Company Analysis: Southwest Airlines

Company Analysis: Southwest Airlines Co
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Introduction
Southwest Airlines Co.(NYSE: LUX) mainly operates in the U.S. using 606 Boeing 737 aircraft and 88 Boeing 717 (Yahoo Finance, 2014). The Company was founded in 1967, and is headed in Dallas, Texas and operates in 41 states, the U.S. District of Columbia, and Puerto Rico. The company also has operations in parts of Mexico and the Caribbean, and employs 44, 831 workers. Southwest mostly relies on low fares to expand to new areas operating short to medium range flights and the high frequency of flights ensures that the company continues operations, but there has been no compromise on service quality from the low cost of operations with the company being recognized for customer service. This paper explores the financial performance, SWOT analysis, and decisions on whether to work or invest in Southwest Airlines Co. in light of the company’s financial analysis.
Income statement
2013 2012 2011 2010 2009 Period End Date 12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009 Stmt Source N/A 10-K 10-K 10-K 10-K Stmt Source Date 12/31/2013 02/04/2014 02/07/2013 02/07/2013 02/09/2012 Stmt Update Type Original Updated Updated Updated Updated Currency Code USD USD USD USD USD   Total Revenue 17,699.0 17,088.0 15,658.0 12,104.0 10,350.0             Cost of Revenue 6,843.0 7,252.0 6,599.0 4,371.0 3,763.0 Gross Profit 9,392.0 8,438.0 7,792.0 6,746.0 5,683.0              INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Selling,General and Administrative 6,499.0 6,147.0 5,638.0 4,691.0 4,372.0  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Depreciation, Amortization and Depletion 867.0 844.0 715.0 628.0 616.0 Acquisition Expense 86.0 183.0 134.0 8.0 0.0 Other Operating Expenses 2,126.0 2,039.0 1,879.0 1,418.0 1,337.0 Operating Expenses 9,578.0 9,213.0 8,366.0 6,745.0 6,325.0   Operating Income 1,278.0 623.0 693.0 988.0 262.0             Net Interest Income -101.0 -119.0 -172.0 -137.0 -152.0 Other Income/Expense,Net 32.0 181.0 -198.0 -106.0 54.0 Pretax Income 1,209.0 685.0 323.0 745.0 164.0             Provision for Income Tax 455.0 264.0 145.0 286.0 65.0 Net Income 754.0 421.0 178.0 459.0 99.0   Dividend Per Share 0.13 0.03 0.02 0.02 0.02 Tax Rate 0.376344 0.385401 0.350000 0.383893 0.396341    INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Basic EPS 1.06 0.56 0.23 0.62 0.13  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Diluted EPS 1.05 0.56 0.23 0.61 0.13   Financial data in USD Values in Millions (Except for per share items)
Source msn.com
With reported revenue of 17.7 Billion, Southwest Airlines Co. is a major player in the U.S. airline industry. In 2010, Southwest Airlines had reported operating revenue of $ 10.35 billion and the fourth largest in terms of revenue versus UAL/ Continental, Delta, AMR and US Airways (MSN, 2014). However, in the same year, the company had the biggest operating income at 262 million owing to the company having the lowest operating expenses among the fourth largest carriers in America (Maxon, 2010). Similarly, the company had a better gross margin in 2013 at 53.07 versus the industry average of 50.91. The net profit margin for the company was 4.26 while the industry average was 13.1 showing that there was an increase in operating expenses between the years 2010 to 2013 in comparison the airlines industry.
There were impressive growth rates in sales in Southwest Co, at 6.1 % in 2013, but the airlines industry registered a drop of 5.75%. This trend was backed by growth in net income for the company in comparing each quarter versus that of the previous year registering a 171.8% rise versus a 3644.46 % reduction for the industry. However, sales growth took a different turn at 9.93 % for the company and 26.08 % showing that the industry outperformed the company. Low- cost carriers typically have higher operating cash flow value than other carriers because they can cover current liabilities from cash operations showing the need to manage the company’s operations (Armen, 2013).
Balance sheet 2009-2013
2013 2012 2011 2010 2009 Period End Date 12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009 Stmt Source N/A 10-K 10-K 10-K 10-K Stmt Source Date 12/31/2013 02/04/2014 02/07/2013 02/07/2013 02/09/2012 Stmt Update Type Original Updated Updated Updated Updated Currency Code USD USD USD USD USD   Assets  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Cash, Equiv and Short Term Investments 3,152.0 2,970.0 3,144.0 3,538.0 2,593.0  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Receivables 419.0 332.0 299.0 195.0 169.0 Inventories 467.0 469.0 401.0 243.0 221.0 Prepaid Assets and Others 250.0 210.0 238.0 89.0 84.0 Deferred Current Assets 168.0 246.0 263.0 214.0 291.0 Deferred Taxes, Current Assets 168.0 246.0 263.0 214.0 291.0 Total Current Assets 4,456.0 4,227.0 4,345.0 4,279.0 3,358.0    INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Net Property,Plant, and Equipment 13,389.0 12,766.0 12,127.0 10,578.0 10,634.0  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Goodwill and Other Intangible Assets 1,136.0 1,108.0 1,125.0 0.0 0.0 Investments and Advances 44.0 41.0 97.0 0.0 0.0 Derivative Assets, Non-Current 145.0 306.0 253.0 0.0 0.0 Other Non-Current Assets 175.0 148.0 121.0 606.0 277.0 Total Non-Current Assets 14,889.0 14,369.0 13,723.0 11,184.0 10,911.0   Total Assets 19,345.0 18,596.0 18,068.0 15,463.0 14,269.0             Liabilities and Shareholders' Equity  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Payables 1,247.0 1,107.0 1,126.0 739.0 746.0 Accrued Expenses, Current 1,229.0 1,102.0 842.0 863.0 696.0 Current Debt 629.0 271.0 644.0 505.0 190.0 Other Current Liabilities 2,571.0 2,170.0 1,921.0 1,198.0 1,044.0 Total Current Liabilities 5,676.0 4,650.0 4,533.0 3,305.0 2,676.0              INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
