Company Analysis: Southwest Airlines - Case Study Example

? Company Analysis of the Table of Contents Table of Contents 2 Southwest Airlines 4 2. Measurement and Control System 5 2.1 Financial Measures 5 2.2 Customer satisfaction measures 6 2.3 Environmental Measures 7 2.4 Control System 7 3. Financial Performance 7 3.1 Liquidity ratio 9 3.2 Solvency Ratio 10 3.3 Profitability Ratio 11 3.4 Efficiency ratio 13 3.5 Comparison with Competitors 14 4. Key Performance Indicators 15 Advancement of security and culture of Southwest 15 Value the employees 16 Make a place in the minds and hearts of the customers 16 Use Resources Sensibly 16 5. Analysis 16 6. Improvement due to the initiatives 17 7. Alignment of initiatives towards strategic management 18 7.1 Towards Customer 18 7.2 Towards Environment 19 7.3 Towards Operations 19 8. Comparison with other organizations 20 Reference 22 1. Southwest Airlines Southwest Airlines officially started operating in Dallas 42 years ago. After they took off the first flight, there was a radical change in the ways the Americans used to fly. Southwest ruled the skies by introducing low fare travel, offering free whisky on board, go-go boots and undergoing rigorous expansion. The vision of the company was to provide the business people with a more efficient and faster way to travel at a much lower cost and rendering the personable service with smile and warmth. Southwest airlines have dealt in more domestic passengers than any other airlines. The company has grown with leaps and bounds and evolved as a strong organization but has retained the original vision. The company continues to provide low fare, excellent customer service and convenient flight schedules. The company has changed their products and services in order to cater to the changing taste of the customers. Not only the travelling habits of the customers have changed but also the short haul travel has declined. As a response to this the company has upgraded their fleet by refurbishing cabins and adding on board access to live Television and Wi-Fi. Apart from this the company has also introduced a series of new, sleek Boeing 737-800 aircraft to the convoy of longer flights. The company has acquired Air-Tran Airways and have undertaken the task of integrating the two airlines in order to form a bigger and stronger organization. Apart from this the company has also renewed their “Rapid Rewards Frequent Flyer program”. The management of the company has equipping the airline for international services and AirTran is providing the start to the company for offering its services to the destinations like Caribbean and Mexico. The company looks for innovative ways to provide the customers with more value and choices. Southwest Airlines has always been pioneer in providing better and new ways to fly. The airline has always provided low cost, friendly and reliable ways to provide value to the customers (Kelly, 2013). 2. Measurement and Control System The airline is leading amongst the major low cost airlines operating in the industry. The company has been affirming their position as low-fare not by harassing, annoying or making the customers expectation trivial but by launching ‘No Change Fees and Bags Fly Free campaign’. They are ranked first in Customer satisfaction by US Department of Transportation and ranked fourth in the Fortune 2011 list as the most admired company. To reach such a position the company has to follow several measures both in financial performance and customer satisfaction. Apart from this the company also uses the environment control system (Southwest Airlines, 2010). 2.1 Financial Measures The financial statement of the Southwest Airlines is prepared according to the generally accepted accounting principles (GAAP) followed in United States of America. The financial statement under GAAP requires reclassification and adjustment of unrealized non-cash items. This is important as a result of accounting obligation and selection under accounting declaration regarding hedging and derivative instruments. The company also provides financial information that is not prepared according to GAAP. The supplemental non GAAP information provided by the company are utilised by the management in evaluating the financial performance. By providing the supplemental non GAAP information, the company look towards offering transparency to the investors. The economic financial result and the GAAP results are significantly different from each other. This is because of the fact that the GAAP results includes the actual settlement in cash occurring due to fuel hedging, which is reflected under Fuel and Oil Expense. The company’s net cash outlays for fuel are reflected by the expenses of oil and fuel in an economic basis. The impact of the fuel hedging done by the company on the liquidity and operating performance are measured better from the economic results. This is due to the fact that they do not include the non-cash, unrealised amendment and arrangement. This allows the management of the company as well as the investors to evaluate the operating performance of the organization consistently on a quarter after quarters and year after year basis and consider all the programs initiated by the company to cut down the fuel expenses (Southwest Airlines, 2010a). 