Southwest Airlines Co.

:
Credit Analysis and Financial Flexibility in the Era of COVID-19 1

1) In Part 1.A we are instructed to fill in the ratios for LUV in the excel provided. Can you confirm
the ratios should be for 2019 in the “Definitions” tab”?

YES

2) With regards to these ratios there seems to be a couple of approaches. Approach #1: I can bluntly
just calculate the ratios based on overall figures such as take the total average receivables to
calculate DSO without filtering what is included in the A/R line item on the balance sheet…. #
Approach 2: I can do as prescribed in professors note on the way Capital IQ does it and Approach
#3: I can use my own judgement on what should be included/excluded based on the 10-K footnotes
etc. What is the approach that we should adopt in this case?

THIS IS A GREAT QUESTION AND ACTUALLY ONE SMALL PART OF THE

TAKEAWAY OF THIS ASSIGNMENT. RATIOS HAVE "STANDARD" DEFINITIONS,
BUT THERE ARE OFTEN DIFFERENT WAYS TO CALCULATE THEM. USING
JUDGEMENT TO GET A "BETTER" OR MORE SUITABLE RATIO IS OFTEN A GOOD
THING, BUT ONE SHOULD ALSO BE AWARE THAT "PACKAGED" OUTPUTS SUCH
AS THOSE COMING FROM CAPITAL IQ MAY NOT NECESSARILY BE THE WAY
YOU WOULD CALCULATE IT. TO DIRECTLY ANSWER THIS QUESTION, FEEL
FREE TO USE YOUR OWN JUDGEMENT AND THEN AFTER THE FACT YOU CAN
COMPARE WHAT YOU DID WITH WHAT I DID -- WHICH MAY NOT BE "OPTIMAL"
IN YOUR VIEWPOINT. WHAT I WANT TO YOU SEE, THOUGH, IS THAT RATIO
CALCULATION REQUIRES JUDGEMENT AND TWO DIFFERENT PEOPLE CAN GET
TO DIFFERENT PLACES.

3) For DIO I need cost of sales in order to make the calculation. Is the idea with this question that
we use our judgement to estimate what the relevant cost of sales should be?

SEE THE NOTE IN THE ASSIGNMENT. CAPITAL IQ USES THE ENTIRE COGS, BUT
AS YOU POINT OUT (AND THE NOTE POINTS OUT) THIS MAY NOT BE VERY
ACCURATE BECAUSE SALARIES AND WAGE, FOR EXAMPLE, ARE LIKELY IN
COGS, BUT INVENTORY ONLY INLCUDES ITEMS LIKE FUEL.

1
This case was prepared by Michael Minnis and Abbie Smith at the Booth School of Business at the University of
Chicago. This case was produced for illustration purposes only and is not intended to establish valid predictions of
firm performance. We sincerely thank John Lyons and Richard Zhao for excellent research assistance.
 Southwest Airlines Co.: Credit Analysis and Financial Flexibility

4) Can you elaborate what are the ratios that we are given in the “Annual Summary” tab i.e. are
these the Capital IQ ratios based on their subjective approach of how to most accurately using the
notes to the financials to calculate the ratios or is this the professor’s “correct” ratios? Before
working with these ratios, just wanted to clarify this.

THIS TAB IS DIRECTLY FROM CAPITAL IQ. I ENCOURAGE YOU TO LOG INTO
CAPITAL IQ TO SEE WHERE THESE COME FROM. ONE ASPECT OF THIS
ASSIGNMENT IS FOR YOU TO CALCULATE THE RATIOS YOURSELF (USING
YOUR JUDGEMENT) ON THE DEFINITIONS TAB AND THEN COMPARE YOUR
ANSWER TO CAPITAL IQ'S ANSWER TO SEE HOW THEY MAY BE DIFFERENT.

5) for question number 4, should we ignore the ratios we calculated in the “Definitions” tab and
assume the “Annual Summary” tab ratios are given and answer the question on the basis of these
ratios only? I see that the Z-score I calculated from “Definitions” is referred to in part d). Just
wanted to clarify this.

AGAIN, THIS IS ACTUALLY A QUESTION IN THE ASSIGNMENT. SEE QUESTION 3

OF THE ASSIGNMENT. FOR QUESTION 4, WHILE YOU MAY COME UP WITH
SLIGHT DIFFERENCES FROM CAPITAL IQ'S CALCULATIONS, THESE
DIFFERENCES SHOULD NOT RESULT IN DIFFERENT ANSWERS TO QUESTION 4.