Financial Analysis

Southwest Airlines (LUV)

FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 1

Background and Industry

Nearly 45 years ago, Rollin King and Herb Kelleher decided to start a new kind of airline

- one focused on exemplary customer service. They began with one notion in mind, “If you get

your passengers to their destinations when they want to get there, on time, at the lowest possible

fares, and make darn sure they have a good time doing it, people will fly your airline” (About

Southwest). They were right. The Company operates the largest fleet of Boeing aircraft in the

world. They began service from Love Field in Dallas, Texas in 1971.

Southwest has been in LUV with their customers from the very beginning; as the

company and customers grew, Southwest’s LUV grew. In 1977, the stock was listed on the New

York Stock Exchange under the ticker symbol "LUV." The company has been recorded on

FORTUNE Magazine’s World’s Most Admired Companies list for 20 consecutive years. One of

LUV’s major competitors is Delta Airlines (DAL), which is also one of the largest global

airlines. DAL may be a larger airline than LUV; but, LUV’s dedication to doing the right thing,

ensuring safety, and fostering trusting relationships have definitely set them apart from any other

airline in the world.

Significant Financial Performance Results of Southwest Airlines

Over the past three years, the economy has been on the rise and consumers have been

traveling more, and as a result, DAL and LUV have both had steady growth. Though DAL has

maintained higher overall revenues, both have seen their revenues increase in the past three years

very evenly, with LUV’s revenues growing by 1.9% and Delta Airlines’ growing by 1.1%.
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 2

Abbreviated Income Statements

$ in Billions 2012 2013 2014

LUV DAL LUV DAL LUV DAL
Revenue 17.090 36.670 17.700 37.640 18.610 40.360
Cost of Goods Sold 13.400 28.990 13.510 29.180 13.110 32.170
D&A Expense 0.844 1.570 0.867 1.660 0.938 1.770
Gross Income 2.846 6.110 3.323 6.800 4.562 6.420
SG&A Expenses 2.040 1.590 2.130 1.600 2.210 1.700
Other Ops. Expenses 0.000 1.960 0.000 2.030 0.000 3.500
Unusual Expenses (0.081) 0.504 0.043 (0.091) 0.126 0.984
EBIT after Unusual 0.081 (0.504) (0.043) 0.091 (0.126) (0.984)
Exp.
Interest Expenses 0.126 1.010 0.135 0.852 0.107 0.650
Pretax Income 0.658 1.030 1.210 2.530 1.820 1.070
Income Tax 0.264 0.016 0.455 (8.010) 0.680 0.413
Net Income 0.421 1.010 0.757 10.540 1.140 0.659

Despite even revenue growth, the companies’ trends in net income are very different.

LUV’s net income has increased steadily over the past three years, with growth of 2.7% during

that timeframe. DAL’s net income shows extreme variances between 2012 and 2013, with

growth in net income at a staggering 10.44%. The deferral of almost 8 billion dollars in taxes

during 2013 helped aid that enormous gain in net income. According to Bachman’s article on

bloomberg.com, the prior years of DAL carrying a net loss has come to their aid as they were

able to defray their earnings for 2013 due to their past losses. They then used those earnings for

their massive Seattle expansion in 2014, which is why they dropped from a 10.5 billion dollar net

income to one of 66 million for 2014 (Trefis 2014). LUV, being a significantly smaller company,
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 3

didn’t experience the same drastic losses as DAL during the 2007-2009 recession and instead,

maintained slow and steady growth in revenues and net income.

While LUV shows continued increase in revenue, it also shows danger signs for possible

investors when it comes to working capital. While their current assets have remained fairly

constant throughout the past three years, their total assets have grown, and with that their current

liabilities have increased exponentially. The working capital formula highlights that the company

would not be able to liquidate quickly to cover their current debts. LUV has gone from a

dangerously low ratio of 0.9 in 2012 to 0.7 in 2014, and that puts them at greater risk if the

economy were to experience a recession in the near future.

