Southwest Airlines has experienced strong financial stability and growth since 1971 through their low cost leadership strategy. They have strengths in their iconic branding, strong domestic demand, and high employee morale. However, they face weaknesses in limited revenue opportunities and flight availability, as well as threats from increased competition and rising costs. Going forward, Southwest should look to capitalize on opportunities presented by population growth, new technology, and their 2015 international expansion, while addressing weaknesses and threats through diversifying revenue streams and controlling costs.

1. S W
TO
SWA CASE STUDY
Professor Williams
Group 2 Bernard, Colon, Earl, Walker
Southwest Airlines: LUV Conquers All

2. Southwest Airlines
• Since 1971 Southwest Airlines has turned
heads with their unique strategies. Starting with
a mission statement of “The mission of
Southwest Airlines is dedication to the highest
quality of Customer Service delivered with a
sense of warmth, friendliness, individual pride,
and Company Spirit. For forty-four years
Southwest has delivered. Truly a company that
has exceeded all expectations and become a jet
setter in the Airline industry.

3. Strengths
•Financial stability
•Iconic Branding
•Strong domestic demand
•Employee Moral
•Organizational Processes and routines
Opportunities
•Population growth
•Increased air travel
•New technology
•Wright Amendment repeal
•New international operations
Threats
• Reduced air travel
•Increased Competition
•Shortcoming on Shareholder
expectations
•Cost Rising
Weaknesses
•Lack of revenue opportunities
•Limited flights available
•Contract obligations with Boeing
S W
TO
Primary factors
SWA CASE STUDY

4. S
Financial Stability
Maintaining a strong balance
sheet, the end of 2nd quarter
of 2014 they held a leverage of
37% and cash in hand of 4
billion USD. The beginning of
2014 Southwest generated 1.6
billion of free cash flow. In
June of 2014 a reduction of
debt and capital leases were at
1.5 billion. Southwest has meet
and exceed economies of
scale a tough goal for this
industry.
Iconic Branding
Deemed the top travel brand
and fifth overall brand by The
Business Journals in the
American Brand Excellence
Awards it is one of the most
recognized brand in the US.
Advertising in high profile
sporting events and social
media is it consistently
exploiting its heritage. A
important differentiation in a
commodities industry, not
going along with the crowd and
forgoing revenue is perhaps
albeit and not easily
accountable.
Strong domestic
demand
The US market is in strong
demand with an 8% passenger
unit revenue growth for the
2nd quarter of 2014. This is
another record SWA holds the
largest gain by an airline. Data
from CAPA and OAG suggests
that Southwest is the second
largest airline in the domestic
market when measured by
seat deployment.
Employee Moral
As for human resources, it is
considered this to be one of
Southwest’ greatest strengths.
They consider “the people” to
be one of their greatest assets.
Southwest has branded
themselves with a reputation
for creating innovative
programs to generate an
increase in productivity and
create ideas to cut cost for a
continual affordable airfare for
the customer. They have also
formulated a collaboration of
experience, knowledge,
judgment and skills into their
legendary “Southwest Way”,
which teaches the art of the
“warrior spirit”, “the servant’s
heart”, and a “fun-LUVing
attitude”.
Strengths
SWA CASE STUDY

5. W
Lack of revenue
opportunities
Rejecting the standard yet
again and not "unbundling" as
the competitors have done in
recent years. Ancillary revenue
remains the greatest
opportunity to increase
medium and long term
revenue.
Limited flights
available
Southwest has few flights
offered in the morning and until
2015 offered no service to
international destinations.
Contract obligations
with Boeing
They are currently dependent
on a single maker of aircraft,
preventing them from
purchasing from other
suppliers that may offer larger
less expensive aircraft.
Weaknesses
SWA CASE STUDY

