Accounting aspects of Southwestern Airlines - Essay Example

Running Head: Accounting Aspects of Southwestern Airlines Accounting Aspects of Southwestern Airlines s Name Southwest Airlines: A Background 'In 1966 Herb Kelleher was practicing law in San Antonio when a customer named Rollin King wished-for starting a short-haul airline like California-based Pacific Southwest Airlines. The airline would fly the "Golden Triangle" of Houston, Dallas, and San Antonio, and by staying within Texas, avoid federal regulations. Kelleher and King formed a company, raised initial capital, and filed for regulatory approval from the Texas Aeronautics Commission. Regrettably, the other Texas-based airlines, namely Braniff, Continental, and Trans Texas, opposed the idea and waged a battle to prevent Southwest from flying. Kelleher argued the company's case before the Texas Supreme Court, which ruled in Southwest's favor. The US Supreme Court refused to hear an appeal filed by the other airlines. In the late 1970s, it looked as if the company could begin flying.' 'Southwest then began building a management team, and the purchase of three surplus Boeing 737s was negotiated. In the meantime, Braniff and Texas International continued their efforts to put off Southwest from flying. The underwriters of Southwest's initial public stock offering withdrew, and a restraining order against the company was obtained two days before its scheduled inaugural flight. Kelleher again argued his company's case before the Texas Supreme Court, which ruled in Southwest's favor a second time, lifting the restraining order. Southwest Airlines began flying the next day, June 18, 1971' (Freiberg & Freiberg, 1996). Southwest Airlines: An Introduction Southwest Airlines has always been thriving in terms of productivity, good employee and union relations, and customer satisfaction at a time when most airline carriers are besieged in all these areas. Crucial to the company's hallmarks is its culture of flexibility and family-orientation. Herb Kelleher summed up the Southwest culture and commitment to employees: 'We don't use things like TQM. It is just a lot of people taking pride in what they're doing. You have to recognize that people are important. How you treat them determines how they treat people on the outside.. I give people the license to be themselves and motivate others in that way. We give people the opportunity to be a maverick. You don't have to fit in a constraining mold at work-you can have a good time. People respond to that' (Lancaster, 1999). Despite the fact that 90% of Southwest employees are unionized, labor relations have been surprisingly positive, especially by industry standards. There are no official structures for labor or union participation in management administration; nevertheless the company led by top managers who vigorously seek out and respond to employee views has taken the lead on developing and maintaining this culture. 'One significant base of the company's achievement in a rather unsteady industry is the fact that the unions are not involved in pushing their roles beyond the conservative collective bargaining and grievance functions they perform. In this regard, Southwest differs from some other renowned cases of Human Resource-based and customer-oriented success stories' (Kochan, 1999). Southwest Airlines: Its Accounting Aspects The September 11 incident pushes the airline industry into economic turmoil, resulting in unemployment, insolvency, and the prospect of fragile prospects. Soon after the September 11, most major airlines announced sharp service reductions, grounded aircraft, and laying-off of employees. Yet 'during the first decade of deregulation, more than 150 carriers, many of them start-up airlines, collapsed into insolvency. Eight of the 11 major airlines dominating the industry in 1978 ended up filing for bankruptcy, merging with other carriers, or just disappearing from the radar screen. All together, the industry made enough money during this period to buy two Boeing 747s.' (Dempsey, 1984). The scenario was different for Southwest Airlines as there was no loss of pay for employees from layoffs, furloughs, or unpaid leaves. By September 18, 2001, Southwest was operating its pre-September 11 flight schedule with 100% job security. Since Southwest had the strongest balance sheet and the highest credit rating in the US airline industry, the company was able to avoid the critical cash flow problems. According to the Southwest 2001 annual report: 'Southwest was well poised, financially, to withstand the potentially devastating hammer blow of September 11. Why Because for several decades our leadership philosophy has been: we manage in good times so that our Company and our People can be job secure and prosper through bad times. Once again, after September 11, our philosophy of managing in good times so as to do well in bad times proved a marvelous prophylactic for our Employees and our Shareholders.' Southwest's low-fare, short-haul strategy produced numerous imitators. By the second