Audit of South West Airlines - Case Study Example

Audit Report of South West Airlines Executive Summary South West Airline is a low cost carrier which has been operating in United States since 1966. The airline’s business model is based on low fares, customer focused firm providing domestic travelling with a corporate culture that focuses on building relationships. The airline acquired AirTran in 2011 and plans to operate it first international flight in July 2014. South West Airline’s performance has gradually increased with time and thus can be said after looking at its financial statistics as of 2013, net income is $754 million. Moreover, revenue from the total number of passengers they travelled with comes 108 million and total operating revenue has been about $17.7 billion. After examining their IFAS, EFAS and SWOT, it can be said that the company has more strengths and opportunities than weaknesses and threats. The major strengths are its brand name, providing reduced fare prices but not compromising on service quality. The airline has the opportunity to expand if they start international flight ongoing basis. The major weaknesses lies on the fact that flights are limited, seats are not segmented and they have not been able to maintain their airplanes. The threats are that many other airlines like Jet blue has copied its business model of being low priced. However, the financial statistics shows that the company has the means to stay competitive provided its low cost strategy is in line with customer value preposition. Audit Report of South West Airlines 1. Current Situation Business Model South West Airlines is a low cost carrier, airline of United States. The airline is heavily unionized having a union of “The Southwest Airline Pilots Association” which represents pilots. Aircraft Mechanics Fraternal Association (AMFA) consists of Maintenance Technicians. International Association of Machinists and Aerospace Workers Union (IAM) contain Customer Service Agents. Transport Workers Union (TWU) contains Flight Dispatchers, Attendants and Operating agents. Thus, it can be said that their business model of using low-cost carriers through working of Unions has been an inspiration. This competitive strategy serves to integrate employee competencies with aircraft productivity having the aim to establish low costs and decrease the aircraft turnaround time. The Discount Airline like South West Airlines has non-stop routes, short haul, limited seating capacity, no meals or lounges (Southwest Airlines: About, 2014). Business Lines South West Airline is arises from Aviation Industry. The airline flies at few destinations at local destinations but currently they announced their first international destination (Investor Relations: News Releases, 2014). It contains sparse customer facilities and do not have seating distinctions but have few customer options and no choices for the kind of air craft’s as they have used Boeing 737s and 727s in the past and after acquiring AirTran Airways in the year 2011, they are now operating as a single airline. Presently, they seat 175 passengers in 737-800. Their pricing structure is simple, but there are no frills or meals. However, the schedules for destinations are well served and the cancellations are less. Moreover, it is known as the safest airline worldwide and level of employee satisfaction is also high. It has a highest customer rating which makes it one of the most consistent profit-making airlines in United States (Southwest Airlines: Fact Sheet, 2014). Business products The airline provides many business products and applications to its customers for instance air offers, hotels and accommodation offers, car offers and various travel and vacation packages. These special deals by South West aim to provide benefits to its loyal customers in low fare rates (Southwest Airlines: Special Offers & Travel Deals, 2014). Customers Frequent flyers of South West Airline are business associates who travel 800 miles on average. Other customers include sales representatives, construction workers, students and city travelers who focus on low fare rates (Southwest Airlines: Fact Sheet, 2014). Value Chain Analysis South West Airline allows travelers especially business associates to have a low-cost airline experience with premium service if they cannot travel in First Class. The main issue arises when the plane remains in the air and does not stop at any destination as they are making point to point routes. However, the airline is still regarded as the America’s Reliable Airline as it does not compromise of service quality even it has low fares. Moreover, they are appreciated they have refundable tickets, purchase of flight plans or tickets are simple procedures which makes it easy to travel at different destinations (Southwest Airlines: Fact Sheet, 2014). Diversification The airline’s diversification is seen