6. O
Population growth
The rise in the elderly and
Hispanic population are
potential markets that
Southwest is currently in the
process of exploiting by the
expansion into the
international flight, beginning
with flight to Mexico and South
America in 2015
Increased air travel
Despite the regulations and
complaints of the newly
established TSA air travel is
predicted to increase rapidly
in the next ten years.
New technology
Newly developed technology
is making air-travel safer and
more pleasurable by offering
Wi-Fi, streaming movies and
up to date weather reports
being broadcast on board.
Being able to offer these and
maintain a low-cost fare will
continue to make SWA number
one.
Opportunities
SWOT ANALYSIS

7. T
Reduced air travel
The ever changing political
and financial markets can have
a huge impact on the cost of
fuel which in turn can reduce
travel in any form especially air
travel. A decline in leisure
travel due to terrorism and a
depressed economy. The
development of high speed
rails can reduce the number of
short flight commutes. Along
with the probability of rising
airfares is likely due to the
inability to implement more
cost cutting measures.
Increased
Competition.
Competing on the basis of
customer service, low cost,
frequency and convenience of
booking travel along with
frequent flyer benefits is a
tough gig. Competitors are
taking notice and strategically
positioning themselves to
maintain their current
standings. With many
competitors having assets
such as large fleets and
branding this can be a difficult
hurdle for Southwest in the
coming years
Shortcoming on
Shareholder
expectations
Failing to meet expectations
will decrease the value of the
company’s stock causing the
company difficulty to raise
capital needed in both short
term endeavors as well as long
term financing such as the
purchase or expansion of the
number of aircraft.
Cost Rising
Southwest labor negotiations
are making it tough to predict
its unit cost increases in the
medium to long term. For the
moment its unit costs are in
line with major airlines, rising
2% in 1H2014 as passenger
unit revenues grew a healthy
6% during that time.
Salaries, wages and benefits
represented 31% of the
airline’s total top-line
expenses.
Threats
SWOT ANALYSIS

8. S O
Financial Stability
Maintaining a strong balance sheet, the end of 2nd
quarter of 2014 they held a leverage of 37% and
cash in hand of 4 billion USD. The beginning of 2014
Southwest generated 1.6 billion of free cash flow. In
June of 2014 a reduction of debt and capital leases
were at 1.5 billion. Southwest has meet and exceed
economies of scale a tough goal for this industry.
Iconic Branding
Deemed the top travel brand and fifth overall brand
by The Business Journals in the American Brand
Excellence Awards it is one of the most recognized
brand in the US. Advertising in high profile sporting
events and social media is it consistently exploiting
its heritage. A important differentiation in a
commodities industry, not going along with the crowd
and forgoing revenue is perhaps albeit and not easily
accountable.
Strong domestic demand
The US market is in strong demand with an 8%
passenger unit revenue growth for the 2nd quarter of
2014. This is another record SWA holds the largest
gain by an airline. Data from CAPA and OAG suggests
that Southwest is the second largest airline in the
domestic market when measured by seat deployment.
Population growth
The rise in the elderly and Hispanic population are
potential markets that Southwest is currently in the
process of exploiting by the expansion into the
international flight, beginning with flight to Mexico and
South America in 2015
New technology
Newly developed technology is making air-travel safer
and more pleasurable by offering Wi-Fi, streaming
movies and up to date weather reports being broadcast
on board. Being able to offer these and maintain a low-
cost fare will continue to make SWA number one.
New technology
Newly developed technology is making air-travel safer
and more pleasurable by offering Wi-Fi, streaming
movies and up to date weather reports being broadcast
on board. Being able to offer these and maintain a low-
cost fare will continue to make SWA number one.
Positive factors
SWA CASE STUDY

