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Running Head: 9 steps of assessment process future financial health of southwest airline

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Running Head: 9 steps of assessment process future financial health of southwest airline

9 steps of assessment process future financial health of southwest airline

Viability of the 3-5 year plan

Southwest airline has a reputation for creating a lot of profit and also achieving its set

goals. Throughout the years it has overcome some of the worst storms in the airline jobs. It had

maintained its way of conducting business and remained among the most competent company

which offers services while offering minimal price. Despite providing quality services at a low

cost, it has not incurred any loses compared to its competitors instead it has grown from a

humble beginning to a more competitive company which is ranked among the giant airline

company in the United States.

Moreover, to be able to gain all this achievement it has not been easy but what has helped

the company achieve all this is because it knows how to look for opportunities and grab them.

For instance, the company noted that other companies were charging customers for their bag.

Which they saw as an opportunity, and they started advertising that their customers will not pay

for languages, they used a slogan “Bags Fly Free,” which turned to be a strategic opportunity.

The plan worked well and helped the organization in gaining more clients (Aviation strategy

2017).

The company has been able to notice threats and opportunities from their competitors

which has helped them maneuver through the fierce competition in the market. Another, thing

that has helped the company is that it has been able to notice its strength and weakness and

worked into ensuring that they do not affect the company productivity. The company has worked
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Running Head: 9 steps of assessment process future financial health of southwest airline

towards strengthening its powers and watching over its shortcomings in finding solutions on how

to deal with them.

Stress test under scenarios of adversity

Despite being a company that has overcome so many soo much in the aviation industry,

there has also been some stress test. A stress test is a situation where simulation technique often

used in the banking industry. Stressing analysis is also applied in gauging how specific stressors

will affect a company or corporate portfolio. In most cases, a stress test is computer generated

although extreme stress testing methodology is typically utilized. Southwest airline has also

experienced stress test soo many times. One of the scenarios is the issue with its 737-300s

whereby the flight had a hole in the cabin roof. This item was criticized since the hole was on the

rooftop and the trip would fly above 30, 000 feet’s. This stress tests made to the company to take

some of their flights from services so that they can deal with it. Since if they had ignored it their

competitors would have used it against them or even the government if the issue was raised to

them.

Another issue that has made the company go through stress test is the kind of flights they

use. For instance, most companies prefer to run Boeing or Airbus alone, which entirely different

from Southwest since it has gone down to twin-engine, single-aisle 737 flight. The company act

of having one flavor states a lot of information. One of the things is that the pilot and crew are

practicing, parts inventory and also to have flight maintenance schedules. It is the weapon the

company uses against its competitors and create a lot of profits. But despite their crew training

and pilot the company still had to fix the issue of its flight having holes in the top roof. It has

caused the company to clear 19-737-300s flights and further 70 out of 3400 flights. This kind of
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Running Head: 9 steps of assessment process future financial health of southwest airline

stresses has seen the company get into some few problems which it has overcome eventually

(Saporito, 2017).

Current Financing plan

The company immediate financing plan is based on the developments the company has in

place to ensure that it has increased its revenue and tax annually. Therefore the organization has

a current financing plan which will provide that the company has been elevated to the next level

regarding competition and development compared to it is competitors. The current financing

plan has to look into the need of company expansion as there is still a high demand for the

company to open its branches in areas it has not reached. The development will in return increase

the company income and revenue. The company will also look into the type of services it offers

as some of them will need to be further upgraded as this will also increase revenue. Another

company current financing is the company regular flight maintenance and pilot, flight attendance

training to keep them well informed and enlightened technology wise.

Analysis of Fundamentals: Goals, Strategy, Market, Competitive Technology, Regulatory,

and Operating Characteristics

Southwest Airlines established in 1971, is a major U.S airline headquartered in Dallas,

Texas, traded under the symbol LUV. It is the largest airline in the U.S based on the number of

passengers carried per year and third most significant concerning fleet size. Its primary goal is to

continue its superiority as the best commercial airline concerning customer satisfaction, excellent
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Running Head: 9 steps of assessment process future financial health of southwest airline

customer care, and safe travel. Another goal is to stay the most successful airline with low fare

prices and on-time operations. Above all, maintain its profitability in the industry. (Southwest,

n.d)

Southwest Airlines employs several strategies such as an appealing brand, outstanding

customer service and low costs of travel. The second approach, a robust route network; the

airline carries the most number of passengers in U.S and has the most daily departures. Lastly, a

superior financial position has an efficient capital distribution strategy and competitive cost

advantage.

