.400.600.400.270.180.60
421243333
0.520.200.120.200.600.300.270.180.45
321222321
0.390.200.120.200.300.200.270.120.15
Total 1.00 3.47 2.84 1.95
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EFE Matrix-Opportunities Key External Factors
Weight
Rating
Weighted Score
Opportunities 1. There is an increased demand for international
travel. 0.10 1 0.10
2. There is a decline of 11 percent in airline companies with funding leading to used planes being able to be purchased.
0.01
1
0.01
3. Increased demand for cities that are currently without SW airline flights (Atlanta, New York, etc.)
0.10
1
0.10
4. Each year airline companies (Delta and Northwest in 2006) are declaring bankruptcy leaving more cities existing allowing more airlines to fly to.
0.05
1
0.05
5. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flights booked online.
0.03
4
0.12
6. Increase popularity with Visa check card purchases with reward points.
0.01 1 0.01
7. With an increase of nearly 3 million people in the US there is an expansion of developing cities across the United States.
0.01
2
0.02
8. Technology is increasing making older planes outdated.
0.03 2 0.06
9. Increased amount of upper level business travelers has led to greater demand for better seats.
0.01
1
0.01
10. Stock market has increased leading to more money to being spent on vacations or business affairs.
0.05
1
0.05
11. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off.
0.03
3
0.09
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EFE Matrix-ThreatsThreats 1. Specialization expertise of Jet Blue using one
plane model allows them to provide less expensive mechanics to maintain planes.
0.09
4
0.36
2. Jet Blue is the only airline to carry satellite televisions on planes.
0.04 1 0.04
3. Higher ticket taxes. 0.04 1 0.04 4. Increase in airport security due to possible
terrorism. 0.10 4 0.40
5. Many companies such as AirTran Airways are offering a business class in their B717 jet.
0.05 1 0.05
6. Competing airlines offer satellite radio in their passenger jets.
0.03 1 0.03
7. High cost of fuel leads to increase in ticket prices.
0.10 3 0.30
8. Studies in 2000 report that obese passengers cost airlines an extra $275 million in fuel costs.
0.03 1 0.03
9. Other airline companies offer in-flight meals adding luxury.
0.03 3 0.09
10. SW competitors are flying newer and more technologically advanced jets with luxury items.
0.06 1 0.06
TOTAL 1.00 2.02
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Ratios (12/07)
Growth Rates % Southwest Industry SP-500 Sales (Qtr vs year ago qtr) 9.50 14.50 8.30 Net Income (YTD vs YTD) 29.30 17.50 16.00 Net Income (Qtr vs year ago qtr) 96.50 28.20 6.60 Sales (5-Year Annual Avg.) 12.30 24.71 13.34 Net Income (5-Year Annual Avg.) 21.76 36.88 20.14 Dividends (5-Year Annual Avg.) 0.00 6.81 10.00 Price Ratios Current P/E Ratio 15.2 18.0 21.9 P/E Ratio 5-Year High 62.9 70.0 22.3 P/E Ratio 5-Year Low 13.6 27.0 5.9 Price/Sales Ratio 0.95 1.39 2.38 Price/Book Value 1.36 2.36 3.39 Price/Cash Flow Ratio 7.80 9.80 10.60
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Ratios (12/07) ContinuedProfit Margins Gross Margin 26.1 28.5 33.8 Pre-Tax Margin 10.7 12.2 17.5 Net Profit Margin 6.5 9.7 12.4 5Yr Gross Margin (5-Year Avg.) 28.4 27.7 33.5 5Yr PreTax Margin (5-Year Avg.) 9.4 12.3 16.8 5Yr Net Profit Margin (5-Year Avg.) 5.9 9.7 11.7 Financial Condition Debt/Equity Ratio 0.30 0.74 1.19 Current Ratio 0.9 1.2 0.9 Quick Ratio 0.9 1.2 0.7 Interest Coverage 31.6 44.7 43.3 Leverage Ratio 2.4 2.5 4.0 Book Value/Share 9.45 8.41 16.25
