internal_analysis.ppt

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Southwest Airlines(2003)

Outstanding Service at the Lowest Fares

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Vision Statement (proposed)

To provide the most affordable, reliable, and comfortable air transportation in the world.

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Mission Statement (proposed)

The mission of Southwest Airlines is to provide excellent customer service (1) and timely air travel (2) at an affordable price (7) for markets in the United States (3). We commit ourselves to the highest standards of integrity (6) in doing what is best for our passengers, the airline industry, our employees (9) and our stockholders. By using the latest technology in engine maintenance (4), we ensure safety, efficiency, and keep fuel emissions below governmental regulations (8). Through this mission, we at Southwest ensure high company sprit and long term financial prosperity (5).

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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

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Competitive Profile Matrix

Southwest America West Delta

Critical Success Factors Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted Score

Advertising Product Quality Price Competitiveness Management Financial Position Customer Loyalty Global Expansion Market Share

0.09 0.25 0.15 0.25 0.10 0.10 0.01 0.05

3 3 4 4 4 3 1 3

0.27 0.75 0.60 1.00 0.40 0.30 0.01 0.15

1 2 3 1 1 2 2 2

0.09 0.50 0.45 0.25 0.10 0.20 0.02 0.10

3 3 1 4 4 3 4 4

0.27 0.75 0.15 1.00 0.40 0.30 0.04 0.20

Total 1.00 3.48 1.71 3.11

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EFE Matrix Key External Factors

Weight

Rating

Weighted

Score Opportunities 1. Federal government may shoulder security burden (about $1 billion annually).

0.10

3 0.30

2. Weaker competitors (20 percent capacity cutback). 0.10 4 0.40 3. Federal subsidies $5 billion in cash, $10 billion in loans or loan guarantees.

0.04 2 0.08

4. Growth of Internet airline ticket sales. 0.04 3 0.12 Threats 1. Federal subsides may last only 45 days. 0.10 3 0.30 2. Projected industry losses as much as $4 billion.. 0.10 4 0.40 3. Economic downturn and resulting decrease in business travel.

0.15 3 0.45

4. Many customers hesitate or afraid to fly. 0.15 4 0.60 5. New FAA security regulations. 0.10 3 0.30 6. OPEC oil production decisions. 0.05 3 0.15 7. Union problems. 0.05 2 0.10 8. Competing online ticket reservation systems. 0.01 2 0.02 9. Up and coming point-to-point competitors. 0.10 4 0.40 10. Industry mergers. 0.01 2 0.02 Total 1.00 3.34

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Ratios

Company Industry Sector S&P 500 Valuation Ratios P/E Ratio (TTM) 31.86 30.63 27.27 29.57 P/E High - Last 5 Yrs 33.39 32.15 51.41 50.13 P/E Low - Last 5 Yrs 16.53 13.22 12.30 17.54 Beta 0.84 1.06 0.74 1.00 Price to Sales (TTM) 2.44 1.60 1.67 3.13 Price to Book (MRQ) 3.05 2.34 3.96 4.86 Price to Tangible Book (MRQ) 3.05 2.49 4.23 7.56 Price to Cash Flow (TTM) 17.84 18.22 13.65 19.25 Price to Free Cash Flow (TTM) 45.27 40.21 44.35 34.32 % Owned Institutions 73.02 65.02 55.33 60.61 Dividends Dividend Yield 0.11 0.25 1.06 1.93 Dividend Yield - 5 Yr Avg 0.10 0.13 1.16 1.34 Dividend 5 Yr Growth Rate 15.65 12.45 -20.19 8.00 Payout Ratio (TTM) 3.34 1.65 20.76 30.33 Growth Rates % Sales (MRQ) vs Qtr 1 Yr Ago -12.00 -0.37 -0.17 -1.06 Sales (TTM) vs TTM 1 Yr Ago -7.74 -7.92 0.19 1.47 Sales - 5 Yr Growth Rate 10.28 9.17 8.19 12.20 EPS (MRQ) vs Qtr 1 Yr Ago -82.67 -42.81 1.92 7.90 EPS (TTM) vs TTM 1 Yr Ago -37.27 -30.77 -2.34 -4.01 EPS - 5 Yr Growth Rate 18.32 18.54 9.26 8.30 Capital Spending - 5 Yr Growth Rate