2.2 Customer satisfaction measures Customers are top priority for Southwest Airlines. In order to enhance the experience of the customers and service effort, the company has engaged into soliciting the feedback and thoughts of the customers on a regular basis. The motto of Southwest Airlines is to make the customers love their flights, so the company spends adequate time and effort in listening to the suggestions of the customers, reading their suggestions, conducting focus group interview and surveys, soliciting feedbacks via social media and tracking the industry results. As an effort to enhance the experience of the customers and to have a clear insight of their experience, the company contacts the customers daily through email and enquire about their travel experience. The survey result is then analysed and the Net Promoter Score (NPS) is calculated. The NPS is calculated by finding the difference between the percentage of people who recommends Southwest Airlines and who does not. Higher the NPS, stronger is the competitive advantage. The most significant metric, which judges the performance of the company, is whether the customers are satisfied. In this regards the customer feedback is tracked and measured through the ratio of customer acclamation to complaints on personnel rudeness (Southwest Airlines, 2010a). 2.3 Environmental Measures The technique through which the company measures the environmental impact is by calculating the number of sanctions and environmental fines received by the company. The company every year tracks the amount of dollars spent for violating the environmental standards. The goal of the company is to make zero environmental violations so that they do not have to pay fines (Southwest Airlines, 2010a). 2.4 Control System The company has several programs that reduce the GHG emissions including modernization of obsolete Air Traffic Control System (ATC) and complete overhaul. The Next Generation Air Traffic Control System (NextGen) includes “state-of-the-art satellite-based navigation system”. Southwest Airlines is the foremost airline that is committed towards spending of millions of dollar towards the retrofit of the entire fleet with Required Navigation Performance (RNP) technology (which is regarded to be the basis of the NextGen). The company is looking towards adopting this NextGen as soon as possible. The company is expecting that once the NextGen is implemented it will reduce the usage of fuel and GHG emission within a range of 6% to 15%. A comprehensive and balanced national energy policy is followed by the airline in cooperation with other carriers that would increase the independence of the country’s energy. This includes rising domestic oil and gas supplies and development of alternative fuel in an environment friendly manner and conserves the additional energy (Southwest airlines, n.d.). 3. Financial Performance Measurement of financial performance of a company signifies analysis of financial statement by using various available techniques to evaluate the connectivity between the financial statement and the financial performance of the company. In this case the financial performance of the company is reviewed to see whether it is financially sound. Financially sound signifies if the company is in a state to pay all its dues, meet unexpected needs of cash and operate profitably. At the same time the company should be in a state to maximise the shareholder’s wealth (Needles & Powers, 2010). Table 1: Financial Results of the current and the previous year Year Particulars 2011-12 (USD in Millions except per share data) 2012-13 (USD in Millions except per share data) Revenue 15,658 17,088 Gross Profit 9,059 9,836 Operating Income 693 623 Earnings per Share 0.23 0.56 (Source: Morningstar, 2013) The above table shows that the company Southwest Airlines have a growth in revenue by 9.13% in the year 2012 as compared to the year 2011. The gross profit has also increased by 8.58% as compared to the previous year. It can be concluded that the rise in gross profit is due to the increase in the revenue of the company (Sinha, 2009). On the other hand the operating income has been seen to decline by 10.1%. The reason for this decline is the increase in the operating expense of the company. This implies that the company has very smaller amount money with them. This in turn may affect the future expansion of company, debt reduction or any target that the company wants to achieve. The earnings per share are seen to increase by ?0.33 as compared to the figure of 2011. This implies that the share price of the company has increased (Lumby & Jones, 2003). For further assessment, ratio analysis is conducted. Ratio analysis is the technique through which the financial statement of the company is analysed. Ration analysis is the way that presents the figures in the financial statement in a summarised, systematised and simplified form. It measures the efficiency, profitability and financial soundness of the business. In simple terms ratio analysis establishes relationship between various financial factors of the business (Siddiqui, 2006). 