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Ratios (12/07) ContinuedInvestment Returns % Return On Equity 9.6 17.1 20.8 Return On Assets 4.3 5.9 5.8 Return On Capital 5.7 7.7 7.7 Return On Equity (5-Year Avg.) 7.8 12.8 14.5 Return On Assets (5-Year Avg.) 3.7 4.3 5.1 Return On Capital (5-Year Avg.) 4.8 5.5 6.8 Management Efficiency Income/Employee 18,762 51,840 37,696 Revenue/Employee 286,840 355,791 343,930 Receivable Turnover 36.9 44.5 9.5 Inventory Turnover 32.2 214.4 5.6 Asset Turnover 0.7 0.7 0.6
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Ratios (12/07) ContinuedDate Avg. P/E Price/Sales Price/Book Net Profit Margin (%) 12/07 17.60 0.95 1.29 6.5 12/06 27.20 1.39 1.86 5.5 12/05 24.70 1.75 1.97 6.4 12/04 55.80 2.00 2.31 3.3 12/03 30.00 2.23 2.52 7.4
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Ratios (12/07) ContinuedDate Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage 12/07 $9.45 0.30 9.3 3.8 11.5 12/06 $8.23 0.26 7.7 3.7 12.1 12/05 $8.33 0.30 7.3 3.5 8.7 12/04 $7.04 0.33 3.9 1.9 8.2 12/03 $6.40 0.30 8.7 4.5 8.3
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Net Worth Analysis (Year-end 2007)
1. Stockholders’ Equity + Goodwill = 6,941 + 0 $ 6,941 2. Net income x 5 = $645 x 5= $ 3,225 3. Share price = $13/EPS 0.84 =$15.47 x Net Income $645= $ 9,982 4. Number of Shares Outstanding x Share Price = 735 x $13 = $ 9,555 Method Average $ 9,900
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IFE Matrix-Strengths
Key Internal Factors Weight Rating Weighted Score
Strengths 1. Eighty-five percent hedge position on fuel. 0.10 4 0.40 2. RPM’s for 42.2 billion. 0.05 4 0.20 3. Thirty-one consecutive years of profitability. 0.05 4 0.20 4. Employee loyalty. 0.10 4 0.40 5. Excellent public image. 0.10 4 0.40 6. Long-term orientation. 0.02 4 0.08 7. Strong management team. 0.10 4 0.40 8. Thirteen billion in market value. 0.05 4 0.20 9. Three hundred and eighty-eight new jets. 0.05 3 0.15 10. Average age of jets is <10 years. 0.05 4 0.20 11. Fourth largest domestic airline. 0.03 4 0.12 12. Growth rate higher than industry. 0.10 3 0.30 13. 54 percent of revenues from SW Website. 0.03 3 0.09 14. Seventy-five percent of flights are E-tickets. 0.02 4 0.08
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IFE Matrix-Weaknesses
Weaknesses 1. SW has highest percentage of full-time employees
leading to increased overhead. 0.06 2 0.12
2. SW only flies one plane, the Boeing 737. 0.01 1 0.01 3. They will not fly outside the continental United States,
63 cities and 32 states. 0.10 1 0.10
4. Difficult to convince customers SW offers benefits other airlines do not.
0.01 2 0.02
5. Flying only 737s could lead to negative press if problems with that plane arise.
0.01 1 0.01
6. Does not accommodate for severely handicapped. 0.02 1 0.02 7. Large cities (Atlanta, Charlotte, etc) are without SW
service. 0.10 1 0.10
8. Does not provide a first class for passengers. 0.01 1 0.01 9. Do not provide assigned seating. 0.01 1 0.01 10. Only some 737s carry televisions. 0.01 2 0.02 11. SW does not offer any type of in-flight meals. 0.01 2 0.02 TOTAL 1.00 2.89
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SWOT Analysis-Strengths
1. SW has a larger market capital compared to others with $11.3 billion. 2. SW has all flights going to cities within the United States. 3. Use point-to-point flight system with no hubs one way. 4. Ability to determine cost/prices within the organization. 5. Leader in market capitalization. 6. Largest in US by the number of passengers carried yearly and 3rd in the
world. 7. One of the world’s most profitable and highest posted profits for 34
consecutive years. 8. In 2006 70 percent of flight bookings and 73 percent of revenue came from
bookings on Southwest’s website. 9. Low prices and relaxed atmosphere made it an icon. 10. First airline to have a webpage in 1995. 11. SW has 481 Boeing 737s jets. 12. Financially they purchase fuel options to hedge cost years in advance to
smooth market fluctuations.