Abbreviated Cash Flow Statements

$ in Billions 2012 2013 2014
LUV DAL LUV DAL LUV DAL
Operating Activities
Net Income 0.421 1.010 0.754 10.540 1.140 —
DD&A 0.884 1.570 0.867 1.660 0.938 —
Deferred Tax Credits 0.251 0.017 0.050 (7.990) 0.501 —
Other Funds (0.201) (0.263) (0.005) (0.447) 0.002 —
Funds from Operations 1.320 2.330 1.670 3.760 2.580 —
Changes in Working 0.749 0.148 0.811 0.513 0.325 —
Cap.
Net Op. Cash Flow 2.060 2.480 2.480 4.270 2.900 —
Investing Activities
Capital Expenditures (1.350) (1.970) (1.450) (2.570) (1.830) —
Purchase/Sales of 0.515 0.061 0.063 (0.202) 0.105 —
Invest.
Other Uses 0.000 (0.055) 0.000 0.000 (0.004) —
Other Sources 0.000 0.000 0.000 0.014 — —
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 4

Abbreviated Cash Flow Statements

$ in Billions 2012 2013 2014
LUV DAL LUV DAL LUV DAL
Net Invest. Cash Flow (0.833) (1.960) (1.380) (2.760) (1.730) —
Financing Activities
Cash dividends Paid (0.022) 0.000 (0.071) (0.102) (0.139) —
Change in Capital (0.373) 0.000 (0.444) (0.250) (0.845) —
Stock
Issuance/Reduct. of (0.578) (0.940) (0.318) (1.190) (0.261) —
Debt
Other Funds 0.026 0.185 (0.018) 0.225 (0.003) —
Net Finance Cash (0.947) (0.755) (0.851) (1.320) (1.250) —
Flow
Net Change in Cash 0.284 (0.241) 0.242 0.197 (0.073) —
Free Cash Flow 0.716 0.508 1.030 1.710 1.070 —

Although most of DAL’s 2014 data is unavailable, it can be realized that between 2012

and 2013, current assets had a 1.2% increase. Nevertheless, DAL is in a worse place than LUV

when it comes to their ability to liquidate current assets to cover current liabilities. Over the past

few years DAL has maintained an average working capital ratio of 0.64, and has dropped 5.4

billion dollars of total assets since 2013.

Along with having a poor working capital ratio, both companies have a low asset

turnover ratio, indicating assets are not being efficiently deployed. The revenues/total assets

formula shows that LUV has maintained a steady 0.92 average over the past three years, which

does not look well to investors. It suggests possible problems with excess production capacity,

poor inventory management, or lax collection methods.

FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 5

DAL shows poorer efficiency in generating revenue from assets. Using the same formula,

revenue/total assets, it becomes apparent that DAL has a very low total asset turnover: from 0.84

in 2012, to 0.63 in 2013, and 0.75 in 2014. Averaging only 74 cents of revenue for every dollar

of assets, it’s evident that there are significant areas where DAL needs improvement to their

asset management.

Abbreviated Balance Sheets

$ in Billions 2012 2013 2014
LUV DAL LUV DAL LUV DAL
Assets
Cash 1.020 2.790 1.360 2.970 1.280 2.150
Short-Term 1.950 0.958 1.800 0.959 1.800 1.220
Investments
Accounts Receivable 0.332 1.690 0.419 1.610 0.365 —
Inventories 0.469 1.020 0.467 1.060 0.342 —
Other Current Assets 0.456 1.810 0.418 3.050 0.573 —
Total Current Assets 4.230 8.270 4.460 9.650 4.270 —
Net PP&E 12.770 20.710 13.390 21.850 14.290 —
Total Invest & 0.347 0.000 0.189 — — —
Advances
LT Notes Receivable 0.000 0.000 0.000 0.000 — —
Intangible Assets 1.110 14.470 1.140 14.450 0.970 —
Other Assets 0.148 1.090 0.175 1.300 0.534 —
Total Assets 18.600 43.500 19.350 59.390 20.060 54.000
Liabilities & SH
Equity
ST Debt & Current 0.271 1.630 0.629 1.550 0.258 —
LTD
Accounts Payable 1.110 2.290 1.250 2.300 1.200 —
Income Tax Payable — 0.585 — 0.673 — —
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 6