Southwest Airlines market is the U.S serving over forty states and eight near-

international markets, Jamaica, Mexico, Cuba, Aruba, The Bahamas, Dominican Republic, Costa

Rica and Belize. Southwest Airlines has an excellent technology whereby customers can

purchase and manage their travel online on its website. The website is personalized to identify

customer location to provide relevant deals, calendar view for advice on best times to travel at

low prices among other features. Customers can also transact on their mobile devices through an

application. Also, uses barcodes on boarding passes and reservation system for luggage check-

ins. (Southwest, n.d)

It operates a total of 723 Boeing and 737 aircrafts serving 101 destinations. The company

observes regulations by the federal government, government agencies, and legislative bodies.

The rules include consumer protection, aviation taxes and fees, health and safety regulations in

civil aviation activities, security regulations, environmental conservation and international

regulations. The company provides point-to-point route services. It offers variety fare options

such as “Wanna get away” and Business select and a rewards program.
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Running Head: 9 steps of assessment process future financial health of southwest airline

Analysis of Fundamentals: Revenue Outlook

Revenue is the gross income of a company. (Gitman, Juchau & Flanagan, 2015)

Southwest Airlines in the year ended 2016 earned net income of $ 2,244 million. The revenue is

obtained from the sale of tickets which most are non-refundable instead re-usable. Net cash from

operating activities for that year was $4,293 million which was an increase from 2015’s $3,238

and 2014’s $2,902. The operating revenue for that year was $20,425 million. (Southwest, n.d)

The passengers brought in $18,594 income, a slight increase from 2015’s $18,299. On the other

hand, freight contributed $171. The operating expenses for that year were $16,665. As per the

analysis, the net profit margin ratio is 9.63 through twelve months and the average for five years

is 7.19.

Compared to other companies in the industry, Southwest Airlines is doing significantly

well regarding revenue. The data is as of October 20, 2017, and the company has earned revenue

of $20.84 billion with a net profit of $2.01, Alaska Air group $6.94 billion and net profits of

$765 million. However, Delta Airlines and American Airlines Group are performing well with

revenue above $40 billion. Its asset turnover ratio is 0.9 the highest in the industry, inventory

turnover of 18.87 after Delta Airlines’ 19.67. Southwest Airlines' receivables turnover ratio is

37.89. Its quick ratio is 0.68 which is a bad indicator showing the company is unable to meet its

short-term debts. (Financial Times, n.d)

The earnings per share which indicate profitability have been forecasted for the end year

2017, highest 3.75 lowest 3.5 and harmonized at 3.6. Projections for the year ended December

2018, the highest EPS 4.9 lowest 4 and harmonized at 4.52, the year 2019, highest 5.29, lowest

3.5 and harmonized at 4.62. (Nasdaq, n.d)

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Running Head: 9 steps of assessment process future financial health of southwest airline

Graph

Yearly Forecast Earnings

5
4.5
4
3.5
Companies invest
3 in business units to
2.5
2
diversify their portfolios
1.5 and hedge against risks.
1
0.5
The business environment
0 is characterized by
Year 2017 Year 2018 Year 2019
uncertainty and continual

changes making it hard to guarantee the success of the business. The level of competition is

always on the rise as more and more firms enter the market in a bid to get a portion of the market

share and penetrate it to increase its share by expanding into new frontiers and markets. Proper

and strategic management of the businesses units results in the overall success of the business.

South West Airline is an established brand that has gained international popularity due to its
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Running Head: 9 steps of assessment process future financial health of southwest airline

service delivery. This paper looks at the investments to support business unit strategies, future

profitability and competitive advantage of Southwest Airlines.

The company has two business units namely passenger and freight. The passenger unit is

concerned with the carrying and transportation of people whereas cargo is involved in ferrying

passengers from one point to the other. The firm has been keen on investing in its business units

by making sure cash is spent on various investing activities. It is demonstrated by the company

putting money in capital expenditure shown by 1748 in 2014, 2041 in 2015 and 2038 in 2016.