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SWOT Analysis-Weaknesses
1. SW has highest percentage of full-time employees leading to increased overhead.
2. SW only flies one plane, the Boeing 737. 3. They will not fly outside the continental United States, 63 cities and 32 states. 4. Difficult to convince customers SW offers benefits other airlines do not. 5. Flying only 737s could lead to negative press if problems with that plane
arise. 6. Does not accommodate for severely handicapped. 7. Large cities (Atlanta, Charlotte, etc) are without SW service. 8. Does not provide a first class for passengers. 9. Do not provide assigned seating. 10. Only some 737s carry televisions. 11. SW does not offer any type of in-flight meals.
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SWOT STRATEGIES-SO
1. Through increased advertising online SW can increase flight bookings (S8, O5).
2. Using a point-to-point system SW can increase flights with business travelers who need timely flights (S3, O9).
3. Use incentives to purchase flights using credit cards to increase profits (S7, O6).
4. Less expensive flights, due to cutting fuel costs by $155M, leave market capitalization available on areas where airline companies no longer fly due to bankruptcy (S12, O4).
5. Cut ticket cost by $2.00, but add a charge of $2.00 to each extra bag (one allowed) (S4, O10).
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SWOT STRATEGIES-WO Hire more part time workers (W1, O11). Add new technology to older planes in order to become up-to-
date and accommodate the handicapped (W6, O8). With airline companies selling planes SW can purchase
models similar to the 737, which could lead to better press if a problem with the 737 arises (W5, O2).
Offer in flight meals for those who meet appropriate requirements based on points received from Visa card usage (W11, O6).
Install televisions and satellite radio in planes for enhanced customer service (W10, O7).
Provide higher quality and luxuries (first class) in some jets for customers willing to pay extra (W8, O9).
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SWOT STRATEGIES-ST1. Upgrade our fleet by adding 12 of the similar Boeing 717 jets in order to
accommodate to the travelers desiring the luxury of a business class. These jets will be flown in the larger cities with more travel demand with an approximate cost of $700 M.
2. Expand the rapid rewards program to offer one reward point for every three purchases made on the Southwest website at least one month in advance. This will help Southwest in the booking processes so that there will be less complications and delays associated with last minute purchases.
3. In order to compete with the luxury airlines offering in flight meals, Southwest will now offer in flight drinks (soda, water, juices, and limited alcohol items) and small snack foods available to the passengers by cash or charge.
4. Make all flights with in the 48 states point-to-point flights with strict time lines given to the employees in order to alleviate delays. We predict this will increase our percent of on-time flights from 83.96% to approximately 90.00%. Then create a marketing program through television and magazines advertising the new policies.
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SWOT STRATEGIES-WT
Using the code share with ATA airlines begin offering flight to select areas outside the US including (Cozumel Mexico, Select Canada locations, Paris, London, etc.)
Shorten the flight life span of the B737’s in order maintain planes that are consistently up to date with technology. This will allow us to hedge any risk of negative problems arising with the 737’s. Maintaining new equipment allows us to easily liquidate the assets when new items are needed to be purchased.
Add new cities not flown to by Southwest such as Atlanta, Charlotte, Chicago, and New York
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SPACE Matrix
6
5
4
3
2
1
-6 -5 -4 -3 -2 -1 1 2 3 4 5 6-1
-2
-3
-4
-5
-6
FSConservative Aggressive
Defensive Competitive
IS
ES
CA
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SPACE Matrix
Net Income 3 Rate of Inflation -2Leverage 1 Technological Changes -1ROA 3 Price Elasticity of Demand -2Inventor Turnover 3 Competitive Pressure -6Income/Employee 2 Barriers to Entry into Market -4
2.4 -3.0Environmental Stability (ES) Average Financial Strength (FS) Average
Environmental Stability (ES)Financial Strength (FS)
Market Share -3 Growth Potential 5Product Quality -2 Financial Stability 4Customer Loyalty -1 Ease of Entry into Market 3Technological know-how -2 Resource Utilization 5Control over Suppliers and Distributors -2 Profit Potential 5
-2.0 4.4Competitive Advantage (CA) Average Industry Strength (IS) Average
Competitive Advantage (CA) Industry Strength (IS)
x-axis: -2.0 + 4.4 = 2.4 y-axis: 2.4 + -3.0 = - 0.6
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Grand Strategy Matrix
Rapid Market Growth
Quadrant II Quadrant I
Strong Competitive
Position
Slow Market Growth
Weak Competitive
Position
Quadrant III Quadrant IV
25
IE Matrix The IFE Total Weighted Score
Strong Average Weak 3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99
Medium IV V VI
The EFE Total Weighted Score
2.0 to 2.99
Southwest
Low VII VIII IX
1.0 to 1.99
Hold and Maintain
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QSPM-STRENGTHSStrategic Alternatives Key Internal Factors Weight
