Southwest Financial Analysis

Topics: Financial ratio, Financial ratios, Southwest Airlines Pages: 10 (3603 words) Published: December 11, 2005
Southwest Airlines is the nation's low fare, high customer satisfaction airline. Southwest was incorporated in Texas in 1967 and commenced Customer Service on June 18, 1971, with 3 Boeing 737 aircraft serving 3 Texas cities – Dallas, Houston, and San Antonio. At year-end 2004, Southwest operated 417 Boeing 737 aircraft and provided service to 60 airports in 59 cities in 31 states throughout the United States. Southwest Airlines topped the monthly domestic passenger traffic rankings published by DOT for the first time in May 2003 ( Based on the monthly data for October 2004 provided in their company website, Southwest Airlines is the largest carrier in the United States based on originating domestic passengers boarded and scheduled domestic departures. One of Southwest's primary competitive strengths is its low operating costs. Southwest has the lowest cost, adjusted for stage length, on a per mile basis, of all the major airlines. Among the factors that contribute 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. RATIO ANALYSIS

Various ratios are used by Southwest Airlines to analyze and forecast the profitability and efficiency of their organization. To measure the ability of Southwest Airlines to meet its short-term financial obligations and to assess the liquidity to convert current assets to cash to reduce current liabilities, they used four financial ratios for establishing the company's short-term liquidity. The table below shows the activity of Southwest Airlines using the four financial ratios and compared them to their leading competitor Jet Blue Airways and to the airline industry averages.

Financial RatioSouthwestJet Blue Industry
Profitability Ratio 2004 2003 2002 2004 2003 2002 2004 2003 2002 Return on Equity(%) 5.67 8.75 5.45 6.28 15.48 13.24 5.20 19.16 13.13 Return on Assets(%) 2.76 4.47 2.69 1.70 4.75 3.98 2.23 4.61 3.34 Gross Margin 68.68 69.43 69.50 63.53 70.04 73.25 58.06 62.24 63.23 EBITDA of Revenue(%) 15.64 15.16 14.57 15.04 22.01 20.77 11.65 16.36 13.83 Operating Margin(%) 8.48 8.14 7.56 8.92 16.91 16.53 8.70 12.52 12.04 Net Profit Margin(%) 4.79 7.44 4.36 3.75 10.41 8.64 3.24 9.60 4.82 Liquidity Ratios

Quick ratio 0.73 1.16 1.39 1 1.69 1 1.17 1.76 1.14 Current Ratio 1.01 1.34 1.56 1.06 1.75 1.05 1.35 1.90 1.25 Working Capital/Total Assets 0 0.06 0.09 0.01 0.13 0.01 0.01 0.09 0.05 Debt Management

Current Liabilities/Equity 0.39 0.34 0.32 N/A N/A N/A N/A N/A N/A Total Debt to Equity 0.33 0.3 0.38 N/A N/A N/A N/A N/A N/A Long term Debts to Assets 0.15 0.13 0.17 N/A N/A N/A N/A N/A N/A Asset Management

Revenues/Total Assets 0.58 0.60 0.62 0.45 0.46 0.46 0.73 0.73 0.88 Data from University of Phoenix Mergent Online. Retrieved 12/05/05

Profitability Ratios
Profitability ratios are used in an effort to evaluate management's ability to monitor and control expenses and to earn a profit on resources committed to the business (Ledford, 2004). The ratios assess Southwest Airlines' strengths and weaknesses, operating results and growth potential. These ratios are used to measure how efficiently the assets are being used to generate net income and sales (Stauffer, 2004). The ratios allow the comparison of the profitability of Southwest Airlines to that of similar airlines within the industry. Profitability is the measure of profit in relation to sales, assets, and other...

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