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- 1. Looking to thefuture Brought to you by: Power to the Point Consulting
- 2. Agenda •Key issues •Problem statement •Industryanalysis •Internal analysis •Alternatives •Recommendation •Implementation with timeline •Financial analysis of recommendation •Risk & Contingencies !2 !2
- 3. Key Issues • Risingoperating costs: labour, fuel, etc. • Labour productivity • Efficiency of aircraft • Maintaining southwest culture in new markets • No prior knowledge/corporate experience in international markets • Integrating culture into AirTran !3 !3
- 4. Problem Statement • Inan ever-competitive market, how will Southwest Airlines maintain its competitive advantage while growing in international markets and fostering its culture within AirTran employees? !4 !4
- 5. Recommendations ! • Remove domesticflight path redundancies between Southwest and AirTran, create an international sub-brand using AirTran’s name, and introduce a profit sharing program tied to productivity measures. !5 !5
- 6. Industry/Competitive Analysis • Lowered barriersto entry • Greater buyer power due to price transparency • High supplier power: Boeing & Airbus • Medium/low substitute services • Industry Rivalry !6
- 7. Internal & Financial Analysis Resources! •Tangible resource: Financial Strength • Intangible resources: Strong culture (Herb Kelleher, servant-leadership) • Human resource: Excellent hiring practice (enthusiastic & extraverted) Capabilities! • Customer service: “perfectly outrageous” • Operational efficiency • Borrowing capacity !7
- 8. Net debt≈0=high borrowingcapacity !8 !8 Net Debt Millionsofdollars (900) (400) 100 600 1,100 1,600 2,100 2,600 1987 2000 2012 Southwest JetBlue
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- 10. • Southwest hasshown desire to grow internationally 1. Acquire JetBlue !10 !10 International penetration
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- 12. • Southwest hasshown desire to grow internationally 1. Acquire JetBlue International penetration Revenues Domestic and international competition !12 !12
- 13. 2. Complete Integration ofAirTran
- 14. • 75% oforganizational change programs fail • Export processes, culture will follow 2. Full Integration !14!14 !14
- 15. • AirTran willbe the international arm • Eliminate redundancies of destinations and staff 2. Full Integration !15!15 !15
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- 17. 2. Full Integration Computerbooking and reward system must be merged ! !17
- 18. 2. Full Integration Sellremaining Boeing 717s to reduce training costs !18!18 !18
- 19. 3. Stock BasedIncentives • Incentive program will address productivity decreases in ASM ! • Met targets will be rewarded with stock options -turnaround time: 15 minute target -customer service: >1% of guests complained !19!19 !19
- 20. Decision Criteria Employee Productivity Aircraft Efficiency Brand Value Market Growth Customer Satisfaction Financial Purchase JetBlue Messy with unions! — ++ O D+ I + More options, better connectivity — — Create Sub- brand out of AirTran + implementation process ++ O D+ I + loyalty program — , merge bookings + + Stock Based Incentive Program +++ ++ + turn- around D O I O + + !20
- 21. Recommendation • Integrate Computerssystems -Integrate Booking System -Integrate Points Systems • AirTran Sub-brand -Reduce staffing in overlapping destinations -Integrate Operational Efficiencies • Introduce Incentive Plan !21!21 !21
- 22. Implementation plan (timeline) Departments Operations Integrate Computers Systems -‐ Amadeus Altea IT Integrate Booking System Integrate Points systems SWA Operations Introduce Incentive Plan HR Moniter Incentive Plan Spread Best practices based on Incentive plan results AirTran HR Reduce redundant destinations Operations Train remaining AirTran Staff to integrate operational efficiencies Introduce Incentive Plan -‐ AirTran Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 + Beyond !22 !22
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- 24. Total Cost /ASM 4.5 5.125 5.75 6.375 7 2004 2005 2006 2007 2008 2009 2010 2011 2012 Southwest Industry Average for LCC JetBlue Slowly SouthWest is losing its Low Cost Competitive Advantage !24
- 25. Wages as %of Total Cost Wages/TotalCost(%) 16 21.5 27 32.5 38 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Southwest Industry Average Wage expense as a portion of total costs is 35% higher than the industry average !25
- 26. ASM (‘000s)/Employee ASM(‘000s) 1600 2100 2600 3100 3600 2003 20042005 2006 2007 2008 2009 2010 2011 2012 SouthWest Industry Average $573 M $573 M Productivity or ASM/Employee has decreased versus industry since 2008. !26
- 27. 0% 30% 60% 90% 120% 2013 2014 20152016 Net Income % increase with productivity boost Regaining recent productivity loss results in massive Net Income Gains. !27
- 28. Net Income Margin 0% 1.5% 3% 4.5% 6% '13'14 '15 '16 without productivity boost with productivity boost With productivity boost, Net Income margins will slowly reach previous levels !28
- 29. • Loss ofdomestic AirTran customers to other competitors • Better turnaround time and customer service does not equal projected increase in productivity and Contingencies !29 !29
- 30. Power to thePoint !30!30 !30 Recommended Solution Added Value • Reduced redundancies $573 M • Incentive based program to increase productivity (conservative est. over 4 yrs) Timeline Key Points • SWA (Incentive Plan)≈15 mo. • Increased productivity = $$$ • AirTran (Redundancy Reduction)≈24 mo. • No dilution of Southwest culture • Improved synergy between AirTran & Southwest
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- 33. Caribbea n Mexico LocationsAruba, Aruba Cabo San Lucas/LosNassau, Bahamas Cancun, MexicoBermuda , Mexico City,Montego Bay,Punta Cana,San Juan, Caribbean Locations Mexico Locations Latin AmericaOranjesta d, Aruba Cancun, Mexico SanJose, CostaNassau, Bahamas Liberia, CostaChrist Church, Bugota, ColumbiaLa Romana, Medellin, ColumbiaPuerto Plata, Lima, PeruPunta Cana/Samana, Dominica ! !Santiago de los ! Santo Domingo,Grand Cayman,Kingston, JamaicaMontego Bay,St. David’s Island, ! !Aguadilla, Puerto ! !Ponce, Puerto ! San Juan, PuertoVieux Fort, SaintProvidenci ales,Port-au- AirTran International Destinations: JetBlue International Destinations:!
- 34. 5 yr sales growthrate 1.1222 Tax rate 0.3854 FY 2012 est. 2013 est. 2014 est. 2015 est. 2016 For the period ending 12/31/2012 Revenue % Sales Values 17088 19176 21519 24149 27100 Revenue with PS 19415 21997 24866 28056 Operating Expenses 0.9528 16282 18271 20504 23009 25821 Operating Income 806 905 1016 1140 1279 Interest Expense 0.0074 126 142 159 179 201 Pretax Income 0.0401 685 769 863 968 1087 Income Tax Expense 264 296 333 373 419 Net Income Current 421 473 530 595 668 NI Margin 2.46 2.46 2.46 2.46 2.46 Net Income w Productivity Boost 664 912 1168 1432 Net Income Margin w Productivity Boost 3.42% 4.15% 4.70% 5.10% Pro-Forma Analysis