LT Debt and Capital Lease Obligation 2,481.0 3,259.0 3,418.0 2,875.0 3,325.0  INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Deferred Liabilities, Non current 3,162.0 3,088.0 2,766.0 2,581.0 2,309.0 Employee Benefits 138.0 148.0 107.0 0.0 0.0 Other Non-Current Liabilities 552.0 459.0 367.0 465.0 493.0 Total Non-Current Liabilities and MI 6,333.0 6,954.0 6,658.0 5,921.0 6,127.0             Total Liabilities 12,009.0 11,604.0 11,191.0 9,226.0 8,803.0              INCLUDEPICTURE "http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gif" \* MERGEFORMATINET 
Capital Stock 808.0 808.0 808.0 808.0 808.0 Retained Earnings 6,431.0 5,768.0 5,395.0 5,399.0 4,983.0 Additional Paid in Capital 1,231.0 1,210.0 1,222.0 1,183.0 1,216.0 Treasury Stock -1,131.0 -675.0 -324.0 -891.0 -963.0 Accum Gains/ Losses Not Affecting RE -3.0 -119.0 -224.0 -262.0 -578.0 Total Equity 7,336.0 6,992.0 6,877.0 6,237.0 5,466.0             Total Liabilities and Equity 19,345.0 18,596.0 18,068.0 15,463.0 14,269.0             Ordinary Shares Outstanding 700.47 730.32 772.56 747.43 742.79 
Value on millions- Source msn.com
Southwest has improved total assets increasing from $14.269 Billion in 2009 to $ 19.345 billion in the financial year 2013(MSN, 2014). The industry saw growth in this period, but between the years 2008 to 2009, it was difficult for all players because of the global recession. The company’s position has been improving over time with the debt/equity ratio reducing from 0.64 in 2009 to 0.42 in the year 2013. Similarly, the return on equity improved from 1.9 to 10.5 in the same period as was return on assets which was 0.7 in 2009 and 4 in 2013(MSN, 2014). Similarly, Southwest has one of the highest cash current debt coverage ratio in average from 2007 to 2011, reflecting the company’s ability to cover current debt maturities (Armen, 2013).
Stock performance
On 31 December 2008, the company’s stock traded at $8.62 and was on a downward trend, indicating the impact of the financial downturn reaching a low of $ 5.22 in 4th March 2009 (Ycharts, 2014). However, the stock price has generally been rising from that time and only falling marginally rising to a high of $ 23.94 on 1 April 2014 (Ycharts, 2014). At a market capitalization of 16.81 billion on April 1, it is apparent that the company’s value has risen over time since the 2008/2009 period reflecting growing investor confidence on the company’s future performance. The company’s dividend yield has risen marginally over time from 0.28% in April 1, 2009 to 0.67% on 2nd April 2014(Ycharts, 2014) and this is in contrast to the earnings yield that has risen substantially over time but fell between June and December 2009. The company’s stock performance in 2010 was also hinged in the acquisition of AirTran, and this also had a positive impact on the company’s revenue projections ( Reklaitis, 2010).
Compare their performance in a least the following areas with industry standards:
Market position
Even though, the airlines industry has suffered losses in the recent past, Southwest has surprisingly done well, and as of 2012, the company had experienced 39 years of profitable operations (Dow Jones, 2012). The 2008/ 2009 affected the company’s profits but the company still reported impressive results. The company’s profits have led to increased growth over time, and the company is now the fourth largest in the U.S, with approximately 15% market share (Ulfberht Captial, 2013). One of the ways through which the company has improved its competitiveness is that most passengers are nonstop, and hence the airline spends less time on the ground than other competitors. The main competitors are companies that have merged including United/ Continental Airlines and Northwest/Delta Air Lines Inc, while the merger of other major airlines in Europe including Air France, British Airways, and Iberia provide increased competition (Carey et al., 2013).Major operational ratios
The operation ratios show the relationship between expense control and income with revenue in measuring profitability and financial wellbeing of the company. The ratios also highlight on relations between the balance sheet and the income statement and typically show efficiency. The Operating expense to operating income ratio was 24.14 in 2009; this reduced to 6.83 in 2010, and then increased then fell to 7.5 in 2013. This shows that there is increased efficiency in the company, because smaller ratios show that the company was maximizing operations by reducing the level of operating expenses relative to the increase in operating revenue.
The company’s asset turnover is 0.93 versus the industry average of 0.84 and this is the ratio of sales to assets. This shows that the higher the ratio for the company shows that there are impressive results better than the industry. Southwest is utilizing its assets to generate sales efficiently than other competitors in the airlines industry.
The inventory turnover represents how efficient was able to sell goods, where the company’s ratio is 14.62 and this is below the industry norms of 18.82, showing that the company is not efficiently selling services and hence action needs to be taken to be in line with the industry norms.
SWOT analysis
The strengths and weaknesses represent the internal factors that determine the company’s direction while the opportunities and threats are the external factors. These factors are the basis of strategic analysis of the company showing the company’s ability to build upon the growth strategy, and use of competencies to leverage on opportunities while also dealing with emerging threats in the airlines industry.
Strengths
The company has been profitable for 40 years even in turbulent years where the company reported revenues of $ 17.7 billion in 2013 against revenues of $17.1 billion in the year 2012. Similarly, the company has improved profits over the years.
The company’s has a strong fleet operation and relying on 606 Boeing 737 aircraft ...