3.1 Liquidity ratio In order to measure whether the firm is able to meet the short term obligations, liquidity ratio is used. This ratio is quite significant in the sense that if the company fails to pay such obligations then it may lead to bankruptcy. High ratio implies that the company is in a better position to pay the short term obligation. However the interpretation of the liquidity ratio depends upon who is analysing it. For a banker a very high liquidity ratio is good but for a shareholder he may think that resources are not devoted to higher returning fixed assets instead of more liquid lower returning current assets. Two liquidity ratios are calculated like quick ratio and current ratio (Gallagher & Andrew, 2007). Current ratio = current assets / current liability Quick ratio = Current assets less Inventory / Current liabilities RATIO SIGNIFICANCE VALUE IMPLICATION Current Ratio This signifies that the amount of cash in the balance sheet plus the amount of other current assets that the organization expects to turn into cash when any obligation arises in the coming period (Kuppapally, 2008). $ (4227 / 4650) million = .90. This shows that the airline has $0.90 of the current assets for every dollar of current liability. Quick Ratio The quick ratio indicates whether the firm is liquid and has the ability to meet its current liability. At the same time it also highlights the liquidity position of the firm (Wahlen et al, 2011). $ (3758 / 4650) million = .81 This implies that the company has to pay off 81% of its current liabilities by liquidating its current assets excluding the inventory. The industry bench mark for this is 0.43, so Southwest Airlines is higher than this. 3.2 Solvency Ratio Solvency ratio is referred to as the ability of the firm to pay their financial obligation as they become due. In solvency ratios, debt equity ratio is of great importance. A company is called solvent only when its assets are much higher than the liabilities. The risk of insolvency increases only when the company relies heavily upon debt financing rather than finance provided by the stockholders or the finance generated internally. The debt equity ratio is discussed from the perspective of balance sheet, looking at the debt and comparing it to the other elements present in the balance sheet (Schmidgall, Hayes & Ninemeier, 2003). Debt-Equity ratio = Total liabilities / Total equity RATIO SIGNIFICANCE VALUE IMPLICATION Debt-Equity Ratio This ratio forms a relationship between the equity and long term debt. This ratio shows the comparative amount of fund provided to a business enterprise by the owners and the outsiders. The long term creditors enjoy high protection if the ratio is low (Schmidgall, Hayes & Ninemeier, 2003). $ (2883 / 6992) million = 0.41 The company is mainly dependent upon equity financing. In airlines industry 4.4 debt equity ratio is expected (CSI Market, 2013). But the company is much below than the benchmark. Hence long term creditors are protected. 3.3 Profitability Ratio Profitability ratios signify the capability of the business to earn profit. This ratio is important while judging the financial soundness of the organization. While analysing the financial position of Southwest Airline three ratios are calculated gross profit ratio, operating margin and net income margin (Thukaram, 2007). Gross Profit percentage = (Gross Profit / Net Sales) * 100 Operating ratio = (Cost of goods sold + Operating expenses) / Net sales Operating Profit Ratio = (Operating Profit / Net Sales) * 100 RATIO SIGNIFICANCE VALUE IMPLICATION Gross Profit It signifies the degree to which the decline in per unit selling price may occur without generating losses in the operations of the firm (Thukaram, 2007). $ (9,059 / 17,088) million =.53 * 100 = 53% The gross margin of the airline industry is 45% and that of Southwest is 53% (CSI Market, 2013). This implies that the company has a higher gross profit percentage. Operating Ratio It signifies the operational efficiency of the firm in conducting the business operations. As it shows the amount of net sales absorbed in the cost of goods sold (Thukaram, 2007). $ {(7252 + 9213)/ 17,088} million = $ (16465 / 17,088) million = 0.96 The company has a higher operating ratio, which is not good it provides fewer margins to meet dividend, interest or other corporate needs. Operating profit ratio This signifies the amount remaining from every dollar worth of sales after all the operating expenses and costs are met (Thukaram, 2007). $ (623 / 17,088) million = 0.036 The operating margin of airline industry is expected to range between 4.81% and 6.46% (CSI Market, 2013). The operating margin of Southwest Airlines is at 3.6%, which is below the industry standard. 