Abbreviated Balance Sheets

$ in Billions 2012 2013 2014
LUV DAL LUV DAL LUV DAL
Other Current 3.270 2.290 3.800 2.300 4.460 —
Liabilities
Total Current 4.650 13.270 5.680 14.510 5.920 —
Liabilities
Long-Term Debt 2.880 11.080 2.190 9.800 2.430 9.780
Provision for R&C 0.289 16.010 0.138 12.390 0.000 —
Deferred Taxes 2.880 2.050 2.930 (4.990) 3.120 —
Other Liabilities 0.898 4.280 1.070 4.270 1.810 0.000
Total Liabilities 11.600 46.680 12.010 47.750 13.290 9.780
Common Equity 6.990 (2.130) 7.340 11.640 6.780 8.810
Total SH Equity 6.990 (2.130) 7.340 11.640 6.780 8.810
Total Equity 6.990 (2.130) 7.340 11.640 6.780 8.810
Liabilities & SH 18.600 44.550 19.350 59.390 20.060 —
Equity

Financial Ratios of Company & Major Competitor or Industry Compared

Morningstar and MarketWatch, along with many other independent financial research

companies, keep detailed records of a company’s financial information over a ten-year history,

allowing stakeholders and others the ability to view and take note of historical performance. It

also better enables analysts to compare LUV with DAL, and any other competitor. It’s the ratios

collected by these two financial companies that will be used here to analyze these airline

competitors.

As will be described later in this paper, LUV had a few tough years where they

performed below the airline industry average. At the end of 2013 and through 2014, however, as
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 7

consumers began to travel more with the economic recovery, they recovered and surpassed their

competition.

To better understand the reason for this boom in performance, a look at LUV’s financial

ratios and a comparison with their main competitor is very important. Only then investors will

see LUV’s financial strengths and weaknesses and whether they can maintain their growing

performance as they move forward into fiscal year 2015. The following paragraphs will give a

brief analysis and comparison between these two corporations by looking at their profitability,

their management proficiency within operating cycles, their return on investment, their liquidity

to assess whether current liabilities can be covered by current assets, and their financial leverage.

The gross margin is a good indicator of a company’s financial health, since without an

adequate gross margin, a company wouldn’t be able to pay their expenses and continue to grow

and succeed. MarketWatch’s data shows that LUV is much more efficient when it comes to

managing its expenses than DAL, as LUV has a 24.46 ratio in comparison to DAL’s 15.90 ratio.

That 8.56 cents per dollar that LUV has left over after cost of goods sold makes a significant

difference for companies who are operating in the billions of dollars range. LUV has 85.6

million dollars per billion more than DAL and they can use that extra revenue for other aspects

of their business.

LUV’s demonstration that they can effectively manage their costs for every dollar

significantly changes when their operating and net margins are analyzed. DAL’s 12.64 operating

margin in contrast to LUV’s 3.03 shows that DAL is more likely to be able to pay for their fixed

costs. DAL proves to be strong in operational management but LUV is better off as far as

financial management, which is obvious during analysis of net profit margin. LUV’s 6.11

outperforms DAL’s 1.63 net profit margin, showing shareholders that more of LUV’s revenues
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 8

can be converted into shareholder profits. LUV can convert 44.8 million dollars per billion more

than DAL and that is extremely appealing to possible investors.

Profitability problems become evident when looking at how LUV handles inventory and

assets. The company turns over inventory 15.5 times per year, which means they can’t use the

extra cash to reinvest back into their inventory as efficiently as DAL, who turns over inventory at

a healthy 22.24 times per year. That downfall puts LUV at a greater risk if the cost of flying

drops. Although DAL is more efficient with their inventory, LUV outperforms them through

their management of account receivables. LUV ensures the timely collection of imparted credit

that’s not earning interest for the firm, by turning over their receivables 47.46 times per year,

compared to DAL’s 20.67 times per year. By collecting that imparted credit ten days faster per

turnover cycle than DAL, it gives LUV a healthy edge when it comes to cash flows and credit

worthiness.

When it comes to generating revenues from assets and showing the productivity of the

company, LUV turns over their total assets 0.94 times per year compared to DAL’s 0.76. Though

LUV is a smaller company with fewer assets, they can generate 22 percent more revenues from

those assets than DAL. Most of that revenue is made possible by LUV’s intangible assets.

However, looking only at LUV’s fixed assets, it is clear that they fall behind DAL in

performance in this regard. DAL’s fixed asset turnover is 1.84 times, compared to LUV’s 1.34.

Taking only those tangible assets into account, LUV’s aforementioned problem with handling

assets is shown once again, as they make 50 cents per dollar of fixed assets less than their

competition.