9. W T
Lack of revenue
opportunities
Rejecting the standard yet again and not "unbundling"
as the competitors have done in recent years. Ancillary
revenue remains the greatest opportunity to increase
medium and long term revenue.
Limited flights available
Southwest has few flights offered in the morning and
until 2015 offered no service to international
destinations.
Contract obligations with
Boeing
They are currently dependent on a single maker of
aircraft, preventing them from purchasing from other
suppliers that may offer larger less expensive aircraft.
Increased Competition.
Competing on the basis of customer service, low cost,
frequency and convenience of booking travel along with
frequent flyer benefits is a tough gig. Competitors are
taking notice and strategically positioning themselves to
maintain their current standings. With many competitors
having assets such as large fleets and branding this
can be a difficult hurdle for Southwest in the coming
years
Reduced air travel
The ever changing political and financial markets can
have a huge impact on the cost of fuel which in turn can
reduce travel in any form especially air travel. A decline
in leisure travel due to terrorism and a depressed
economy. The development of high speed rails can
reduce the number of short flight commutes. Along with
the probability of rising airfares is likely due to the
inability to implement more cost cutting measures.
Shortcoming on
Shareholder expectations
Failing to meet expectations will decrease the value of
the company’s stock causing the company difficulty to
raise capital needed in both short term endeavors as
well as long term financing such as the purchase or
expansion of the number of aircraft.
Negative factors
SWA CASE STUDY

10. Strategic Alternatives
The goal of Southwest Airlines is to make air travel
available to people who could not afford it. Their
profit-making strategy includes keeping prices at rock
bottom prices. The company is more interested in
minimizing prices, instead of capitalizing on profits.
Their ultimate goal is supported by the following lists
of strategic objective, followed with alternative
capable of accomplishing the respective objectives.
Recommendations & Alternatives
SWA CASE STUDY
Strategic Issues and Recommendations
Southwest strategic issues can be summarized into two
categories. Southwest maintain its low cost advantages in the
airline industry. Second, Southwest will need to be able to
maintain its growth through its current operational strategy.
Maintaining Cost
Most of the discount airlines have attempted to challenge
Southwest’s position for low cost. As CASM increases,
Southwest has become vulnerable and at time, appears to be
losing its market advantage. Southwest needs improvement
with non-fuel cost management. Many of the other
operational costs will be harder to control with its current
market position, Southwest can take steps to guarantee that it
can maintain its low cost advantage.

11. Southwest Airlines Financial Ratios
and Measures
LIQUIDITY 2014
Current assets 4.4 Billion = .743
Current Liabilities 5.92 Billion
Current ratio indicates that Southwest struggles to meet its’ short term obligations.
Current assets minus inventories 4.39 Billion =.75
Current Liabilities 5.92 Billion
Acid ratio indicate that Southwest cannot pay their current inventories and should be looked at with extreme caution.
LEVERAGE 2014
Total debt 13.43 Billion= .66
Total assets 20.2 Billion
Debt ratio indicates that 66 percent of Southwest assets are financed by debt. This percentage of debt can be a challenge to manage. Even though
Southwest has more assets than debt it can be considered a high risk level company.
Total Debt 13.43 Billion= 2
Total Equity 6.78Billion
Considering that in 2014 Southwest has a high debt/equity ratio it indicates that they have been aggressively financing their growth debt, which can
result in volatile earnings as a result of the additional interest expense.
Profits before interest and taxes 355 Million= 2.6
Total interest charges 139 Million
Southwest’ (times interest earned) is 2 ½ times higher than its interest expense for the year which indicates that creditors can trust that they are able
to pay their interest payments when they come due.
ACTIVITY
Sales 13.111 Million= .38
Inventory 342 Million
Inventory turnover for Southwest is .38 which means they sold over a third of their inventory.