3.4 Efficiency ratio Efficiency ratio evaluates how efficiently the company can utilise its assets to manage the liabilities. In this case the inventory turnover ratio is considered (Morningstar, 2010). Inventory turnover = Cost of goods sold / Inventory RATIO SIGNIFICANCE VALUE IMPLICATION Inventory turnover ratio This ratio signifies how well the company manages its inventory level. Low inventory turnover suggests that the company is engaged in overstocking of the inventory whereas high inventory level signifies that inventories are utilised by the company (Morningstar, 2010). $ (7252 / 469) million = 15.46 The inventory turnover ratio for the airlines industry is 31.54 (CSI Market, 2013). Whereas the inventory turnover for Southwest Airline is 15.46. This suggests that the inventory turnover ratio is much lower than the industry standard, which is not good. Moreover it suggests that the company is unable to reduce its inventories. While comparing with the industry standard the quick ratio is found to be higher but current ratio is lower. A low current ratio signifies that the company will have problem in meeting their current obligations. A low current ratio can be gauged by the company by maintaining a strong operating cash flow. On the other hand a high quick ratio signifies that the company is experiencing growth, easily changing the receivables into cash and meeting their current obligations. The debt equity position also shows that the company is on safe side and the long term creditors are protected. The gross profit percentage of Southwest Airlines is higher than the industry standard, which is good. However a high operating ratio and low operating profit ratio than the industry standard indicates that the company is not in a healthy position. Inventory turnover also suggests that the company is not able to manage its inventory efficiently. The company seems to be financially sound but need to work more on increasing the operating margin and inventory turnover. 3.5 Comparison with Competitors RATIOS SOUTHWEST AIRLINES DELTA AIR LINES JETBLUE AIRWAYS CORP. Current Ratio 0.90 0.62 (MarketWatch, 2013a) 0.68 (MarketWatch, 2013b) Quick Ratio 0.81 0.55 0.66 Debt Equity ratio 0.41 0.79 1.51 Gross Profit 53 16.68 11.44 Operating Ratio 0.96 0.93 0.92 Operating Profit Ratio 0.036 0.069 0.0735 The above table has compared the key ratios between the competitors of the Southwest Airlines. In this case the competitors like Delta Airlines and JetBlue Airlines has been considered. These two airlines are operating in USA as low cost carriers. On comparing the ratios it can be concluded that Southwest Airlines is performing better than the other two companies when compared on the basis of quick ratio and current ratio. However in case of debt equity ratio the company is performing better than Delta Air Lines but not better than JetBlue Airlines. At the same time operating ratio JetBlue is better than Delta and Southwest. Operating profit ratio of Delta is nearer to the industry standard whereas that of JetBlue Airways have higher operating profit ratio. But that of Southwest Airlines is much low. 4. Key Performance Indicators In the year 2010 the company in a measure to honour the commitment towards creating a more sustainable organization along with its three bottom lines: Planet, People and Performance, wanted to define the Key performance indicators with the help of a team that comprised of cross departmental people. The main goal was to recognize and define the KPIs that discover the opportunities and launch goals in order to create long term sustainability for the organization. The organization strongly feels that the KPIs will help them in enhancing the commitment of the organization towards the planet, people and performance, help them in monitoring the progress, create a concrete framework to achieve future goals, increase the involvement of the employees, benchmark the company with other competitors in the industry and also improve the communication with the stakeholders (Southwest Airlines, 2010b). Finally in the year 2011 after in-depth materiality assessment, the committee was successful in designing and developing the Key Performance Indicators (KPI) in order to measure the progress of the business towards the strategy and at the same time the metrics related to each KPI were identified and tracked. The social KPIs are as follows: Advancement of security and culture of Southwest Protection of the customers and the employees of the Southwest Airlines is the top priority of the company. In this regards the company is committed towards continuous education and improvement of safe environment and advancing the culture of safety in the organization (Southwest Airlines, 2011). Value the employees The Southwest Airlines foster such an environment within the organization that rewards the employees for their success, assist them in achieving the best and respect and celebrate their strengths and differences (Southwest Airlines, 2011). Make a place in the minds and hearts of the customers The organization follows the Golden rule that makes the organization to show the same care, concern and respecting attitude towards the employees within the organization that the employees are expected to share while interacting with the customers. This helps the company in providing award winning customer service that creates satisfaction amongst the customers and bring them back to the airline (Southwest Airlines, 2011). Use Resources Sensibly Southwest Airlines being the hometown carrier believes that it is their responsibility to protect and safeguard the planet and the natural resources. The company in this regard has done their level best to minimize the impact of their business on the environment by effectively operating, assembling and evaluating the information related to impact. These information help in enhancing the actions that may help in mitigating the impact and make the company operate in the “green filter” (Southwest Airlines, 2011). 