LUV is better at managing expenses and cash flows than its competition and this trend is

continued during analysis of their operational efficiency. Looking at the average number of days
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 9

it takes LUV to collect revenues after sales have been made, Morningstar shows they collect

every 7.69 days, whereas DAL collects revenues every 17.66 days. By quickly converting sales

into cash, LUV has the ability to put cash back into use, increasing efficiency, and effectively

with high revenues LUV is determined to be successful at bringing money into the business.

LUV once again shows their strength in financial management when their day’s payable

outstanding is observed. Just as they are quick to collect their receivables, they’re also quick to

pay their payables - which looks great for the company’s credit. Their day’s payable is 40.51,

which once again outperforms DAL’s 42.19 when it comes to managing in and outflows of cash.

LUV’s days of sales in inventory displays the same trends in regards to weak inventory

management with a ratio of 23.54, indicating LUV’s slow turnaround is a warning sign for

potential, internal problems. DAL’s ratio of 16.41 shows better inventory management, likely

apparent to a great brand and image that has enjoyed continued growth and popularity.

The next analysis, one sure to have the interest of potential investors, is LUV’s return on

investment at 5.77 percent. It is illustrative of their healthy ability to earn revenues from their

total assets, as discussed during analysis of LUV’s total asset turnover. With this same ratio,

DAL’s 1.16 shows that in terms of total assets, they are much weaker at generating revenue than

LUV. LUV, again, shows possible investors that they may be the better option as an investment

when their return on equity is analyzed. Morningstar highlights that a shareholder can earn

16.10% when investing in LUV, as opposed to 6.44 percent from DAL. Overall, LUV appears to

be a great investment for 2015 with a return on invested capital of 12.13 - almost nine percent

greater than the competition.

When analyzing LUV’s liquidity, please note that current ratios are expected to be less

than that of a company whose assets are not as costly, as airline companies have extremely
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 10

expensive assets and would need a lot of them to generate sufficient revenues. LUV and DAL

have a very low, and identical, current ratio of 0.74, which shows that they both are unable to

effectively cover their current liabilities with current assets. They are, however, at average within

their industry and neither has the upper hand in this category.

Both companies are tremendously weak when it comes to their short-term liquidation.

LUV, with a ratio of 0.57 percent, has a stronger, short-term ability to liquidate than DAL,

however, LUV is still weak in this category because they’re barely able to cover half of their

current liabilities with their current assets minus inventories. DAL is still worse off in this area,

as they have a 0.39 percent ability to cover their liabilities.

LUV’s financial leverage ratio, 2.98, is much lower than that of DAL’s 6.14, meaning

LUV is considered a much safer company for lenders since LUC is better able to repay their

debts and are therefore considered a much lower risk for bankruptcy. When comparing the

companies’ debt to equity, and total debt to total assets ratios, the investment of suppliers,

lenders, creditors, and obligors are much riskier when it comes to DAL since they’re using a

tremendous amount of their money to finance their business. DAL has a debt to equity ratio of

110.94 and a total debt to total assets ratio of 18.10; whereas LUV has a debt to equity ratio of

39.73 and a total debt to total assets ratio of 13.42. This shows that shareholders hold more of

LUV’s debt, and a downturn in the economy could be disastrous to those shareholders.

Return on Equity of Company & Major Competitor or Industry Compared

Return on Equity (ROE) is computed in the following manner using the DuPont method:

ROE = Profit Margin (Net Profit/Sales) * Total Asset Turnover (Sales/Total Assets) * Equity

Multiplier (Total Assets/Total Equity)

FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 11

This method allows an analyst to determine which component of a company’s capital structure is

negatively influencing its return on equity, thereby permitting the analyst to focus on ways to

improve that component.

Here is a summary of each company’s ROE: (Please see calculations in tables 1 and 2)

Fiscal Year Southwest Airlines Co. Delta Air Lines Inc.

LUV DAL
2012 6.02% -47.35%
2013 10.28% 90.53%
2014 16.77% 7.48%

LUV’s revenues, net income and total assets have grown between 2012 and 2014, but its

net income has grown faster than its sales; this was the main factor contributing to its spectacular

growth in return on equity (see Table 1 below). Its degree of financial leverage also grew by a

respectable percentage.

