Company Analysis of Southwest Airlines - Report Example

COMPANY ANALYSIS OF SOUTHWEST AIRLINES

Introduction

The paper will try to develop and present an in-depth analysis of Southwest Airlines covering topics such as company history, company role in the supply chain, company organizational structure, company financials, company global impact, company current issues and company public image. Southwest Airlines Co. (symbol LUV on the New York Stock Exchange) refers to a major U.S. airline as well as the largest low-cost carrier in the world, headquartered in Dallas, Texas (Lauer, 2010). It was founded by Herb Kelleher in March 15, 1967 but commenced operation in June 18, 1971 when it adopted the name Southwest Airlines. As of December 2015, the airline had nearly 50,000 employees and operates over 3,800 flights each day. Currently, it schedules service to 97 destinations with a fleet size of 718 in 40 states. It has a company slogan of “low fares, nothing to hide.” Southwest Airlines is currently the largest operator of the Boeing 737 across the world, with more than 700 in service and each averages six flights each day (Simkins & Simkins, 2013).

Its current list of executives include chairman of the Board, President and Chief Executive Officer Gary C. Kelly, Executive Vice President and Chief Commercial Officer Robert E. Jordan, Executive Vice President Corporate Services Jeff Lamb, Executive Vice President Strategy and Innovation Tom Nealon, Executive Vice President and Chief Financial Officer Tammy Romo and Executive Vice President and Chief Operating Officer Michael G. Van De Ven (Simkins & Simkins, 2013). As of financial year ending 2015, the total revenue of the company was US$19.82 billion, operating revenue of US$4.12 billion, net income of US$2.18 billion, total assets of US$21.31 billion, Total equity of US$7.36 billion. It is a Fortune 500 company with a current ranking of 160. Its website is www.southwest.com (Lauer, 2010).

Company History

On March 15, 1967, Southwest Airlines started with the incorporation of Air Southwest Company by Herb Kelleher and Rollin King to fly within the state of Texas (Lauer, 2010). Air Southwest Co. changed its name on March 29, 1971 to Southwest Airlines Co. the traffic rose subsequently as shown in the following table.

Revenue passenger-kilometers, in millions

Year

Traffic

1975

480

1979

2,405

1985

8,587

1990

16,024

1995

37,535

2000

67,923

2005

97,097

Source: Air Transport World

Southwest Airlines began expanding its network to Harlingen in 1975, Tulsa, Oklahoma city and Albuquerque in 1980; Kansas City, California, Las Vegas and Phoenix in 1982; Little Rock in 1984; Chicago Midway and St. Louis in 1985; Nashville in 1986; Birmingham and Detroit Metro in 1987. The network expansion continued and in 1998 it moved to Manchester (Simkins & Simkins, 2013).

Between 1980s and 2000s the airline hired the first black pilot in 1980. In 1981 it was sued for hiring only female flight attendants and ticket agents. In 1990 it moved to its current headquarters. As of 2006, approximately 1400 employees worked in the three storey building. It became one of the first carriers to have a website on March 16, 1995 (Lauer, 2010). It began building a 300,000 square feet in March 1996 to add to their existing corporate headquarters. In the late 2004, it repealed the Wright Amendment restrictions and in 2005 it added Missouri to its list of permissible destination states. It voluntarily grounded 44 planes in 2008 to check the need for further inspection. In 2010s, it announced the acquisition of AirTran Airways to expand globally. In 2012 it expanded its destinations to Mexico (Lauer, 2010). Southwest Airlines introduced the 737-800 to the fleet on 2012 while in 2014 it introduced new branding which includes a new logo and livery (Simkins & Simkins, 2013). The airline has expanded internationally and is currently experiencing revenue growth.

Company Role in the Supply Chain

Southwest Airlines refers to the single biggest low-fare carrier today, conveying a bigger number of passengers to their destinations than some other aircraft on the planet. The only thing that has made the company so huge in the industry is its dedication to high quality customer service (Bidgoli, 2010). Commitment to customer service is an area of focus that emphatically influences an association's main concern and bottom line. This strategy has enabled Southwest Airlines to consistently generate a profit for over the last 40 years even if almost every major U.S. airline has been able to declare bankruptcy within the last 10 years (Coyle & Coyle, 2009).

Good customer relationships are an invaluable asset for the businesses of today. To manage their fortress over different aircrafts, Southwest Airlines searched for extra approaches to enhance their officially faultless customer service (Bidgoli, 2010). This implied patching up its parts stock or inventory management to oversee and control its inventory and supply chain at an ideal or optimal level. With a specific end goal of accomplishing this objective, they needed to hone some of their business procedures, for example, their supply chain planning systems, as well as the factors that have just been mentioned, which included supply chain execution and demand planning (Coyle & Coyle, 2009).