12. Fiscal year is Jan - Dec. 2014 2013 2012 2011 2010
Cash 1.28B 1.36B 1.11B 829M 1.26B
Marketable Securities 1.71B 1.8B 1.86B 2.32B 2.28B
Receivables 365M 419M 332M 299M 195M
Inventory 342M 467M 469M 401M 243M
Raw Materials - - - - -
Work In Progress - - - - -
Finished Goods - - - - -
Notes Receivable - - - - -
Other Current Assets 709M 418M 702M 764M 517M
Southwest Airlines Total Current Assets 4.4B 4.46B 4.23B 4.35B 4.28B
Property Plant & Equipment 22.51B 20.82B 19.5B 18.42B 16.34B
Accumulated Depreciation 8.22B 7.43B 6.73B 6.29B 5.77B
Southwest Airlines Net Property Plant & Equipment 14.29B 13.39B 12.77B 12.13B 10.58B
Investment & Advances - - - - -
Other Non-Current Assets - - - - -
Deferred Charges - - - - -
Intangibles 970M 970M 970M 970M -
Deposits & Other Assets 534M 530M 633M 626M 606M
Southwest Airlines Total Assets 20.2B 19.35B 18.6B 18.07B 15.46B
Notes Payable - - - - -
Accounts Payable 1.2B 1.25B 1.11B 1.06B 739M
Current Portion Long-Term Debt 258M 629M 271M 644M 505M
Current Portion Capital Leases - - - - -
Accrued Expenses 1.57B 1.23B 1.1B 996M 863M
Income Taxes Payable - - - - -
Other Current Liabilities 2.9B 2.57B 2.17B 1.84B 1.2B
Southwest Airlines Total Current Liabilities 5.92B 5.68B 4.65B 4.53B 3.31B
Mortgages - - - - -
Deferred Taxes/Income 3.26B 2.93B 2.95B 2.64B 2.58B
Convertible Debt - - - - -
Long-Term Debt 2.99B 2.63B 2.88B 3.11B 2.88B
Non-Current Capital Leases - - - - -
Other Long-Term Liabilities 1.26B 771M 1.12B 910M 465M
Southwest Airlines Total Liabilities 13.43B 12.01B 11.6B 11.19B 9.23B
Minority Interest - - - - -
Preferred Stock - - - - -
Common Stock Net 808M 808M 808M 808M 808M
Capital Surplus 1.32B 1.23B 1.21B 1.22B 1.18B
Retained Earnings 7.42B 6.43B 5.77B 5.4B 5.4B
Treasury Stock 2.03B 1.13B 675M 324M 891M
Other Liabilities -738M -3M -119M -224M -262M
Southwest Airlines Shareholders Equity 6.78B 7.34B 6.99B 6.88B 6.24B
Southwest Airlines Total Liabilities & Shareholders’ Equity 20.2B 19.35B 18.6B 18.07B 15.46B
Southwest Airlines Annual Balance Sheet Financial Ratios

13. Strategic Alternatives
The goal of Southwest Airlines is to make air travel available to people who could not afford it. Their profit-making strategy includes keeping prices at
rock bottom prices. The company is more interested in minimizing prices, instead of capitalizing on profits.
The success of Southwest Airlines is determined by hosting the strongest balance sheet and highest credit rating in the industry. Southwest’s pricing
strategy involves the application of price resistance to perfect a system-wide peak and off-peak pricing system. Their strategy involves dividing the short-
haul market into executives and pleasure travelers. This results in cheaper flights in the evening. In the event of full aircraft, the fare-determination
strategy does not call for an increase in the fare. Instead, they increase the number of flights. Their hiring strategy involves a panel interview, complete
with a presentation by the prospective employee.
Diversification is the best way to ensure a steady revenue stream, although Southwest is not known for servicing, shipping or reservations. The best way
for Southwest to diversify is simply by expanding their market. Saving and investing a portion of retained earnings could also smooth the peaks and
valleys of travel fluctuations. A shakeout strategy must be developed to overcome intense pricing competition and cyclical effects of the industry.
Investors selected to work for Southwest Airlines must have a proven track record. Professional financiers only quote the textbook and seldom have any
common sense or profit to back their knowledge.
In observation to the history of Southwest Airlines, they have accomplished over 39 years of profitability. Some of the core attributes contributing to
their accomplishment consist of: legendary customer service, functional strategies and low cost advantage for (operations, maintenance and training).
Highlighting a few of their strategic strengths, Southwest Airlines strategically focuses primarily on point-to-point travel for more direct trip flights,
shortening the passenger trip length. Also, the decision to use a specific type of aircraft “Boeing 737” for simple scheduling, operations, maintenance
and training. Southwest also benefited from fuel hedging in which they pay up front for the right to buy fuel at certain, lower prices (Strategic
Management in Action 250).
As of 2014, Southwest hit 42 years of profitability. According to the shareholders 2014 annual report their net income of $1.1 billion easily surpassed the