8.05 18.78 4.99 10.85

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Ratios

Company Industry Sector S&P 500 Financial Strength Quick Ratio (MRQ) 1.29 1.08 1.04 1.10 Current Ratio (MRQ) 1.40 1.31 1.27 1.64 LT Debt to Equity (MRQ) 0.41 1.29 0.70 0.69 Total Debt to Equity (MRQ) 0.42 1.41 0.75 1.06 Interest Coverage (TTM) 5.93 2.65 11.03 8.57 Profitability Ratios % Gross Margin (TTM) 78.73 62.61 59.13 46.57 Gross Margin - 5 Yr Avg 80.41 66.98 74.21 47.38 EBITD Margin (TTM) 14.77 6.53 17.39 20.50 EBITD - 5 Yr Avg 20.52 15.26 17.87 21.82 Operating Margin (TTM) 8.74 0.52 10.18 17.03 Operating Margin - 5 Yr Avg 15.22 9.93 11.55 18.17 Pre-Tax Margin (TTM) 12.38 2.11 8.64 14.21 Pre-Tax Margin - 5 Yr Avg 15.94 10.04 9.50 17.14 Net Profit Margin (TTM) 7.64 1.21 5.38 9.84 Net Profit Margin - 5 Yr Avg 9.80 6.04 5.72 11.26 Effective Tax Rate (TTM) 38.25 36.40 37.40 33.71 Effective Tax Rate - 5 Yr Avg 38.51 39.04 40.27 35.82

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Ratios

Company Industry Sector S&P 500 Management Effectiveness % Return on Assets (TTM) 5.08 1.12 5.43 5.83 Return on Assets - 5 Yr Avg 8.69 6.15 6.13 7.88 Return on Investment (TTM) 6.54 1.16 6.96 9.49 Return on Investment - 5 Yr Avg 10.79 7.51 7.97 12.64 Return on Equity (TTM) 10.53 -6.13 12.22 17.07 Return on Equity - 5 Yr Avg 17.75 15.81 14.65 21.56 Efficiency Revenue/Employee (TTM) 170,481 177,912 184,165 639,553 Net Income/Employee (TTM) 13,030 13,222 12,695 77,268 Receivable Turnover (TTM) 45.04 30.55 13.83 9.51 Inventory Turnover (TTM) 14.80 25.10 11.32 10.19 Asset Turnover (TTM 0.67 0.74 1.07 0.98 www.investor.stockpoint.com July 2002

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Net Worth Analysis (Year-end 2001)

1. Stockholder’s Equity $4,014 2. Net income x 5 $2,555 3. Share price = $20/EPS = .633 x Net Income ($511)

$16,145

4. Number of Shares Outstanding X Share Price = 807 x 20

$16,140

Method Average $9,713

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IFE Matrix Key Internal Factors Weight Rating Weighted

Score Strengths 1. Eighty percent hedge position on fuel. 0.10 4 0.40 2. RPM’s for 42.2 billion. 0.05 4 0.20 3. Twenty-eight 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 thirty new jets. 0.05 3 0.15 10. Average age of jets is 8.4 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. Twenty-five percent of revenues form online bookings.

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 1. Carry a small amount of freight/cargo. 0.05 2 0.10 2. Few coast to coast flights. 0.10 1 0.10 3. No international flights. 0.03 2 0.06 4. No business section on planes. 0.05 2 0.10 5. No alliances. 0.02 1 0.02 TOTAL 1.00 3.60

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TOWS Analysis Strengths Weaknesses 1. Eighty percent hedge position on fuel. 2. RPM’s for 42.2 billion. 3. Twenty-eight consecutive years of

profitability. 4. Employee loyalty. 5. Excellent public image. 6. Long-term orientation. 7. Strong management team. 8. Thirteen billion in market value. 9. Three hundred and thirty new jets. 10. Average age of jets is 8.4 years. 11. Fourth largest domestic airline. 12. Growth rate higher than industry. 13. Twenty-five percent of revenues form

online bookings. 14. Seventy-five percent of flights are E-

tickets.