through its corporate culture as it is seen that the airline has been hiring candidates who have a good sense of humor and this trait is seen reflected in their services. Even at the early years, the different departments have been seen working with each other and they were commonly known as “The Warrior Spirit.” Pilots and flight attendants are also seen helping the crew clean the planes. The culture is conducive and this makes the company with the lowest turnover rate. They are also focused on building relationships with customers so introduced a strategy like “love your bags’ where the travels were not charged for first two bags when they checked in. Presently, they have introduced a flight to international destination which provides diversification to the company’s previous goal and vision. Overall Performance Even though, the airline is focused on reduced rates but due to its unique culture, the company has been successful in responding to customer needs for example even though meals are not available during flights but if the customer demands for it, then the Airline has the capacity to develop a package that satisfies the customer’s needs (Hill, Jones, & Schilling, 2014). In the same way, the products and services offered by the airline have always been reliable. Moreover, the airline’s efficiency lies on the fact that they are inclined towards time management, problem solving, handling baggage, having an effective recruitment and incentive plan which makes the work experience a successful one (Southwest Airlines: Fact Sheet, 2014). Mission Statement Analysis The mission of South West Airline is “dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit (Eva, Hindle, Rollaston, & Tudor, 2010).” The airline has been successful in executing its mission as they are seen building relationships and creating performance measures based on relationships and this is referred to as “Servants Heart” by the airline itself (Southwest Airlines: About, 2014). 2. Corporate Governance Directors At South Airlines, directors should posses’ personal and professional ethics and have to be committed to fulfill their responsibilities and if they wish to resign the Corporate Governance Committee has the aim to consider the nature of the cause of resignation. A director is not limited to serve any of number of years. The board is supposed to value the performances of directors and, consider nomination of new Board members on different departments like finance, marketing, education etc. Based on the past performance of the director, the board can re-nominate the director for the same position (Investor Relations: Corporate Governance, 2014). Management At South West Airlines the management constitutes in three major levels, the top level involves planning and strategic planning by CEO, CFO, COO and Senior VP who have the role to take effective decisions, be creative and have the ability to manage time to manage all airline’s capacity to remain competitive in the market. The middle management contains organizational and analytical processes that have to be carried out by Directors, Vice Presidents and Senior Manager and they are also involved with critical thinking processes. The third management levels have the role to assign work, lead, control and evaluate performances of the employees and they are managers, supervisors and team leaders (Investor Relations: Corporate Governance, 2014). 3. External Environment (Opportunities & Threats) ` The main opportunity for growth and development taken by South West Airline was when the airline acquired AirTran Airlines. This acquisition was carried out in 2011 and it helped the airline expand its services and covering the routes of AirTran (Cadle, Paul, & Turner, 2010). They also made alliances with West Jet and Volaris (The Airline Website: Southwest Codeshare with Volaris, 2014) and this has changed the impact of passenger traffic, booking, and fuel prices for the better. Currently, the airline seized the opportunity to introduce international flights which will increase their scope in the future. The weight age of opportunities for the airline comes about 1.23 EFE thus, it can be said that they are taking opportunities form the external environment. Threats SouthWest has been able to deal with ongoing threats by following their policies and focusing on security to maintain its clientele. Though, the airline dropped some profits because of the threatening forces like decreased airfares and competitive forces but they are still able to remain competitive as they have been a leader for low cost airline since a very long time (Eva, Hindle, Rollaston, & Tudor, 2010). The score South West Airlines EFE comes about 1.27 which makes it an average airline as far as threats are concerned. Task Environment Bargaining Power of Buyer: Low Bargaining Power of Supplier: Low Threat of New Entrants: High Competitive Rivalry: High