LUV has been growing its ROE for the past years, and looks like they reached the peak

of their return on investment with 16.77 percent at the end of their last fiscal year. As you can

see, ROE has grown about 70.76% from 2012 to 2013, and 63.13% from 2013 to 2014. The

company looks to have a healthy and very positive return on equity with an average 66.88

percent yearly growth rate over the three years, and it carries a solid balance sheet; the company

had more in cash than it had in debt in each of the 3 years analyzed. Southwest also increases in

its cash flow provided by operating activities and free cash flow, showing that it manages its

cash flows well.

DAL hasn’t followed the same path, however, and the company has very uneven results

compared to LUV. While DAL’s revenues increased by an average annual rate of 4.91 percent

from 2012 to 2014, its net income decreased by an average annual rate of 19.18 percent.
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 12

Furthermore, while its total assets increased by an average of 10.22 percent annually, its

stockholders’ equity was negative in 2012 and positive for the next two years.

DAL’s 2012 ROE was - 47.35%, and in 2013 it rose to 90.53%. From 2013 to 2014 its

ROE declined from 90.53% to 7.48%, a 91.74% decline from one year to the other. It looks like

net income and taxes have been the major factor in the change in DAL’s ROE. While it’s net

profit margin and total asset turnover decreased dramatically, its financial leverage increased

during the period under examination. Furthermore, its net cash from operating activities and free

cash flow improved significantly.

It is safe to say that LUV has a solid and consistently improving financial performance,

perhaps a very traditional management style where the company claims to have the best

customer service, and a strategy called the “nuts” idea (Freiberg &Freiberg, 1996), where they

distribute LUV snacks on every flight and thus, conceivably have found a traditional path to stick

to.

While LUV found its path, DAL seems to have been on a bumpy road lately, which

doesn’t necessarily mean they are in the wrong path, just that their choices were not as judicious

as those of LUV. DAL has great investments and has been working in many alliances to improve

its services throughout the world, but investors may be skeptical to invest in the airline, and

would most likely wait another year to see where the company is headed. DAL should work on

increasing its profit margin by finding solutions to help prevent thefts, and should start analyzing

their pricing structure. DAL’s comfortable aircraft has a great reputation, but DAL does not have

competitive ticket pricing. Although each airline has many loyal customers, DAL needs to be

able to attract new customers to add to its frequent traveler list, and they may be able to raise

profit margins by better analyzing their pricing structure.

FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 13

Southwest Airlines Co. (LUV)

Selected Financial Information
For Fiscal Years 2012, 2013 and 2014
(In $Millions, Except Percentages)
Average
Annual
Growth
2012 2013 2014 Rate
Revenue 17,088 17,699 18,605 4.34%
Net Income 421 754 1,136 64.27%
Total Assets 18,596 19,345 20,200 4.22%
Total Stockholders' Equity 6,992 7,336 6,775 -1.56%

Financial Ratios
Profit Margin 2.46% 4.26% 6.11% 57.43%
Total Asset Turnover 91.89% 91.49% 92.10% 0.12%
Financial Leverage 2.660 2.637 2.982 5.88%
Return on Equity 6.02% 10.28% 16.77% 66.88%

Table 1: DuPont Analysis on Southwest Airlines Co.

Delta Airline, Inc. (DAL)

Selected Financial Information
For Fiscal Years 2012, 2013 and 2014
(In $Millions, Except Percentages)
Average
Annual
Growth
2012 2013 2014 Rate
Revenue 36,670 37,773 40,362 4.91%
Net Income 1,009 10,540 659 -19.18%
Total Assets 44,550 52,252 54,121 10.22%
Total Stockholders' Equity (2,131) 11,643 8,813 N/A

Financial Ratios
Profit Margin 2.75% 27.90% 1.63% -22.97%
Total Asset Turnover 82.31% 72.29% 74.58% -4.81%
Financial Leverage (20.906) 4.488 6.141 N/A
Return on Equity -47.35% 90.53% 7.48% N/A

Table 2: DuPont Analysis on Delta Airlines, Inc.

FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 14

Other Areas of Financial Performance Results of Company & Major Competitor or

Industry Compared

LUV has invested $22.513 billion in net property, plant and equipment, while DAL has

invested $31.269 billion. Both companies have consistently invested in long- term assets so their

investments should bear fruit in the future with increased revenues derived from their increased

capacity to carry passengers. According to Neal Dahora from Morningstar, Southwest gained 37

new domestic markets when it purchased Airtrain in 2011. Furthermore, the company started

flying internationally in July 2014 and intends to explore other international routes pretty soon

(Dahora, N., 2015).