Southwest Airlines complies with the procedure steps required by a lean system. Besides they are attempting to enhance the procedures consistently discovering approaches to lower wastage and improve process streams (Bidgoli, 2010). There are several factors that make the Southwest Airlines lean. Such factors include a customer centric approach to the operations, elimination of waste in their value stream and provision of affordable services with no compromise in the quality. The los cost supply chain model contributes greatly to the success of the airline (Gittell, 2003). A lean process or methodology adopted by the airline helps in eliminating wastages in the system thus improving the efficiency of Southwest as a whole. The lean system has helped in improving quality, reducing total cost and time and eliminating waste. Southwest Airlines has been able to take off with better supply chain management (Coyle & Coyle, 2009). Southwest Airlines is highly dedicated to maintaining their low-cost leadership through efficient and effective procurement practices to support the connection of people with what is important in their lives. The company treats suppliers impartially and fairly during the process of evaluation and selection. Depending on supply market conditions and company requirements, the company uses more than one selection process (Bidgoli, 2010).

Company Organizational Structure

Southwest Airlines is a passenger airline providing scheduled air transportation in the U.S. It is the largest low-fare carrier in America and services more customers domestically than any given airline (Pride, Hughes & Kapoor, 2010). The company’s senior level executives include Chief Executive Officer, Chief People & Administration Officer, Chief Operating Officer, Chief Legal & Regulatory Officer, Chief Marketing Officer, Chief Finance Officer and Chief Technology Officer. From that organization chart, it is clear that Southwest Airlines Co is a Functional organizational structure (Gittell, 2003). This is because there are three layers of management according to different functional areas. The company’s values are regarded as the core of the Southwest Airline’s which includes reliability, action, quality, informal communication and feedback. Job specialization goes far with the company unlike with other airlines. Southwest Airlines uses job specialization in reducing the turnaround time (Pride, Hughes & Kapoor, 2010).

The company is a functional organizational structure because all of their decision-making happens at the top levels of the management. It implies that the company’s upper management has complete control over the company. It additionally gives a reasonable career trajectory for employees, from junior-level positions, up to the top basic leadership positions (Pride, Hughes & Kapoor, 2010). A functional organizational structure gives efficiency and stability, particularly in substantial and complex associations, on the grounds that everybody utilizes comparable procedures. This additionally permits the organization to exploit economies of scale (Gittell, 2003). Although this kind of structure can likewise prompt poor communication between divisions, the departments of Southwest Airlines usually work together thus avoiding interdepartmental conflict. Job specialization resulting from functional organizational structure ensures that the clients have smooth and enjoyable flight (Gittell, 2003). This is envisioned in their mission statement which explains their strategy. The company mission statement is “dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit” (Pride, Hughes & Kapoor, 2010). The highest quality of customer service is achieved by the company’s separate mission statement for its human resource management which is “We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth” (Pride, Hughes & Kapoor, 2010). In addition, the company’s strategy is so strong because of other strong characteristics such as creativity and innovation. The customers and the employees of Southwest Airlines are provided with the same concern as well as caring attitude (Gittell, 2003).

Company Financials

Analysis of company financials entails the analysis of income statement, balance sheet and statement of cash flow.

Income statement analysis

The income statement is a financial statement that provides information on the expenses, revenues and the profitability of the company (Warren, 2009). Wealth of information that is valuable on the income statement is company’s gross profit, sales (revenue), operating income, profitability (net income) and retained earnings. Southwest Airline’s sales or revenues refer to the amount of money the company receives from its operations (Warren, 2009). The total revenue of the company improved indicating an increase in the effectiveness and efficiency of their operations. It increased from $17.699 billion in 2013 to $18.605 billion in 2014 and finally to $19.820 billion in 2015 (Finance.yahoo.com).

Gross profit refers to the profits the company makes after subtracting cost of revenue (Warren, 2009). According to Yahoo Finance the Southwest Airlines’ gross profit was US$9.392 in 2013 billion; in 2014 it increased to US$10.928 billion while in 2014 it was US$13.795 billion (Finance.yahoo.com). The profitability increased, implying it made more money hence Southwest Airlines has a good financial health because the performance related to the gross income is improving.