Threat of Substitute Products: Medium 4. Internal Environment (Strengths & Weaknesses) Factors Weight Rating W. Score Strengths Many people are opting for it Known as one of the best low-cost airlines Focus on workforce diversity Increase in revenue seen in 2014 Net income increased Leads short haul segments Fourth largest domestic Airline Focuses on customer Services Weaknesses No international flight yet. First will commence on July 2014 Seating is not segmented Limited Flights They are associated with less online booking agencies Employees are mostly associated with Unions They carry less cargo Do not use emails They do not have morning flights 0.05 0.10 0.08 0.10 0.08 0.10 0.10 0.10 0.05 0.05 0.03 0.02 0.03 0.05 0.04 0.02 4 5 3 5 5 5 2 3 2 3 2 1 1 2 3 1 0.20 0.50 0.24 0.50 0.40 0.50 0.20 0.30 0.10 0.15 0.06 0.02 0.03 0.10 0.12 0.02 Total 1.00 5. SWOT analysis Strengths: They are one of the recognized low-fare carriers in United States. They are completely unionized but are still focused on flexible time frame. They have the facility to provide information and booking online. They focus on building staff relationship. Weaknesses The business model of South West is copied by many other airlines, They are limited to only 60 cities. Threats The prices of oil tend to increase during recession which increases their costs. Their main competitors are Jet blue Opportunities They have been able to acquire AirTran so they have opportunity to expand and give more services. Introduction of international flights is a good opportunity for them. Southwest Airlines Co. Common size balance sheet ASSETS 2013 2013 Cash and Cash equivalents 1,335 6.90% Short-term investments 1,797 9.29% Accounts and other receivables 419 2.17% Inventories of parts and supplies, at cost 467 2.41% Deferred income taxes 168 0.87% Prepaid expenses and other current assets 250 1.29% Total current assets 4,456 23.03% Property and equipment     Flight equipment 16,937 87.55% Ground property and equipment 2,666 13.78% Deposits on flight equipment purchase contracts 764 3.95% Assets constructed for others 453 2.34% less allowance for depreciation and amortization 7,431 38.41% Goodwill 970 5.01% Other assets 530 2.74% Property and equipment 14,889 76.97% Total Assets 19,345 100.00% LIABILTIES AND STOCKHOLDERS EQUITY     Accounts Payable 1,247 6.45% Accrued liabilities 1,229 6.35% Air Traffic liability 2,571 13.29% Current maturities of long-term debt 629 3.25% Total Current liabilities 5,676 29.34% Long term debt less current maturities 2,191 11.33% Deferred income taxes 2,934 15.17% Construction obligation 437 2.26% Other noncurrent liabilities 771 3.99% Total Long term debts 6,333 32.74%       SHAREHOLDERS EQUITY     Common stock 808 4.18% Capital in excess of par value 1,231 6.36% Retained earnings 6,431 33.24% accumulated other comprehensive income -3 -0.02% Treasury stock -1,131 -5.85% Total stockholders equity 7,336 37.92% Total equities 19,345 100.00% Southwest Airlines Co. Income Statement   2013 2013 Operating revenues 17,699 100.00% Salaries, wages and benefits 5,035 28.45% Fuel and oil 5,763 32.56% Maintenance materials and repairs 1,080 6.10% Aircraft rentals 361 2.04% Landing fees and other rentals 1,103 6.23% Depreciation and amortization 867 4.90% Acquisition and integration 86 0.49% Other operating expense 2,126 12.01% Total operating expenses 16,421 92.78% Operating Income 1,278 7.22% Interest expense 131 0.74% Capitalized interest -24 -0.14% Interest income -6 -0.03% Other (gains) losses, net -32 -0.18% Total other expenses (income) 69 0.39% Income before Income taxes 1,209 6.83% Provision for income taxes 455 2.57% Net income 754 4.26% Net income per share, basic 1.06 0.01% Net income per share, diluted 1.05 0.01%       2013 2012 2011 Liquidity ratios Current Ratio Total Current Assets/Total current liabilities 0.78 0.90 0.95 Quick Ratio (total current assets - inventories) / current liabilities -2.33 0.80 0.87 Leverage ratios Debt to equity Total Debt/ Total equity 0.62 1.65 1.62 Debt to asset Total Debt/ Total assets -0.68 0.62 0.61 Activity ratio Gross margin Gross Income/Sales 0.53 0.49 0.49 Operating margin Operating Income/Sales 0.07 0.036 0.04 Return on assets Net Income / Total Assets 0.03 0.02 0.009 Efficiency ratios Asset turnover Sales/Total Assets 0.91 0.91 0.86 Inventory turnover Cost of Goods Sold/Inventory 17.78 18.44 19.61 The financial information of Southwest Airlines Co. (2011-2013) it can be observed that the overall profits of the company during the period. Financials of the company reflects that the company has improved it cost performance to reduce its expenditures and increase its revenues and returns on shares. However, there has been significant increase in the net income and pre tax returns of the invested capital of the company. The returns on investment were recorded as 13.1 percent in 2013 that has doubled since 2012 (Southwest