LUV has half the amount of employees that DAL has, and LUV made a little less than

half of the revenue that DAL made last year. That being said, both companies seem very similar

in a lot of ways, financially. Both company’s stocks have consistently increased in price since

2012, and their prices on February 20, 2015 are very close: LUV’s was selling for $44.78 per

share and DAL’s stock was selling for $47.44 per share. Both companies have Betas of less than

1.0, which indicates that they have lower risk, and therefore lower returns, according to the

Capital Asset Pricing Model, than the overall market. Both companies are very cyclical, so they

both depend heavily on the current economic conditions to drive their revenues, as customers

might fly more during good economic times and cut travel costs during a recession.

According to Wall Street analysts, LUV has a 4.2 rating and DAL has a 5.0 rating, so

both stocks are advantageous to hold. LUV and DAL’s stock has been rising and there is good

chance that a long-term investor will make money investing in either company.

LUV’s current ratio and credit rating are its most glaring financial weaknesses. Its current

ratio was only 0.74 times at the end of Fiscal Year 2014, meaning that its current assets could not
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 15

satisfy its current debts if they all came due at once. However, DAL had the same weakness

because its current ratio was identical to that of LUV’s at the close of its 2014 fiscal year.

Furthermore, Standard & Poors (S&P) gave LUV a BBB rating on its improving financial

situation, an improvement from its previous rating of BBB- (Jean, 2014). This rating means that

LUV can adequately meet its financial commitments, but is very much subject to adverse

economic conditions (Credit Ratings Definitions & FAQs, n.d.). DAL carries an S&P rating of

BB, which means they are not vulnerable in the near-term but face major ongoing uncertainties

to adverse business, financial, and economic conditions (Credit Ratings Definitions & FAQs,

n.d.).

Despite its weaknesses, LUV has offered its shareholders great value. In fact, according

to LUV’s Fact Sheet, it issued its 154th consecutive quarterly dividend payment to its

shareholders in January 2015, and returned $1.1 billion to shareholders through repurchases of

$955 million of common stock (33 million shares) and distribution in dividends in 2014

(Southwest Corporate Fact Sheet, 2015).

Other Financial Analysis Areas Chart

Company’s Symbol LUV DAL
Stock Price
$44.78 $47.44
02/20/2015
% Change in Stock
2.33% 3.31%
02/20/015
Beta 0.48 0.59
52 Week Change -5.04% -7.09%
4.2 rate 5.0 rate
Wall Street Recommendations
Hold to buy Hold to buy
Stock Type Cyclical Cyclical
Current Ratio
Current Asset/ Current 0.74 times 0.74 times
Liabilities
Credit Rating Valuation,
BBB BB
according to S&P
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 16

Stock Performance of Company & Major Competitor or Industry Compared

As of February 4, 2015, there were 675,993,892 shares of LUV stock outstanding.

(Southwest Airlines Co., 2014). Cash dividends paid to shareholders during 2014 totaled $139

million at $0.22 per share, according to LUV’s 2014 10-K report. The price range of traded LUV

shares in 2014 was between $18.78 and $43.19 with earnings per share (EPS) of $1.65

(Southwest Airlines Co., 2014). Based upon the LUV closing price of $42.32 on December 31,

2014 obtained online via Yahoo Finance and in addition to Southwest 2014 10-K data; a price to

earnings (P/E) ratio of 26 and a dividend yield of 0.52% can be realized. The average rates of

growth for LUV stock for the years 2012-2014 are: 92.47% for EPS, 85.49% for net income, and

5.92% for revenue (Morningstar Inc., 2015). In 2014, 4,917,497 million outstanding LUV shares

were repurchased by LUV at $955 million (Southwest Airlines Co., 2014).

