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The airline industry is cyclical, labor-intensive, energy-intensive, capital-intensive and highly competitive as to fares, frequent flyer benefits, routes, and service, and some carriers competing with Southwest have larger fleets and wider name recognition. Certain major United States airlines have established marketing and codesharing alliances with each other, including Northwest Airlines/Continental Airlines/Delta Air Lines; American Airlines/Alaska Airlines; and United Airlines/US Airways. One of Southwest’s primary competitive strengths is its low operating costs. Among the factors contributing to its low cost structure are a single aircraft type, an efficient, high-utilization, point-to-point route structure, and hardworking, innovative, and highly productive employees. Low costs attract Customers who will become frequent flyers. The in-flows or revenue streams won’t stop any time soon. The company has also recognized how cyclical the business can be. Quarterly operating income and, to a lesser extent, revenues tent to be lower in the first quarter (January 1 – March 31) and fourth quarter (October 1 – December 31) of most years.

From the earlier premium alcoholic beverages to the high-revenue bringing internet site (www.southwest.com), Rapid Check-IN, Rapid Rewards and access to increased credit by the use of services of non-airline partners such as car rental agencies, hotels, telecommunications companies and credit card partners (Southwest Airlines Chase Visa card and newsletter Inside Flyer, Customers are paying attention to the low fares offered by this company. They know they can depend on the Southwest brand. Southwest’s low fares, convenience (numerous flights to each point), friendly Customer Service, robust route system and longstanding profitability record have made it one of the premier airlines in the industry. The Southwest Culture has fast become the measuring stick for most corporations in America.

When it comes to the financial plan and financial feasibility, Southwest’s leaders are very selective and prudent about the airports they choose to serve. They prefer to fly from airports that support a high number of frequencies and their low operating costs. Most of their airports have more than 100 departures per day. No wonder that they had close shops at Houston George Bush International Airport. Also, they schedule their aircraft to minimize the amount of time at the gate, which is a way for them to have the highest aircraft utilization and employee productivity. The planes may be at the gates for less than 20 minutes.

There’s no doubt that Southwest has been able to maintain this strong financial position thanks to its continued profitability. Its business has fixed operating costs. Its operations are susceptible to weather conditions, natural disasters, and federal oversight. Since September 11, safety and security issues have been on the fore front of each passenger’s mind. Careful, timely planning and discipline have allowed the company to have the strongest balance sheet in the airline industry. Southwest is the only U.S. airline with an investment grade credit rating. The leaders are happy to report that they have ample liquidity and access to capital. They started 2004, for example, with $1.3 in cash and fully available bank revolving credit facility of $575 million, $682 million in cash deposits at Boeing for future aircraft deliveries. Its unmortgaged assets have a value of over $5 billion, and our debt to total capital is under 40 percent, including aircraft leases as debt.

Southwest’s common stock is traded on the New York Stock Exchange and is traded under the symbol LUV. The high and low sales prices of the stocks are as follows. When the same period of 2004 is compared to that of 2003, we can see that the dividend was rather high. According to information collected by the company, total operating revenues for third quarter 2004 increased 7.8 percent to $1.67 billion for third quarter 2003. Operating income was $191 million, compared to $185 million in third quarter 2003. Total third quarter 2004 operating expenses were $1.48 billion, an increase of 8.4 percent, compared to $1.37 billion in third quarter 2003. What’s clear is that the company’s hedging program resulted in an offset to fuel and oil expense of $131 million in third quarter 2004. Fuel and oil expenses are being closely watched by SWA. The company ended third quarter 2004 with $1.88 billion cash on hand plus its fully available unsecured revolving credit line of $575 million.

Some of the major capital investment decisions that the leaders of Southwest Airlines have been able to make are due to the fact that cash was available. They have been able to react quickly to growth opportunities even in bad economic times. While they want to maintain growth at a managed growth rate of roughly 8 percent per year, the company’s leaders and employees have enough experience, wherewithal and flexibility to take advantage of any growth opportunities as they arise or at any market. While all other airlines are besieged with losses, Southwest has been able to start service to Philadelphia last May, 2004. The customers of this route have responded en masse. That explains why the company increased the flights from 14 to 41 in a relatively very short time. Next month (May 2005), Southwest will start flying to Pittsburg, which will be its 60th city. No wonder that it’s been known as a growth company by any industry insiders and customers. The leaders know how to exploit opportunities when they arise.

Furthermore, Southwest acquired the leasehold rights to six additional gates through the competitive bid process in the ATA Airlines, Inc. bankruptcy proceedings, bringing its total gates in Chicago Midway to 25. It acquired the six gates and a six-bay maintenance hangar in Chicago for a purchase price of $40 million. It does make sense to have cash on hand! Southwest signed a codeshare agreement with ATA. Thanks to this accord, Southwest customers will be able to initially connect in Chicago Midway for travel between select cities and following ATA destinations.

Operating an all-coach, Boeing 737 fleet of 417 aircraft, Southwest is not resting on its laurels. Its leaders are looking at potential investments. It has future orders, options, and purchase rights with the Boeing Company for 2005 through 2012 for 737-700s. They consider that the average age of its young fleet is less than 10 years. The company is in the process of renewing the interior and exterior of its entire fleet with leather-covered seats. Southwest pins its future prosperity on the 737-700 aircraft. They want 34 new 737-700s.

Southwest has a well-known brand. Customers are attracted to its low fares. They are buying tickets to their final destinations while participating in its Rapid Rewards or frequent flyer miles program. They have acquired gate and maintenance hangar access from ATA whose planes Southwest customers have been able to board on connecting flights. The leaders have also gotten enough early fuel and oil contracts to place the company in a good position for the first two quarters of 2005. Controlling costs is an on-going process. To do so, Southwest started adding “blended winglets” to approximately 92 percent of its fleet of 737-700 aircraft. The addition of these wing enhancements are expected to be completed for all 737-700 this year. They will extend the range of these aircraft, save fuel, lower potential engine maintenance costs and reduce takeoff noise. The company expects annual fuel consumption of 3% for each aircraft outfitted with the winglets. Commission paid out to travel agents was phased out. All other U.S. airlines have done the same thing. Southwest ended up saving $50 million by just initiating this policy change.

Thanks to its low-cost, high production, high customer satisfaction, competitive edge, protective fuel hedging position, and excellent workers, it will be able to face the future and know prosperity. With a strong financial backing, it will be able to find new sources of investment and take on the competitors attracted to the Low Cost Carriers (LCC) advantage. Even high cost carriers are trying to make a few dents in this rewarding niche market too.

Sources:
1. http://www.southwest.com
2. http://www.reportgallery.com

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