5. Analysis Total Quality Management signifies the advancement in the traditional ways of doing business. This is the technique that guarantees the survival of an organization in world class competition. Total Quality management is the way the whole organization is managed such that it achieves excellence (Sashkin & Kiser, 1993). For a customer service organization like Southwest Airlines, the building block of quality is commitment of the management, focus on customer’s need, involvement of the employees and administrative and operational aspects of the organization. The employees of the organization do not see themselves as the airline with great customer service but as an organization that provides great customer service and happens to be an airline. The organization has kept the requirements and needs of the customers as their top priority. In this regards they are continuously changing their products and services. Whether it is quality of flights or service or any additional benefit the airline takes care of every minute detail. They design each and every product with such an expertise that the customers will feel attracted towards the airline and come back to them. They have not only created better flights but also provided every service that the customers think of starting from internet connectivity to New Rapid Reward Program. They have also provided new upgraded reservation platform to ease the accessibility of the passengers. The services that they provided reminds the customers that services are free of cost. Apart from this they also strategically manage the whole process like the network optimization technique that has helped in better management of capacity by removing the less popular and unprofitable flights and reallocating this capacity to the high demand markets. 6. Improvement due to the initiatives There was 16.9% increase in the operating revenue of the company in the year 2010 as compared to the figures of 2009. Per unit operating revenue increased by 12.30 cents or by 16.5%. This increase was due to the amalgamation of factors like record load factors and strong passenger yield. Due to the launch of ‘Pets Are Welcomed in Southwest’ (P.A.W.S.) campaign, Early Bird Check-in and Minor services charge, there has been increase in the freight and other incomes by over $150 million. The Free Bag policy has also augmented the number of bags checking out of the airline. This has led to an increase in the load factor by 3.3 point. There has been steady growth in the revenue for the year 2010. The demand in business travel has also improved, by contributing an increase in passenger yield by 10.8%. The increase in revenue has been also contributed by network optimization, business select, EarlyBird check-in and enhancement in Southwest.com. The network optimization technique helped in better management of capacity by removing the less popular and unprofitable flights and reallocating this capacity to the high demand existing market and other new markets. Business Select also enhanced number of passengers by 19%. Incremental revenue reached $88 million due to the EarlyBird Check-In. Southwest.com provided new booking platform that improved navigation facilities and added new shopping cart features. This also accounted to almost 84% of total passenger’s revenue. Moreover the acquisition of AirTran is expected to generate net synergies of $400 million annually (Southwest Airlines, 2010a). 7. Alignment of initiatives towards strategic management 7.1 Towards Customer Since 2010 the organization has made significant progress towards implementing the strategic initiatives in responding to the changing needs of the customers. The popular Bags Fly Free campaign is aimed towards reminding the customers that Southwest is an organization that does not charge for the services that they provide. They believe that services should come inherently as a part of the travel experience of the customers. This philosophy has exaggerated many changes in the “No Change Fees Policy” (Southwest Airlines, 2010, p. 3). The company has launched internet connectivity in flight and have commenced “offering international connecting itineraries through Volaris, Mexico’s second largest airline” (Southwest Airlines, 2010, p. 3). 7.2 Towards Environment Apart from serving the customers the company also aims to serve the community and the environment. In the year 2010 the company donated over $13.9 million to the communities. The company is passionate about the environment and believes that respecting it is a part of good business. In this regard the company has implemented a technology called Required Navigation Performance (RNP) that aims to conserve jet fuel, installing instruments required for ground service to use cleaner burning fuel and implementing initiatives at the headquarter that are meant for reducing the use of electricity. The company also contributes significantly towards implementation of emission reduction and fuel efficiency. 