Operating income is the revenues remaining after operating or variable costs have been paid. Operating income increased from US$1.278 billion in 2013, to US$2.225 billion in 2014 and finally to US$4.116 billion in 2015 (Finance.yahoo.com). Therefore, the proportion of revenues left to pay for non-operating costs such as interest expense has increased (Warren, 2009). The performance of the company relating to operating income has improved indicating that Southwest Airlines is making enough money from its operations to meet its non-operating expenses. Net income indicates the company’s bottom line. According to Yahoo Finance, the net income of Southwest Airlines increased implying an increase in the company’s profitability (Warren, 2009). Southwest Airline’s net incomes increased from $754 million in 2013 to $1.136 billion in 2014 and finally to $2.181 billion in 2015 (Finance.yahoo.com). Southwest Airlines’ profitability is on the rise.

Balance sheet analysis

The balance sheet, currently known as statement of financial position, is a financial statement that shows the worth of a firm at a given point in time. Statement of the financial situation usually sums up the economic resources (assets), the owners’ capital and obligations (short term liabilities, debts and other long-term liabilities) at a specified point of time (Warren, 2009).  The total assets of the company has been of the rise, it increased from $19.345 billion in 2013 to $19.723 billion in 2014 and to $21.312 billion in 2015 implying an increase in the worth of the company. Although the total current assets of Southwest Airlines increased from $3.927 billion in 2014 to $4.024 billion in 2015, the relatively increase to total current liabilities was greater, $5.923 billion in 2014 to $7.406 billion in 2015 (Finance.yahoo.com). This implies that the company is less liquid and cannot meet its short term obligations using current assets because the total current liabilities are higher than the total current assets. The lower total current assets imply that most of the assets of the company are in the form of property, plant and equipment. This implies that a lot of cash is tied up. The total liabilities and stockholders’ equity of Southwest Airline implies that the company has higher liabilities than equity and hence has more business risks. Southwest Airline had a total liability of 413.954 billion in 2015 compared to a total stockholders’ equity of $7.358 billion in 2015 (Finance.yahoo.com). The company depends heavily on debt financing (borrowings) as it has more debts than equity.

Cash flow statement analysis

A cash flow statement shows the total cash that comes in and goes out of the firm over the year. The company’s total cash flow from operating activities increased from $2.477 billion in 2013 to $2.902 billion in 2014 and finally to $3.238 billion in 2015 (Finance.yahoo.com). The company has a positive total cash flow from operating activities indicating that it is a healthy business. The total cash flow from operating activities shows an upward trend implying that the business is generating more cash that it is spending on the section’s activities. Southwest Airlines does not need to rely on external financing to operate hence will sustain the business long term (Warren, 2009).

On the other hand, the total cash flow from investing activities decreased further, it was -$1.384 billion in 2013, -$1.727 billion in 2014 and -$1.913 billion in 2015 (Finance.yahoo.com). Southwest Airlines has a negative total cash flow from investing activities implying that it is purchasing long-term investments for the company’s future health. The company is using more of short-term cash on its capital expenditures (Warren, 2009).

Finally, the company’s total cash flow from financing activities was -$851 million in 2013, -$1.248 billion in 2014 and -$1.024 billion (Finance.yahoo.com). The company has a negative total cash flow from financing activities meaning the company is servicing its debts, making stock repurchases and dividend payments or retiring debt. More money is flowing out of the company than flowing in, which decreases the assets of the company (Warren, 2009).

Company Global Impact

Until 2014, the company was just a domestic carrier with a few international exposures but with the completion of the merger with AirTran in 2014, Southwest Airline introduced international flights to Jamaica, Aruba and Bahamas which increased its global presence (Pettus, 2003). Such flights were so successful that the airline decided to further increase it international presence through the construction of an international hub at Houston Hobby airport (Anderson & Vincze, 2000). In this exertion, the carrier contributed intensely on the principal international terminal at the Hobby Airport comprising of five gates. Of the five gates, Southwest operates four. The new terminal has permitted the Southwest Airlines to offer flights to new international destinations, especially in Central America, Mexico, and the Caribbean (Anderson & Vincze, 2000). The airline’s potential flights to Central America and Canada extend the global reach of the company thus allowing it to stay true its customers. In addition, Southwest Airlines attracts passengers on international flights by allowing two free checked bags. Southwest Airlines is currently poised for the global takeoff with many growth drivers that are able to take their sales and profits aloft (Pettus, 2003).