1. Carry a small amount of freight/cargo. 2. Few coast to coast flights. 3. No international flights. 4. No business section on planes. 5. No alliances

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TOWS Analysis

Opportunities S-O Strategies

1. Federal government may shoulder security burden (a proximally $1 billion annually).

2. Weaker competitors (20 percent capacity cutback).

3. Federal subsidies $5 billion in cash, $10 billion in loans or loan guarantees.

4. Growth of Internet airline ticket sales.

1. Take up routes abandoned by other carriers in cutbacks (O2, S3).

2. With federal subsidies to assist in costs, use corporate capital to expand (O1, O3, S11, S14).

W-O Strategies 1. Add flights to Mexico (O3, W3). 2. Increase freight loads (O2, W1).

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TOWS AnalysisThreats S-T Strategies 1. Federal subsidies may last

only 45 days. 2. Projected industry losses as

much as $4 billion. 3. Economic downturn and

resulting decrease in business travel.

4. Many customers hesitate or afraid to fly.

5. New FAA security regulations.

6. OPEC oil production decisions.

7. Union problems. 8. Competing online ticket

reservation systems. 9. Up and coming point to

point competitors. 10. Industry mergers.

1. Current financial position may allow the company to survive independently of government subsidies (S3, S12, T1).

2. Increase advertising to capitalize on rival’s weaknesses (S5, T5).

W-T Strategies 1. Add international routes

(W3, T9).

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SPACE Matrix

Y axis Financial strength +5 +1 worst to + 6 best Y axis: 5 + (-3) = 2 Environmental stability -3 -1 best to –6 worst X axis Industry strength 3 1 worst to 6 best X axis: 3 + (-2) = 1 Competitive advantage -2 -1 best to -6 worst

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SPACE Matrix

Conservative FS Aggressive

CA IS

Defensive ES Competitive

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Grand Strategy Matrix

RAPID MARKET

GROWTH

Quadrant II Quadrant I

WEAK

COMPETITIVE STRONG

POSITION COMPETITIVE

POSITION

Southwest

Quadrant III Quadrant IV

SLOW MARKET

GROWTH

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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

Freight

Medium IV V VI

The EFE Total Weighted Score

2.0 to 2.99 Passenger

Low VII VIII IX

1.0 to 1.99

Grow and Build

Segment Revenue EFE IFE Passenger $5.4 B 3.34 3.32 Freight $1.1 M 3.20 3.80

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QSPM Strategic Alternatives Key Internal Factors Weight

Expand Domestic Routes

Expand Freight Loads

Strengths AS TAS AS TAS 1. Eighty percent hedge position on fuel. 0.10 --- --- --- --- 2. RPM’s for 42.2 billion. 0.05 --- --- --- --- 3. Twenty-eight consecutive years of profitability. 0.05 --- --- --- --- 4. Employee loyalty. 0.10 --- --- --- --- 5. Excellent public image. 0.10 4.00 0.40 3.00 0.10 6. Long-term orientation. 0.02 4.00 0.08 3.00 0.06 7. Strong management team. 0.10 3.00 0.30 4.00 0.40 8. Thirteen billion in market value. 0.05 4.00 0.20 3.00 0.15 9. Three hundred and thirty new jets. 0.05 4.00 0.20 3.00 0.15 10. Average age of jets is 8.4 years. 0.05 --- --- --- --- 11. Fourth largest domestic airline. 0.03 4.00 0.12 3.00 0.09 12. Growth rate higher than industry. 0.10 --- --- --- --- 13. Twenty-five percent of revenues form online bookings.

0.03 --- --- --- ---

14. Seventy-five percent of flights are E-tickets. 0.02 --- --- --- --- Weaknesses 1. Carry a small amount of freight/cargo. 0.05 1.00 0.05 2.00 0.20 2. Few coast to coast flights. 0.10 2.00 0.20 1.00 0.10 3. No international flights. 0.03 --- --- --- --- 4. No business section on planes. 0.05 --- --- --- --- 5. No alliances. 0.02 --- --- --- --- Total 1.55 1.25

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QSPM Key External Factors Weight

Expand Domestic Routes

Expand Freight Loads

Opportunities AS TAS AS TAS 1. Federal government may shoulder security burden (about $1 billion annually).