Besides, Southwest airlines have invested in short-term investments demonstrated by 3080 in

2014, 1986 in 2015 and 2388 in 2016. The firm has also been keen on selling some of its short

and other investments shown by 3185 in 2014, 2223 in 2015 and 2263 in 2016. The company

made investments of 1727 in 2014, 1913 in 2015 and 2272 in 2016.

The company has a positive future probability indicated by its financial statements. The

sales revenues are expected to increase in the future. It is substantiated by the increase from

17,658 in 2014 to 18,299 in 2015 to 18,594 in 2016. The net income will also double as

demonstrated in the three-year period. The business had 1136 in 2014, 2181 in 2015 and 2244 in

2016. The earnings per share have also increased from 1.65 in 2014, 3.30 in 2015 and 3.58 in

2016. The shareholders will also receive increased dividends in the future despite the company

maintaining the same payout ratio. It is shown by a payment of 0.22 in 2014, 0.285 in 2015 and

0.375 in 2016. It is likely to witness increased customer numbers, increase the number of flights

and its fleet. Besides, there will be increased competition as many international airlines are likely

to enter new markets and routes. The tournament will cause an adverse effect on price dispersion
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Running Head: 9 steps of assessment process future financial health of southwest airline

which will be greater in areas with relatively different demand elasticities (Gerardi & Shapiro,

2009).

Business units are an integral part of any company. These are usually organized into

departments as they deal in specialized commodities and products. Besides, they are separately

indicated and shown in the financial statements. The units are run by managers who set strategies

and long-term goals they expect the business to achieve. The strategic plan gives the company a

sense of direction through which efforts are directed. Besides, the firm has to allocate resources

to counter competition and ensure the success of the business. It involves setting aside

investments for to facilitate the performance of the units.

Future External Financing Needs

Southwest Airlines expects to increase its profitability in future. There is high demand

from consumers for Southwest Airlines services in other regions it has not established. The

company looks forward to expanding its operations and increasing sales revenue. Southwest

Airlines needs to maintain its cost advantages and maximize new growth opportunities. The firm

requires funds to increase its direct flights to other regions in future. Rising costs of fuel and

labor are significant concerns for the company. 22% of the operating expenses in 2016 covered

energy, jet fuel, and oil (Southwest, n.d). An increase in operations such as buying or leasing

more jets which require more fuel expenses. Thus Southwest Airlines involves capital to support

its predicted sales and other activities such as covering employee wages. A company has an
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Running Head: 9 steps of assessment process future financial health of southwest airline

option of internal from net profits, sales or external outsourcing. In this case, Southwest Airlines

needs external financing in future, the net profit alone cannot support its expansion.

From the financial analysis of previous years, we get an increasing trend in revenues and

number of tickets sold. Currently, the company sources its revenues from shareholders who own

some percentage of the business and profit from sales. Research indicates that more foreign

Airlines Company is getting into the market. The company will have to increase its investors or

borrow funds. Therefore, an opportunity for the company to expand its international market. The

company will require finances to engage in such operations (Southwest, n.d). The company looks

forward to forming partnerships with other foreign airline companies and expanding its broad

customer base. The company is yet to utilize some of these opportunities. Investors,

shareholders, bank loans and partnerships are great ways of sourcing external finances (Gitman,

Juchau & Flanagan, 2015).

Access to Target Sources of External Finance

The external target sources for Southwest Airlines include bank loans, investors,

partnerships, mergers, and acquisitions. Easy access to financial aid is bank loans and investors.

The company’s debt to equity ratio is 40.13, debt to capital is 28.64 and long-term debt to assets

0.11, which means the company is financially healthy and can pay its debts. The profitability of

the business indicated by its 2016 net income which was $ 2,244 million (Southwest, n.d).

Ability to pay outstanding debts increases the company’s access to receiving aid from banks and
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Running Head: 9 steps of assessment process future financial health of southwest airline

other lenders. The company’s operating cash flow was above the deficit which means it utilizes

its debt well hence able to pay off future debts.