7.3 Towards Operations The company has also undertaken four big initiatives that include integration of Southwest and AirTran, All-New Rapid Rewards program, adding more Boeing 737-800 in the fleet and substitution of reservation system. Southwest Airlines has entered into agreement with AirTran Holdings, Inc. to acquire the outstanding common stock of the company, in exchange for a combination of common stock of Southwest Airlines and cash. This transaction is considered to be efficient and attractive towards the use of capital and boost the strategy that accelerates the profitability and helps in achieving the financial targets. The All New Rapid Reward Program provides improved membership benefit and also provides opportunity to generate revenues. Through this new program the members will be able to earn points on every dollar they spend based on the product and fare, which is different from the previous program. Due to this program the members now have more options and flexibility in receiving and converting their rewards. The program is expected to increment the annual revenue by hundreds of millions via “bringing in new Customers; increasing business from existing Customers; increasing usage of our Rapid Rewards Co-Branded credit card; and strengthening our hotel, rental car, and retail partnerships” (Southwest Airlines, 2010, p. 29). A total of twenty 737-800 aircrafts have been substituted for 737-700 that are scheduled to be delivered in 2012. After evaluating the performance of those flights, more will be procured in the year 2013. This addition will also lead to catering to some new destinations. These flights are also considered to be more economic. The new reservation system of Southwest Airlines have grown to a huge extent and help in enhancing the capabilities for future growth. This also helps in providing better customer services especially during the irregular operations and also incorporate opportunities of revenue management. Whatever the airline does the main financial goal of the company is to attain 15% pre-tax return on invested capital. Thus by implementing this strategic plan the company wants to reach the profit requirement that helps in capacity growth. 8. Comparison with other organizations For comparison within industry JetBlue Airways is considered, while that of outside the industry Walmart is considered. Walmart is the largest grocer in USA who has taken major initiatives to provide the customers with more affordable and healthier food choices. They have reformulated the package food products by decreasing the sodium content by 25% and adding sugar by 10%. The company has also planned to save $1 billion of the customers by implementing new pricing, logistics and transportation initiatives that would reduce unnecessary cost (Wal-Mart Stores, Inc., 2012). Thus it can be seen that since Walmart is a retail company and deals in groceries the main aim is to provide quality food at affordable price, whereas the case of Southwest Airline is to provide quality service at affordable price. JetBlue Airways claim that superior customer service, product, social and environmental responsibilities help them in becoming the most favourite airline of America. Safety and security is given high priority by JetBlue Airways. They ensure that the passengers along with the crew members all are safe throughout their JetBlue experience. In this regards they have implemented several plans. At the same time they have launched the reuse and recycle initiative that helps in reducing the landfill. They also take initiative to monitor the health of the engine so that the consumption of fuel can be reduced. They have also reduced the weight of the aircraft (JetBlue Airways, 2010). Thus it can be seen that JetBlue Airways has taken major initiatives towards environmental problem and enhancement of product. They have also addressed issues that can give them some extra revenue like fuel conservation whereas Southwest Airlines is seen to give more attention towards the customer service and satisfaction. Reference CSI Market. (2013). Financial strength information & trends. Retrieved from http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=1102 Gallagher, T.J. & Andrew, J.D. (2007). Financial management; principles and practice. Freeload Press, Inc. JetBlue Airways. (2010). Improving our communities and our world. Retrieved from http://www.jetblue.com/p/ERS-091412.pdf. Kelly, G. (2013). Past, present, and future. Retrieved from http://www.southwest.com/assets/pdfs/about-southwest/garys-greeting.pdf. Kuppapally, J.J. (2008). Accounting for managers. New Delhi: PHI Learning Pvt. Ltd.  Lumby, S. & Jones, C.M. (2003). 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Walmart launches major initiative to make food healthier and healthier food more affordable. Retrieved from http://news.walmart.com/news-archive/2011/01/20/walmart-launches-major-initiative-to-make-food-healthier-healthier-food-more-affordable. Read More