half of 1994, low fares were available on more than one-third of the industry's total capacity. Southwest resisted the airline industry tendency by earning a profit in 29 consecutive years. Southwest was the only major US airline in 1990, 1991, and 1992 to make both net and operating profits. Even considering the losses in its first two years of operations, the company averaged more than 12% annual return on investment. As of February 2002, Southwest's 10-year average return to shareholders was 23.6%. Southwest has ranked number one in fewest customer complaints for the last eleven consecutive years. Southwest placed second among companies across all industry groups and first in the airline industry in Fortune magazine's 2002 list. Southwest accomplished its record by challenging accepted standards and setting viable thresholds. The company had established many new industry standards. Southwest flew more passengers per employee than any other major airline, at the same time having the fewest number of employees per aircraft. Southwest maintained a debt-to-equity ratio much lower than the industry average and was one of the few airlines in the world with an investment grade credit rating. Southwest had a fleet of 355 737s in 2002, up from 106 in 1990 and 75 in 1987. Of the total fleet, 256 aircraft were owned and the remainder leased. At the end of 2001, Southwest was committed to 132 orders for the 737-700 aircraft. Southwest's low-fare, short-haul strategy produced numerous imitators. By the second half of 1994, low fares were available on more than one-third of the industry's total capacity (Aerospace & Air Transport, February 1, 1996). With the airline industry in turmoil in 2002, Southwest was in unique position. Southwest was the only major US airline to earn an operating profit in 2001 and in the first quarter of 2002. With its strong financial position, perhaps this was the time to expand more forcefully. Southwest's market share in the northeast was still quite small, and US Airways was in grim financial condition. Clearly the coming years would result in dramatic changes to airline industry structure. In all likelihood, Southwest would continue to prosper through these challenging times. At present, many departments at Southwest request hard copies of accounts from the Accounts Payable Department for a variety of reasons namely budgeting, auditing, reporting, accounting, resolving disputes, tracking inventory, and so forth. Besides, federal, state and local agencies from time to time request specific sets of accounts and other relevant documents during tax audits. The retrieval process for these requested documents involve monotonous manual searches, hours of research, and large volumes of copying, sorting, filing, storing, and manual document delivery. The potential implications of not being able to find these documents include the assessment of considerable fines and penalties by federal, state and local tax jurisdictions and lost productivity within the A/P and Tax departments. This process at present involves about 500,000 documents per year. These documents are received in a variety of formats. There are also a wide variety of types of documents, such as bills, backup material for invoices, W9 forms, journal entries, credit memos, and many more. Southwest hired Blue Fish to design and develop a continuous solution for the input, storage, and retrieval of all of the A/P department documents. Blue Fish suggested a best-of-breed approach that included a high-volume scanning and indexing system and a Documentum repository that would be able to accept input both directly from an existing mainframe system and from the InputAccel system. Southwest 28-Year Comparison 1971 1999 April, 2002 Size of fleet 4 306 355 Number of employees 195 29,005 34,000 Number of passengers carried 108,554 52.6 million 64.6 million Number of cities served 3 55 58 Number of trips flown 6,051 602,578 *940,426** Total operating revenues 2,133,000 4,164,000,000 *5,555,174,000** Net income (losses) (3,753,000) 433,400,000 *511,147,000** Stockholders' equity 3,318,000 2,397,900,000 *4,014,053,000** Total assets 22,083,000 4,716,000,000 *8,997,141,000** *1998 Figures **2001 Figures Sources: "Nuts: Southwest Airlines Crazy Recipe for Business and Personal Success," K. Freiberg and J. Freiberg, 1996, Austin, TX, Band Press, p. 326; Hoovers Online; Bureau of Transportation statistics References Dempsey, P.S. (1984), "Transportation Deregulation: On a Collision Course," Transportation Law Journal, 13, p. 329. Freiberg, K. & Freiberg, J. (1996), Nuts: Southwest Airlines' Crazy Recipe for Business and Personal Success (Austin, TX: Bard Press. p. 14-21. "Industry Surveys," Aerospace & Air Transport, February 1, 1996, p. A36. Kochan, Thomas A. (1999), Rebuilding the Social Contract at Work: Lessons form Leading Cases, Institute for Work and Employment Research, MIT Sloan School of Management. Lancaster, H. (1999), "Herb Kelleher Has One Main Strategy: Treat Employees Well," Wall Street Journal, August 31. p. B1. Read More