Add 12 B17s to Fleet
Shorten Life of Current Planes in
Use Strengths AS TAS AS TAS
3. SW has a larger market capital compared to others with $11.3 billion.
0.04 2 0.08 3 0.12
4. SW has all flights going to cities within the United States.
0.02 2 0.04 3 0.06
5. Use point-to-point flight system with no hubs one way.
0.06 3 0.18 2 0.12
6. Ability to determine cost/prices within the organization.
0.06 --- --- --- ---
7. Leader in market capitalization. 0.03 2 0.06 3 0.09 8. Largest in US by the number of
passengers carried yearly and 3rd in the world.
0.02 3 0.06 2 0.04
9. One of the world’s most profitable and highest posted profits for 34 consecutive years.
0.05 3 0.15 2 0.10
10. In 2006 70 percent of flight bookings and 73 percent of revenue came from bookings on Southwest’s website.
0.10
---
---
---
---
11. Low prices and relaxed atmosphere made it an icon.
0.01 --- --- --- ---
12. First airline to have a webpage in 1995.
0.01 --- --- --- ---
13. SW has 481 Boeing 737s jets. 0.10 2 0.20 3 0.30 14. Financially they purchase fuel
options to hedge cost years in advance to smooth market fluctuations.
0.15
---
---
---
---
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QSPM-WEAKNESSESS
1. SW has highest percentage of full-time employees leading to increased overhead.
0.06 --- --- --- ---
2. SW only flies one plane, the Boeing 737. 0.01 3 0.03 4 0.04 3. They will not fly outside the continental United
States, 63 cities and 32 states. 0.10 3 0.30 2 0.20
4. Difficult to convince customers SW offers benefits other airlines do not.
0.01 2 0.02 3 0.03
5. Flying only 737s could lead to negative press if problems with that plane arise.
0.01 4 0.04 3 0.03
6. Does not accommodate for severely handicapped. 0.02 2 0.04 3 0.06 7. Large cities (Atlanta, Charlotte, etc) are without
SW service. 0.10 2 0.20 1 0.10
8. Does not provide a first class for passengers. 0.01 4 0.04 2 0.02 9. Do not provide assigned seating. 0.01 3 0.03 1 0.01 10. Only some 737s carry televisions. 0.01 3 0.03 4 0.04 11. SW does not offer any type of in-flight meals. 0.01 --- --- --- --- SUBTOTAL 1.00 1.50 1.36
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QSPM-OPPORTUNITIES Key External Factors Weight
Add 12 B17s to Fleet
Shorten Life of Current Planes in
Use Opportunities AS TAS AS TAS 1. There is an increased demand for international travel. 0.10 --- --- --- --- 2. There is a decline of 11 percent in airline companies
with funding leading to used planes being able to be purchased.
0.01
4
0.04
1
0.01
3. Increased demand for cities that are currently without SW airline flights (Atlanta, New York, etc.)
0.10 --- --- --- ---
4. Each year airline companies (Delta and Northwest in 2006) are declaring bankruptcy leaving more cities existing allowing more airlines to fly to.
0.05
2
0.10
1
0.10
5. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flights booked online.
0.03 --- --- --- ---
6. Increase popularity with Visa check card purchases with reward points.
0.01 --- --- --- ---
7. With an increase of nearly 3 million people in the US there is an expansion of developing cities across the United States.
0.01
--- --- --- ---
8. Technology is increasing making older planes outdated.
0.03 3 0.09 4 0.12
9. Increased amount of upper level business travelers has led to greater demand for better seats.
0.01 4 0.04 2 0.02
10. Stock market has increased leading to more money being spent on vacations or business affairs.
0.05 --- --- --- ---
11. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off.
0.03
2
0.06
1
0.03
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QSPM-THREATS
Threats 1. Specialization expertise of Jet Blue using one plane
model allows them to provide less expensive mechanics to maintain planes.