In increasing their global impact, the company has significant opportunities in expanding at Washington Reagan, Houston International, Dallas Love Field and LaGuardia International. It has partnered with Spain-based Amadeus thus being able to move towards using Amadeus’ Altea reservation system both overseas and domestically (Anderson & Vincze, 2000). Prior to this partnership, Southwest airlines’ system could only book domestic flights, but with it, they are currently able to book international flights which offer convenience for its passengers while cutting the costs of the airlines (Pettus, 2003). The airline’s international expansion has resulted in positive global impact. For instance, the cities that Southwest Airlines flies into have experienced a dual result, that is, booming passenger traffic and drop in the prices (Anderson & Vincze, 2000). The dual result has been dubbed the “Southwest Effect” (Pettus, 2003). The carrier has introduced a remarkable period of moderateness or affordability. Although the airlines’ cost advantages have decreased, the Southwest’s legacy of inexpensive flights still remains (Renga & Mentges, 2010). The company’s airfares are still relatively low compared to the broader pricing metrics in the economy. This has enabled the airline to be liked by many passengers considering their high quality customer service (Pettus, 2003).

Company Current Issues

South west Airlines has currently been faced with major union problems as it had suspended over 100 ground workers (Haasen & Shea, 2003). The union, Transport Workers Union accused the airline of punishing the workers for simply attending the union meetings (Gittell, 2003). This implies that the airline face an ethical problem as they punish employees who advocate for their rights. This show how greedy the company is as they demand the workers to feel the pain when the times are bad and fail to share their wealth with the customers when the times are good (Haasen & Shea, 2003). The company argues that they discourage the workers from joining unions because union poison workplace relations hurt the corporation and the members that they work for as well as the customers that they server. The company’s current issue is the inability to fully give in to the unions and be very competitive in the market (Gittell, 2003).

On the other hand, Southwest Airlines has been faced with technical issues that have forced them to delay their flights (Haasen & Shea, 2003). The technical issue or glitch caused hundreds of flights to be delayed and this greatly affected its customer services to its passengers (Gittell, 2003). Because of the outage, the employees of Southwest Airlines had to rely on the backup procedures in getting their customers checked in and this greatly delayed the process. In addition, it resulted in long queues at the check-in counters (Haasen & Shea, 2003). This implies that the system of Southwest is less efficient. The intermittent technical issues on the airline’s website, phone centers, mobile app and airports are likely to occur because the cause was not determined. The airline has a less robust system considering that it is the fourth largest American airline by traffic (Gittell, 2003).

Company Public Image

Southwest Airlines is in the Transportation-Airline industry group with a good public image and is ranked a strong 16 on the IBD’s list of 197 industries (Bidgoli, 2010). The company has a good public image because it is the single biggest low-fare carrier today, conveying a bigger number of passengers to their destinations than some other aircraft on the planet (Renga & Mentges, 2010). It has developed a competitive advantage because of its low costs structure and no bag fees. It is the only airline that charges no fee for baggage from its passengers (Pettus, 2003). The airline view the los cost structure as a competitive edge over the counterparts even if investors see it as loss of revenue. The no bag fees have contributed to a good public image because it has helped them in attracting more customers. The strategy has also pleased the investors because of the growing revenue trends (Bidgoli, 2010). Since Southwest appreciates the size of vast transporters as far as the traveler activity and a cost structure comparative to that of the low-cost airlines, it makes business importance for the aircraft to extend its operations globally to gain piece of the overall industry and, thusly, enhance its operating margins. This has contributed in enhancing its public image further (Pettus, 2003).

On the other hand, the public image of the airline has been enhanced by its initiative of flying green. Southwest Airlines takes environmental awareness very seriously as it considers it part of their triple bottom-line approach: planet, people, and profits (Bidgoli, 2010). The airline uses a low-carbon, renewable jet fuel. Southwest Airlines has been able to leverage its low fares as well as its customer-friendly heart in becoming the largest carrier of the international and domestic fliers of the nation (Renga & Mentges, 2010). Southwest Airlines is highly dedicated to maintaining their low-cost leadership through efficient and effective procurement practices to support the connection of people with what is important in their lives (Pettus, 2003). The company’s efforts of maintaining their low-cost leadership has enabled it to develop a positive public image among the stakeholders. The airline’s plan of increasing its international flights has enabled it to fly high (Bidgoli, 2010).

Conclusion

Southwest Airlines is the single biggest low-fare carrier today, conveying a bigger number of passengers to their destinations than some other aircraft on the planet. The airline has expanded internationally and is currently experiencing revenue growth. The company’s high commitment to customer service has enabled Southwest Airlines to consistently generate a profit for over the last 40 years even other major U.S. airlines have been able to declare bankruptcy within the last 10 years. The company is a functional organizational structure as all of their decision-making happens at the top levels of the management and the company’s upper management has complete control over the company. Southwest Airlines is currently poised for the global takeoff with many growth drivers that are able to take their sales and profits aloft. The company’s efforts of maintaining their low-cost leadership has enabled it to develop a positive public image among the stakeholders as the airline’s plan of increasing its international flights has enabled it to fly high.