Business Description and Aspects of Southwest Airlines - Case Study Example

Company Research (Southwest Airlines) Introduction This report presents the findings of a research about Southwest Airlines. The report contains details about various aspects of the company and data that summarises the financial performance of the company in the recent past. The report is divided into several sections that cover the following information: history, services and the management structure of the company. Also contained in the report is information about the financial performance of the company. Summary Business Description of Southwest Airlines History of Southwest Airlines Southwest Airlines started operating back in 1971 as a small airline that had a small fleet of only three Boeing 737 aircrafts (Southwest Airlines Co. 2017, p. 1). The company started its operations by serving the following three cities in Texas: Dallas, San Antonio and Texas (Avstop.com, 2015). Since its inception, the company has managed to grow and attain a leadership status in the industry in which it operates. For example, Southwest Airlines was the first carrier to offer the miles programme (Avstop.com, 2015). The company used the miles programme to reward its frequent customers with points. The customers would then redeem the points at later dates in the form of reduced prices or even free tickets. Currently, the company has 723 aircrafts and serves 101 destinations that are in 40 different states (Southwest Airlines Co. 2017, p. 1). Summary of performance The company has managed to overcome industry-wide challenges and post profits on several occasions (Hill & Jones 2009, p. 105). For example, in the wake of the 11 September 2001 attacks, the global aviation industry was affected by a slump in demand for travel services (Hill & Jones 2009, p. 105). Many airlines posted losses in their annual financial reports for the years that followed (Hill & Jones 2009, p. 105). However, it is observed that Southwest Airlines managed to post profits between 2002 and 2005 (Hill & Jones 2009, p. 105). In this period, the company posted an accumulated Return on Invested Capital (ROIC) of 5.8% when many other airlines in the industry posted losses and relatively less returns on invested capital (Hill & Jones 2009, p. 105). Use of the low-cost carrier model Southwest Airlines is one of the pioneers of the low-cost carrier (LCC) model (Wang 2005, p. 16). The company was founded on the principle that if it could charge its customers up to 30% less in fares and keep its costs of operations down, it could break even and remain profitable (Lauer 2009, p. 14). Currently, the company still operates on the LCC model by using a fleet that is composed of Boeing 737 planes only, not offering in-flight meals and speeding up the time that its planes take while at airports (Lauer 2009, p. 17). The company uses these strategies to optimise its operations, reduce its overheads and maximise the demand for its services (Cento 2008, p. ix). Summary of Business Aspects of Southwest Airlines Products Southwest Airlines operates short- and long-haul domestic flights between various cities in the United States by relying on the point-to-point model as opposed to the hub-and-spoke model of operations (Southwest Airlines Co. 2017, p. 3). In 2014, the company started international flight services (Southwest Airlines Co. 2017, p. 3). Its international flight services now cover three destinations: Mexico, Liberia and Costa Rica. The company operates direct flights to these countries from Los Angeles. The international service of the company has been growing considerably. For example, about USD 226 million of the revenue of the company back in 2014 was derived from its international service (Southwest Airlines Co. 2017, p. 3). The revenue from international service grew to USD 287 million in 2015 and to USD 338 million in 2016 (Southwest Airlines Co. 2017, p. 3). Management The management structure of the company is based on the need to communicate the mission and vision of the company to all the employees and keep them engaged (Gallo 2014). The company uses a basic management structure that is composed of a chief executive officer and several vice presidents (Gallo 2014). Currently, the CEO of the company is also the chairman of the board of directors of the company. Moreover, the vice presidents oversee various aspects of the business of the company and they report directly to the CEO (Southwest 2017). The following aspects of the business of the company are overseen by executive vice presidents: ground operations, air operations, finance and information (Southwest 2017). The company has executive vice presidents who oversee other aspects of its business including planning, cargo, charters, labour relations and supply chain (Southwest 2017). Under the executive vice presidents are managing directors who oversee specific aspects of the business of the company at the departmental level (Southwest Airlines 2017). Therefore, the company has a typical top-down organisational structure. Culture The culture of Southwest Airlines is evident in the company’s mission, vision and values. The mission of the company is to provide the highest quality of service to its customers (Southwest Airlines 2017). The company seeks to provide high-quality service to its customers with a sense of company spirit and