A Financial Analysis of Southwest Airlines Co

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A Financial Analysis of Southwest Airlines Co.

Accounting for Financial Decisions BA812

Professor Wayne Drake May 20, 1998

Gillian Ainsworth Jennifer Goidell Christine Ledoux Tarak Modi Gerald Owens Robin Walters

Southwest Airlines: Twenty-Six Years of “LUV”
Twenty-six years ago, Rollin W. King scribbled three lines on a cocktail napkin, leaned across the table, and muttered to his longtime friend: “Herb, lets start our own airline”. Herbert D. Kelleher loosened his tie and knitted his brow before replying: “Rollin, you’ crazy.” He then paused, grinned, and added, re “Lets do it!” 1They founded Air Southwest Company in 1967. The company incorporated as Southwest Airlines in Texas, and commenced customer service on June 18, 1971. They began with three Boeing 737 aircraft serving three Texas cities – Dallas, Houston, and San Antonio. Today, Southwest Airlines operates more than 243 Boeing aircraft and provides service to more than 50 airports located in 49 cities in more than 24 states. Southwest Airlines offers approximately 2200 low fare, short-to-medium range flights throughout the United States.2 Their stock-exchange symbol “LUV” symbolizes their home at Dallas Love Field, as well as the theme of their customer relationships. Today, Southwest is the nation’ low fare, high customer satisfaction airline. Southwest has literally s written the book on low fares. The airline has never pretended to be anything more than a bus service. With an average flight distance of 425 miles, Southwest Airlines’ most significant competitor is ground transportation. No matter how long the flight is Southwest offers only a single class, open seating, and no meals. Southwest Airlines also maintains high frequency of flights and quick ground turnaround, yielding approximately 20 minutes ground time between flights.3 By maintaining this consistency, they have been able to drive cost-cutting efforts and provide superior service. Southwest flies from smaller, lower traffic airports and schedules its planes to minimize the amount of time they spend at the gates. A classic moment in the history of Southwest was when Herb, in 1992, arm-wrestled Stevens Aviation chairman Kurt Herwald to determine the rights to the “Just Plane Smart” advertising slogan, and for starring in Southwest’ TV commercials. s


1996 Southwest Airlines Annual Report


Southwest Airlines Compared to the US Airline Industry

Since its beginnings as a scheduled airline in 1971, Southwest Airlines has distinguished itself within the US airline industry as a unique player. Its commitment to offering a low fare structure to both business and leisure travelers has made air travel more affordable to many consumers and has caused a consistent increase in demand for expansion into new markets, as well as increasing price competition within the cities it serves. Since the airline regulation in 1978, Southwest has dramatically increased the number of markets it serves and its market share. It has also been the model for a number of less successful low cost start-up airlines, such as ValuJet and People’ Express. s Southwest Airlines has implemented several cost-effective strategies which allow the savings to be passed along to the consumer. First, Southwest does not offer full cabin service and provides only “coach class” service to its passengers. Meal service is not offered, only peanuts, snacks and beverages. Second, Southwest only operates one type of aircraft and one type of engine, the Boeing 737 series and GE engines, which greatly reduces maintenance costs, allows for lower spare parts inventory and cuts on training costs for crews. Third, Southwest uses “ticketless” and “paperless” travel reservations systems. Passengers are not issued paper-boarding passes and are not assigned seating when making reservations. Instead, they are given plastic numbered reusable boarding passes based on first come, first served basis. Fourth, Southwest Airlines offers...
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