On January 31, 2015, DAL had approximately 824,271,663 shares of DAL common

stock outstanding (Delta Air Lines, Inc., 2014). Cash dividends paid out to shareholders during

2014 totaled $251 million at $0.33 per share according to Delta’s 2014 10-K report. DAL shares

traded within the price range of $27.26 and $50.16 for the 2014 year with earnings per share

(EPS) of $0.79 (Delta Air Lines, Inc., 2014). Based upon the DAL stock closing price of $49.19

on December 31, 2014, obtained online via Yahoo Finance, and in addition to 2014 DAL’s 10-K

data; a price to earnings (P/E) ratio of 62 and a dividend yield of 0.67% can be realized. The

average rates of growth for DAL stock for years 2012-2014 are: -8.25% for EPS, -8.28% for net

income, and 4.75% for revenue (Morningstar Inc., 2015). In 2014, DAL repurchased 12,228,564

million of its outstanding shares for a total of $1.5 billion (Delta Air Lines, Inc., 2014).
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 17

LUV DAL
Outstanding Shares 675,993,892 824,271,663
Dividends Per Share $0.22 $0.33
Price Range $18.78 - $43.19 $27.26 - $50.16
Earnings Per Share $1.65 $0.79
Price to Earnings Ratio 26 62
Dividend Yield 0.52% 0.67%
3 Year Average Rate of Growth for Earnings Per Share 92.47% -8.25%
3 Year Average Rate of Growth for Net Income 85.49% -8.28%
3 Year Average Rate of Growth for Revenue 5.92% 4.75%

Several comparisons can be made between LUV and DAL stock. Looking at P/E ratios,

DAL stock has a favorable ratio compared to LUV. According to the statistic, investors have

been willing to pay $62 for every $1 in earnings for DAL stock, whereas for LUV stock, they are

willing to pay $26 for every $1 in earnings. While that data favors DAL, it should be noted that

those shareholders are expecting commensurate returns proportionate to the higher prices paid

and future investment in the company will remain dependent upon this. In regards to EPS, LUV

shareholders currently benefit from a higher EPS. Higher EPS are attractive to potential

investors. Comparing EPS of both stocks, LUV earns $0.86 more per share than DAL. Even

though DAL issues dividends $0.10 higher per share than LUV does, the ability of LUV to

generate a higher EPS should help compensate for the difference. In addition, LUV has fewer

outstanding shares than DAL and this can be considered advantageous to potential investors

since stock ownership would enable increased equity, and eventually a higher market price and

corresponding earnings. Concerning market price, DAL currently trades at a value greater than

LUV. While a higher market price is favorable, it is known that market prices adjust accordingly

in the long-run as investors realize intrinsic value, and this should be no different for DAL and

LUV stocks. Finally, 3 year average rates of growth for LUV in respect to EPS, net income, and

revenue are significantly higher than that of DAL stock. This data is significant because it
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 18

demonstrates actual, historical figures conveying LUV’s outperformance of DAL, a major

competitor in the same industry, over the past 3 consecutive years in all three of these key areas

where growth is most important. While LUV may not be as large as DAL, their data shows they

are growing in the right direction as shown in figure 1, obtained online via Morningstar,

comparing the growth of $10,000 invested in LUV and DAL over a period of ten years. Should

LUV continue at this level of performance, it would undoubtedly be a worthy investment sure to

bring significant, future returns; especially at the current, undervalued price.

Figure 1

Recommendation

Based off of several rationale presented in this report, a long-term commitment with LUV

is recommended. The airline industry is considered unpredictable, but LUV is certainly not, and

forty-one consecutive years of profit for the now fourth largest U.S. airline is reflective of this.

Profitability data favors LUV over DAL in terms of higher gross profit margins, net profit

margins, return on equity, and return on assets. LUV’s success can be credited to its low-cost

structure, focusing on shorter, non-stop flights by a non-diverse aircraft fleet allowing lower
FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 19

overall costs and turn-around times. This strategy has promoted steady and continuous growth to

a variety of areas. For the past ten years, rates of growth for revenue, net income, EPS, and

dividends have continued to progress in an upwardly direction compared to major competitor,

DAL. Acknowledging the volatility of U.S. fuel prices, LUV is credited for successful

management of the cumbersome expense with exhibition of profits even during high price

periods. Furthermore, improving economic conditions and declining oil prices should no doubt

be advantageous to LUV throughout 2015 as they continue expanding upon their operations with

their entry into the international market. Worth mentioning is the perceived risk in regards to

inventory and asset management. While inventory and assets may currently be more effectively

managed by DAL, it should be noted that DAL is a substantially larger company with the ability

and resources to better dedicate towards efficient management. It is anticipated that LUV will

follow the same path as they continue to grow. Nevertheless, LUV is recognized for better

leveraging its debt to assets, and collecting on its own outstanding debt than DAL. Should LUV

continue its current course, its ‘LUV” will surely grow with customers and investors alike and

transport them to unimaginable heights in the future.

 FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 20

Resources

About Southwest. (n.d.). Retrieved February 16, 2015, from https://www.southwest.com/html/about-

southwest/

All calculators. (n.d.). Retrieved February 17, 2015, from http://www.calkoo.com/?lang=3&page=41

Bachman, J. (2014, January 21). Why Delta, With Huge Profits, Won't Pay Taxes for Years. Bloomberg

Business L.P., Retrieved February 13, 2015, from http://www.bloomberg.com/bw/articles/2014-

01-21/why-delta-with-huge-profits-wont-pay-taxes-for-years

Dahora, N. (2015, January 22). Southwest's decision to not hedge fuel for 2015 will significantly

improve profits. Retrieved February 15, 2015, from http://

http://analysisreport.morningstar.com/stock/research?t=LUV&region=USA&culture=en-

US&productcode=MLE

DAL Historical Prices | Delta Air Lines, Inc. Common St Stock - Yahoo! Finance. (n.d.). Retrieved

February 14, 2015, from

http://finance.yahoo.com/q/hp?s=DAL&a=11&b=31&c=2014&d=11&e=31&f=2014&g=d

Delta Air Lines Inc. (2015). Market Watch Inc., Retrieved February 18, 2015, from

http://www.marketwatch.com/investing/stock/dal/profile

Delta Air Lines Inc. (2015). Morningstar Inc., Retrieved February 18, 2015, from

http://financials.morningstar.com/ratios/r.html?t=DAL®ion=usa&culture=en-US

Delta Air Lines Inc. (2015, January 1). Market Watch Inc., Retrieved February 18, 2015, from

http://www.marketwatch.com/investing/stock/dal/financials

Delta Air Lines Inc. (n.d.). Retrieved February 14, 2015, from

http://financials.morningstar.com/ratios/r.html?t=DAL
 FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 21

Delta Air Lines Inc. DAL (U.S.: NYSE). (n.d.). Retrieved February 15, 2015, from

http://quotes.wsj.com/DAL/financials

Delta Air Lines, Inc. (2014). Form 10-K 2014. Retrieved from SEC EDGAR website

http://www.sec.gov/edgar.shtml

Freiberg, K., & Freiberg, J. (1996). Nuts!: Southwest Airlines' crazy recipe for business and personal

success. Austin, Tex.: Bard Books.

LUV Historical Prices | Southwest Airlines Company Comm Stock - Yahoo! Finance. (n.d.). Retrieved

February 14, 2015, from

http://finance.yahoo.com/q/hp?s=LUV&a=11&b=31&c=2014&d=11&e=31&f=2014&g=d

Southwest Airlines Co. (2014). Form 10-K 2014. Retrieved from SEC EDGAR website

http://www.sec.gov/edgar.shtml

Southwest Airlines Co. (2015). Market Watch Inc., Retrieved February 18, 2015, from

http://www.marketwatch.com/investing/stock/luv/profile

Southwest Airlines Co. (2015). Morningstar Inc., Retrieved February 18, 2015, from

http://financials.morningstar.com/ratios/r.html?t=LUV

Southwest Airlines Co. (2015, January 1). Market Watch Inc., Retrieved February 18, 2015, from

http://www.marketwatch.com/investing/stock/luv/financials

Southwest Airlines Co. (n.d.). Retrieved February 14, 2015, from

http://financials.morningstar.com/ratios/r.html?t=LUV®ion=usa&culture=en-US

Southwest Corporate Fact Sheet - Corporate Fact Sheet - Southwest Airlines Newsroom. (n.d.).

Retrieved February 18, 2015, from http://swamedia.com/channels/Corporate-Fact-

Sheet/pages/corporate-fact-sheet#history
 FINANCIAL ANALYSIS ON SOUTHWEST AIRLINES 22

Standard & Poor's | Americas. (2015, January 1). Retrieved February 21, 2015, from

http://www.standardandpoors.com/en_US/web/

Trefis. (2014, November 25). Delta's Seattle Expansion Will Help Maintain Its Growth Momentum.

Forbes LLC., Retrieved February 13, 2015, from

http://www.forbes.com/fdc/welcome_mjx.shtml