Airlines Co., 2013). The operating ratio of the company indicates boost in the operating profits of the company in current year, as operating ratio of the stood at 36 percent in 2012 that increased to 72 percent in 2013. The stable fuel prices and the cost controlling strategies of the company greatly impact the operations of the company (Southwest Airlines Co., 2013). Liquidity indicators of Southwest Airlines Company show that there has been a continuous declining trend in the current ratio of the company. It shows that the availability of the current assets have relatively declined, as compared to the liabilities of the company. Quick ratio of the company indicates that the decline in the liquid assets of the company has influenced liquidity of the company to meet its short term obligations. It may because of the reason that the company is inclined towards credits sales that has suppressed the availability of liquid assets. Southwest’s performance has boosted during the period 2012-2013, it is because the returns on the assets and returns on equity have significantly increased during the period (Southwest Airlines Co., 2013). It shows that the company is efficient to utilize it assets and equities due to which the revenues of the company have improved during the period. However, the inventory turnover of the company has decline during 2012-2013. It because the inventory of the company no significant change in the inventory has been observed, however the cost of the goods of the company have declined. Analyzing the asset turnover ratio of the company it can be observed that the company throughout the period (2011-2013) has remained efficient to utilize its assets. However, the company shall make efforts to utilize its equities; it is because the major part of the revenues is generated through assets and if the company deploys its equities it can yield higher amount of revenues. It can allow the company to increase profit margin of the company. 6. IMPLEMENTATION OF RECOMMENDED STRATEGY Analyzing the financial information of Southwest Airlines Co. (2011-2013) it can be observed that cost effective strategies of the company has immensely contributed to generate higher volume of profits. However, the sales of the company have not significantly increased during the period, whereas the cost of good has proportionately increased (Southwest Airlines Co., 2013). Thus, it is important that the company should be focused to increase its sales volume in times to come, as it shall allow the company to generate higher profits. It can be analyzed the company has made initiative to utilize its assets and equities but the assets have contributed significant in the profit margin of the company. The decline in the current assets can be one of the most alarming situations for the company, as the current obligation of the company is higher than the availability of currents assets. It has also affected long term leverage measure of the company. The shortfall of the assets for the company can be alarming for the company to meet its future obligations. Therefore, Southwest Airline Company should take considerable measures to increase availability of assets, or else the company is at higher risks of bankruptcy. 7. Conclusions From the above information, it can be observed that the Southwest Airlines Co. low costing strategies has positively impacted overall performance of the company. The company has great opportunity to expand its business internationally. However, it is important that the company should maintain its low costing strategies in its international operations to sustain its profit margins in the company. References Cadle, J., Paul, D., & Turner, P. (2010). Business Analysis Techniques: 72 Essential Tools for Success. Chippenham: The Chartered Institute. Eva, M., Hindle, K., Rollaston, C., & Tudor, D. (2010). Business Analysis. London: BCS Learning and Deevelopment Limited. Hill, C., Jones, G., & Schilling, M. (2014). Strategic Management: Theory: An Integrated Approach. Mason: Cengage Learning . Investor Relations: Corporate Governance. (2014). Retrieved from http://southwest.investorroom.com/index.php?s=117&item=91 Investor Relations: News Releases. (2014). Retrieved from http://southwest.investorroom.com/index.php?s=43&item=1860 Southwest Airlines Co. (2013). Annual Report. London: Southwest Airlines Co. Southwest Airlines: About. (2014). Retrieved from https://www.southwest.com/html/about-southwest/ Southwest Airlines: Fact Sheet. (2014). Retrieved from http://swamedia.com/channels/Corporate-Fact-Sheet/pages/corporate-fact-sheet#about Southwest Airlines: Special Offers & Travel Deals. (2014). Retrieved from http://travel.southwest.com/specialoffers/topOffers.html?int=GNAVSPCLOFFR The Airline Website: Southwest Codeshare with Volaris. (2014). Retrieved from http://theairlinewebsite.com/topic/386679-southwest-codeshare-with-volaris/ Read More