0.09
1
0.09
3
0.27
2. Jet Blue is the only airline to carry satellite televisions on planes.
0.04 3 0.12 2 0.08
3. Higher ticket taxes. 0.04 --- --- --- ---
4. Increase in airport security due to possible terrorism. 0.10 --- --- --- --- 5. Many companies such as AirTran Airways are
offering a business class in their B717 jet. 0.05 4 0.20 1 0.05
6. Competing airlines offer satellite radio in their passenger jets.
0.03 3 0.09 4 0.12
7. High cost of fuel leads to increase in ticket prices. 0.10 --- --- --- --- 8. Studies in 2000 report that obese passengers cost
airlines an extra $275 million in fuel costs. 0.03 --- --- --- ---
9. Other airline companies offer in-flight meals adding luxury.
0.03 --- --- --- ---
10. SW competitors are flying newer and more technologically advanced jets with luxury items.
0.06 3 0.18 4 0.24
SUBTOTAL 1.01 1.04 SUM TOTAL ATTRACTIVENESS SCORE 2.51 2.40
30
RECOMMENDATIONS
The QSPM strategies assessed adding 12 new planes to the fleet or retiring older planes. It is recommended Southwest add 12 new planes at a total cost of $500 million.
31
EPS/EBIT Analysis
$ Amount Needed: 500M Stock Price: $13 Tax Rate: 35% Interest Rate: 7% # Shares Outstanding: 735M
32
Mission/Vision
Give SW Customers the Freedom to Fly
Low Fares Frequent Flights Friendliest Service
in the Sky
33
Strategy to Date
Low Cost, Low Fare High Frequency No Frills Almost No Interlining No Hubs, No International Point-to-Point Short-Haul Service Regional Service HQ in Texas
34
Strategy Success to Date I
Net Income at $499.0 million in 2006 Passenger Revenues in 2006 at $9.086
Billion Many years of top airline performance
re: on-time; complaints; and lost luggage
33 consecutive years of profit through 2006
35
Strategy Success to Date II
Diluted EPS of $.61 in 2006 Rivals Delta & United near Bankruptcy Overall SW looks strong in 2007 despite
the aftermath of 9/11 Long Term Debt at $2.887 billion in
2006
36
Internal Analysis: Strengths
Low Cost Fast Turnaround Work Force commitment and flexibility Differentiation --not just low cost but
better service (on time, no lost luggage,fewer complaints)
Leader in Re-engineering Operational Simplicity
37
Internal Analysis: Weaknesses Low Economies of Scale (small relative
to other majors, short routes) No Hub System No code sharing -- can sell only tickets
from its own offices No Interlining No International Routes
38
Internal Analysis
Financial Marketing Management Operations Information Technology
39
External Analysis: Opportunities Market Expansion: over 100 cities have
asked Southwest to offer service Longer Flights International Expansion to Canada and
Mexico
40
External Analysis: Threats
Weak Demand New Rail Service (Dallas to Houston) Increased Competition -- if they lose
their Love Field Restrictions Increased Regulation (noise) Dependence on Domestic Markets
41
External Analysis: Porter’s 5 Forces
Entry of New Competitors: Unlikely Substitute Products: High Speed Rail,
Video Conferencing Competition Among Existing
Competitors: Strong Power of Suppliers: In 2007, Weak for
Aircraft but Strong for Fuel Suppliers Power of Customers: Strong
42
External analysis
Economics Demographics Environmental Legal …...
43
Strategy Alternatives
Continue Present Strategy -- --Problem is limited growth
Expand Geographically --Point-to-Point --serve other regions efficiently
Expand Geographically --Major Hubs Remain Regional --through hubs Increased ticketing via internet
44
Should Southwest Code Share? PRO: Increase visibility and potential
customers CON: Increase Costs
45
How Can High Worker Commitment and Productivity be Sustained?
As Company Expands, New Workers Will Be Needed with Company Culture Transferred to them
Reward System with Bonuses and Incentives but within Cost Controls
46
Management Depth
Management will have to be extended to support expansion
Kelleher, Kelly and Barrett are still the top trio (see p. 242)
47
Conclusion
Southwest is a Benchmark Competitor --Setting Industry Standards
They have successfully expanded and continued to innovate -- e.g., ticketless travel, boarding pass download at home or office prior to going to the airport, friends fly free, use of underutilized airports, etc.
48
Recommendations
Continued Gradual Expansion Maintain the characteristics that have
enabled their success: Conservative Growth Cost Containment Commitment of Employees
… … ...
49
Update
2008 Results (from SW Website) operating revenues at $11.023 Billion up 10% over 2007
Expansion continues with new service at San Francisco, planned service to New York
Stock Price 2/9/09 = $7.18; 52 Week Range $16.77 to $6.56
Hedging on Fuel was successful as Fuel Prices rose but costly when they fell in late 2008.