0.10

--- --- --- ---

2. Industry recently announced a 20 percent capacity cutback.

0.10 --- --- --- ---

3. Federal subsidies $5 billion in cash, $10 billion in loans or loan guarantees.

0.04 3.00 0.12 2.00 0.08

4. Growth of Internet airline ticket sales. 0.04 --- --- --- --- Threats 1. Federal subsidiaries may last only 45 days. 0.10 --- --- --- --- 2. Projected industry losses as much as $4 billion.. 0.10 1.00 0.10 4.00 0.40 3. Economic downturn and resulting decrease in business travel.

0.15 1.00 0.15 3.00 0.45

4. Many customers hesitate or afraid to fly. 0.15 1.00 0.15 2.00 0.30 5. New FAA security regulations. 0.10 --- --- --- --- 6. OPEC oil production decisions. 0.05 --- --- --- --- 7. Union problems. 0.05 --- --- --- --- 8. Competing online ticket reservation systems. 0.01 --- --- --- --- 9. Up and coming point to point competitors. 0.10 --- --- --- --- 10. Industry mergers. 0.01 --- --- --- --- SUBTOTAL 0.52 1.23 SUM TOTAL ATTRACTIVENESS SCORE 2.07 2.48

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EPS/EBIT Analysis

Common Stock Financing Debt Financing

High Low High Low EBIT ($631 in 2001) Interest (5%) EBT Taxes (316/827=38%) EAT # of Shares Outstanding (price=$20) EPS

$1,000 0

$1,000 380 620 832

.7452

$600 0

$600 228 372 832

.4471

$1,000 50

$950 361 589 807

.7289

$600 50

$550 209 341 807

.4225

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Mission/Vision

Give SW Customers the Freedom to Fly

Low Fares Frequent Flights Friendliest Service

in the Sky

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Strategy to Date

Low Cost, Low Fare High Frequency No Frills No Interlining No Hubs Point-to-Point Short- Haul Service Regional Service HQ in Texas

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Strategy Success to Date I

Net Income up to $511.147 million in 2001 Passenger Revenues in 2001 at $5.555

Billion Many years of top airline performance re: on-

time; complaints; and lost luggage 29 consecutive years of profit through 2001

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Strategy Success to Date II

Diluted EPS of $.63 in 2001 Rival America West in & out of Chapter

11 Overall SW looks strong in 2002 despite

the aftermath of 9/11 Long Term Debt up to $1.3 billion in

2001

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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

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Internal Analysis: Weaknesses Low Economies of Scale (small relative

to other majors, short routes) No Hub System No codesharing -- can sell only tickets

from its own offices No Interlining

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Internal Analysis

Financial Marketing Management Operations Information Technology

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External Analysis: Opportunities Market Expansion: over 100 cities have

asked Southwest to offer service Longer Flights International Expansion to Canada and

Mexico

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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

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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: Weak at Present

for Aircraft but Strong for Fuel Suppliers Power of Customers: Strong

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External analysis

Economics Demographics Environmental Legal …...

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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

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Should Southwest Codeshare? PRO: Increase visibility and potential

customers CON: Increase Costs

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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

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Management Depth

Management will have to be extended to support expansion

Kelleher, Parker and Barnett are the top trio

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Conclusion

Southwest is a Benchmark Competitor --Setting Industry Standards

They have successfully expanded and continued to innovate -- e.g., ticketless travel, friends fly free, use of underutilized airports, etc.

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Recommendations

Continued Gradual Expansion Maintain the characteristics that have

enabled their success: Conservative Growth Cost Containment Commitment of Employees

… … ...

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Update

2002 Results (from SW Website) Expansion continues with new non-stop

service between San Jose and BWI and between Phoenix and Detroit

Stock Price 9/17/03 = $18.52; 52 Week Range 11.23 to 18.99

Hedged for 83% of 2003 fuel requirements