The profitability, and ability to utilize its funds well attract more shareholders. Southwest

Airlines has market capitalization $32.47 billion which is a safe indicator for stakeholders. It has

a strong balance sheet and high liquidity thus more stock available for shareholders. Even if

liquidity drops, increase in interest rates will cover the stock. In the year 2016, the company

returned a total of $222 million dividends to stakeholders and had $1.75 million share

repurchases. Most shareholders will want to buy shares in the company as it expands hence cater

for its future financial needs.

A partnership is another way the company can find resources for future expansion needs

(Gitman, Juchau & Flanagan, 2015). Boeing Company is a significant supplier of aircrafts used

by Southwest Airlines. The firm acquires planes from Boeing through direct purchases,

Southwest looks forward to increasing its jets, instead of buying and using private finances, it

can partner with Boeing to give them a certain quantity of aircrafts for a given period could be on

lease terms. Also, the company can buy shares in Boeing Company. A merger would be best but

difficult to acquire.

Overview

Southwest airlines were established in 1971, it is accompany based in the United States of

America, and its headquarters are located in Dallas, Texas, and the company trades at the symbol

LUV. Over the years the company has managed to be the largest airline in the US which has

been concluded based on the number of passengers it carries per year. The company runs two
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Running Head: 9 steps of assessment process future financial health of southwest airline

kinds of flights the cargo which carries passengers who are traveling short distance and

passenger which moves and transport people. The company has a substantial number of

employees, and it also has a good design culture whose primary objective and the goal is to care

and treat its customer with great care and respect. It is one of the companies that offer the

cheapest flight services over the years but ironically doing well financially and in revenue. From

the corporations 2016 revenue, the company has shown to have maintained in generating higher

revenue as it has always done over the years which shows that it is a right place for investors to

invest. Its income, while compared to other airline companies, is outstanding which indicates that

the company is still at the top of its game in the airline business. The company’s future financing

needs are also inevitable as it needs to expand to places where it has not been established already

there is an excellent demand for its services. It calls for the company to look at its growth

strategies so that it can see which areas it needs to maximize in to attain more profit and which

areas it needs to minimize it so that it can reduce in expenses. Due to expansion require the

company needs external finances and its target is bank loans, investors, partnerships, mergers,

and acquisition.

References

(2017). aviation strategy. Retrieved 4 December 2017, from

https://www.aviationstrategy.aero/newsletter/Feb2011/4/Southwest_Airlines

%3A_Return_to_growth_mode
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Financial Times (n.d) Southwest Airlines Co LUV retrieved from

https://markets.ft.com/data/equities/tearsheet/forecasts?s=LUV:NYQ available on

October 23, 2017

Gerardi, K. S., & Shapiro, A. H. (2009). Does competition reduce price dispersion? New

evidence from the airline industry. Journal of Political Economy, 117(1), 1-37.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015) Principles of managerial finance Pearson

Higher Education AU

Gitman, L. J., Juchau, R., & Flanagan, J. (2015) Principles of managerial finance Pearson

Higher Education AU

Nasdaq (n.d) Southwest Airlines Company Earnings Forecast retrieved from

http://www.nasdaq.com/symbol/luv/earnings-forecast available at October 23, 2017

Saporito, B. (2017). Southwest’s Stress Test | TIME.com. TIME.com. Retrieved 4 December

2017, from http://business.time.com/2011/04/04/southwests-stress-test/

Southwest (n.d) Investor Relations. Available at

http://www.southwestairlinesinvestorrelations.com/our-company/company-overview

accessed on October 23, 2017

Southwest (n.d) Investor Relations. SOUTHWEST AIRLINES CO. 2016 ANNUAL REPORT

TO SHAREHOLDER Available at

http://investors.southwest.com/~/media/Files/S/SouthwestIR/Annual%20Reports/2016_A

nnualReport_LUV.PDF accessed on October 23, 2017

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Running Head: 9 steps of assessment process future financial health of southwest airline

Southwest (n.d) Investor Relations. SOUTHWEST AIRLINES CO. 2016 ANNUAL REPORT

TO SHAREHOLDER Available at

http://investors.southwest.com/~/media/Files/S/SouthwestIR/Annual%20Reports/2016_A

nnualReport_LUV.PDF accessed on November 22, 2017.