Southwest Airlines

SOUTHWEST AIRLINES

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 (www.southwest.com). 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 Ratio Southwest Jet 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

ANALYSIS

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 industry indicators of efficiency (Berry 2004). Southwest Airlines Return on Equity (ROE) is looking very good. Although, there is such a big leap between 2002 and 2003, due to the effects of the September 11 attacks, the airlines tried to recover enough to bring the number back down. The managers at Southwest Airlines are maximizing the use of the shareholder's funds. On the other hand, Jet Blue is doing very poorly in utilizing their shareholder's funds. But in fairness, they were able to bring their percentage down in 2004. In order for Jet Blue Management to recover and compete against the industry, they have to initiate a serious overhaul of the strategic management of managing funds.

Jet Blue managers have not managed the company's assets efficiently and effectively. Because of the September 11 terrorists attack, Jet Blue's Return on Assets (ROA) has drastically dropped from 2003 to 2004. It is very far from showing profitability and best use of its assets. Southwest Airlines also experienced a drop from 2001 to 2002 but has sufficiently recovered and is on an upward trend. Their increase from 2002 to 2003 was at 35%. It is showing profit and increasing its ROA. Jet Blue's performance shows that the company is currently improving and may be stronger in its future performance. Southwest Airlines shows that their current performance and future performance expectations are good.

The gross margin of Southwest Airlines has remained steady in the three year period presented above. Southwest Airlines has a relatively high gross margin rate, primarily because of low-operating costs. Low operating costs is one of Southwest Airlines' claims to fame, as discussed in their 2003 Annual Report, "By keeping low costs low, we keep our fares low. This, in turn, gives customers the freedom to fly". On the other hand, Jet Blue's Profit margin is still considered the highest in the industry. As of September 30, 2005 (www.bigeasyinvestor.marketguide.com), Jet Blue's revenues