individual pride (Southwest Airlines 2017). To achieve this mission, the company seeks to provide for its employees a stable work environment so that the employees can access opportunities for personal growth and development (Southwest Airlines 2017). The vision of the company is to become the most loved, profitable and flown airline in the world (Gallo 2014). Therefore, the company concentrates on taking care of the needs of its people as one of the most important characteristics of its culture (Gallo 2014). Moreover, Southwest Airlines has various corporate values including the following: warrior spirit or the determination to be the best airline in the industry and the practice of treating others with respect, which is embodied in the statement “A servant’s heart” (Southwest Airlines 2017). Lastly, the company emphasises fun in the way its employees carry out its operations (Southwest Airlines 2017). Employee benefits and attributes Currently, the company has about 53,100 employees (Southwest Airlines Co. 2017, p. 20). The employees of the company are distributed among its several departments and divisions. About 22,100 employees of the company work in the flight section as pilots, flight attendants and flight engineers (Southwest Airlines Co. 2017, p. 20). About 19,100 people work as ground teams for Southwest Airlines (Southwest Airlines Co. 2017, p. 20). The company recognises that most of its employees are members of labour unions (Southwest Airlines Co. 2017, p. 20). Consequently, the way the company compensates its employees is tied to the collective bargaining agreements that the company signs with the various labour unions to which its employees belong (Southwest Airlines Co. 2017, p. 21). In addition to the requirements of the collective bargaining agreements, Southwest Airlines provides other monetary and nonmonetary benefits to its employees (Lauer 2009, p. 14). These benefits are meant to ensure that the employees remain engaged and motivated (Hill & Jones 2009, p. 106). Moreover, the company expects that all its employees understand its values, mission and purpose (Lauer 2009, p. 14). Therefore, Southwest Airlines seeks to recruit individuals who are highly motivated and ready to adhere to the company’s values (Hill & Jones 2009, p. 107). Commentary on Financial Statements Balance sheet Exhibit 1 below shows the balance sheet of Southwest Airlines at the end of the financial years 2015 and 2016. The balance sheet shows that the company was in a financially-sound position at the end of the financial year, given its value of current and non-current assets. Also, compared to the previous year, the company registered higher retained earnings, lower accumulated debt and an increase in the stockholders’ equity. Exhibit 1: Southwest Airlines’ consolidated balance sheet for the financial years 2015 and 2016 Source: Southwest Airlines Co. (2017, p. 77). Income statement Exhibit 2: Southwest Airlines’ consolidated income statement for the years 2016, 2015 and 2014 Source: Southwest Airlines Co. (2017, p. 78) Exhibit 2 indicates the consolidated income statement for the company for the year 2016. The statement also indicates figures for the two previous years: 2015 and 2014. The indicated figures show that the total income and profitability of Southwest Airlines has been rising steadily for the three consecutive years indicated on the statement. This trend underscores the positive financial performance of the company over the years. Financial ratios Exhibit 3: Southwest Airlines’ ROIC for the years 2016, 2015 and 2014 Source: Southwest Airlines Co. (2017, p. 55) Exhibit 3 indicates the ratios for the Return on Invested Capital (ROIC) of the company for 2016, 2015 and 2014. Other financial ratios, primarily those that indicate the level of liquidity of the company, are indicated on other financial statements. However, the ROIC percentages of the company indicate that the company has been valuable for three consecutive years since 2014. Conclusion In conclusion, Southwest Airlines is one of the most successful carriers using the LCC model. Since its establishment, the company has been profitable even during the years when the global aviation industry has faced incidents of major slumps in demand for travel services. The company offers short-haul and long-haul services in the domestic and international markets. Southwest Airlines has developed a corporate culture that emphasises the need for employees to be fully engaged in their work to make it the most loved, flown and profitable airline in the world. References Avstop.com 2015, ‘History of Southwest Airlines,’ viewed 14 June 2017, . Cento, A 2008, The airline industry: Challenges in the 21st century, Springer, Heidelberg. Gallo, Carmine 2014, ‘Southwest Airlines motivates its employees with a purpose bigger than a pay check,’ Forbes, 21 January, viewed 14th June 2017, . Hill, C & Jones, G 2009, Strategic management theory: an integrated approach, Cengage, Mason. Lauer, C 2010, Southwest Airlines, ABC-CLIO, New York. Southwest Airlines 2017, Southwest airlines executives and leadership, viewed 14 June 2017, . Southwest Airlines Co. 2017, 2016 annual report to shareholders, viewed 14 June 2017, . Wang, C 2005, The effect of a low-cost carrier in the airline industry (Master’s thesis, North-western University, Evanston, Illinois), viewed 14 June 2017, . Read More