Case Analysis

Presented By: Ronald B. Aquino

I. CASE BACKGROUND  

 The Airline was conceived in 1967

when Rollin King, an investment
adviser, met with his lawyer to discuss
his idea for a low-fare, no frills airline
to fly between three of the major
cities in Texas

 Today, Southwest Airlines still poised

for a success.

 Southwest airline listed among the top five of all major carriers for
on-time performance and fewer customer complaints for 16th
consecutive years (1991 to 2006) in Department of Transportation
(DOT) Air Consumer Report.

 Southwest is the only airline to ever hold the Tripple Crown in DOT
report for its performance.
I. CASE BACKGROUND  

 Southwest was among Fortune magazine’s most admired

companies (third in 2006).

 Southwest reported profits for the 34th consecutive year. In 2006,

it had $499M in net income on $9.1B in revenues.

 The company’s low –cost structure and fuel hedging has a big
factor in contributing to their consistent growth.

 But in September 30, 2007 financial report, Southwest’s net

income declined by 41.7% which means that their continued
success is not a guaranteed.
Case Analysis
II. ENVIRONMENTAL ANALYSIS  

A. GENERAL
ENVIRONMENT OPPORTUNITIES THREATS
     
Economic   Rising in energy cost
     
    Increase in labor expenses
     
B. INDUSTRY
ENVIRONMENT  OPPORTUNITIES  THREATS
     
Rivalry Due to recent terrorist attacks,
The world's only short-haul, high
frequency, low fare and point-to-point competitors are also expanding
and developing low-fare flight
carrier.
program.
     
  Continues to operate with the lower
cost per available seat mile among all
major airlines, with an average of 15 to
25% below its rivals.  
   
  The company received the certification
to fly in May 2007 and is already adding
new routes.  
     
II. ENVIRONMENTAL ANALYSIS  

B. INDUSTRY
ENVIRONMENT OPPORTUNITIES THREATS
     
Bargaining power of
Consumers
Southwest has made its mark by
concentrating on flying large number
of passengers on high frequency,
short hops at bargain fares.  
     
     
Threat from product
substitution
Long haul trips/routes is dealing
with the change in federal tax
which was pushed by the bigger
  carriers.
     
EXTERNAL FACTOR EVALUATION (EFE ) MATRIX      
Assessment of the attractiveness and risks of the opportunities and threats
in the general and industry environment.

Key Factors Weight Rating Weighted

        Score
Opportunities      
1The world's only short-haul, high frequency, low fare and point-to-point carrier. 0.30 2 0.60
Continues to operate with the lower cost per available seart mile among all
2 major airliness, with an average of 15 to 25% below its rivals.
0.20 3 0.60
3The company received the certification to fly in May 2007 and is already adding
new routes. 0.40 4 1.60
4Southwest has made its mark by concentrating on flying large number of
passengers on high frequency, short hops at bargain fares. 0.10 1 0.10
         
    Rating scale: 1.00   2.90
Threats      
1Rising in energy cost 0.10 -2 (0.20)
Opportunities
2 Increase in labor expenses : Threats : 0.30 -1 (0.30)
3 Attractive +1 Threatening -1
Due to recent terrorist attacks, competitors are also expanding and developing
low-fare flight More Attractive +2 More Threatening -2
program. 0.40 -4 (1.60)
4 Highly isAttractive +3 change
Highly Threatening
Long haul trips/routes dealing with the in federal tax which was-3 0.20 -3 (0.60)
pushed by theMost
bigger Attractive
carriers. +4 Most Threatening -4
         
  1.00   (2.70)
TOTAL       0.20
Conclusion:
The Opportunities are worth pursuing. Opportunity #
3 is the most attractive opportunity followed by
opportunity # 1 and opportunity # 2. Threat # 3 is the
riskiest that should be considered in strategy
formulation and implementation.
Competitive Profile Matrix ( CPM )                
Assessment of the competitiveness of the industry players.

Critical Success Factors Weight JET BLU (JBLU) AIRTRAN (AAI) DELTA (DAL)
Value Rating Score Value Rating Score Value Rating Score
                     
Operating Revenues 0.10 $2,363 1 0.10 $1,893 1 0.10 $17,171 3 0.30
Income before tax 0.10 9 2 0.20 26 2 0.20 (6,968) 1 0.10
Net Income 0.10 ($01) 1 0.10 $16 2 0.20 ($6,203) 1 0.10
EPS 0.10 $0 1 0.10 $0.17 2 0.20 $31.58 4 0.40
Cash 0.25 $699 1 0.25 $159 1 0.25 $2,034 3 0.75
Total Assets 0.15 4,843 1 0.15 1,602 1 0.15 19,622 3 0.45
Total Stockholders' Equity 0.20 952 2 0.40 383 2 0.40 -13,593 1 0.20
                     
TOTAL 1.00     1.30     1.50     2.30

Critical Success Factors Weight United Airlines (UAL) Southwest Airlines

Value Rating Score Value Rating Score
               
Operating Revenues 0.10 Rating
$17,882scale:4 0.40 $8,750 2 0.20
Income before tax 0.10 43 3 0.30 790 4 0.40
Net Income 0.10 $25 3 0.30 499 4 0.40
EPS 0.10 Competitive
$0.14 2 0.20 1
$0.63 3 0.30
Cash 0.25 $3,832 4 1.00 $1,390 2 0.50
Total Assets 0.15 25,369 4 0.60 13,460 2 0.30
Total Stockholders' Equity 0.20 More Competitive
2,148 3 0.60 2
6,449 4 0.80
    Highly Competitive
      3      
TOTAL 1.00     3.40     2.90
Most Competitive 4
Conclusion :

The Competitive Profile Matrix shows that the

United Airlines has the most competitive advantage
among five rival companies in the industry followed
by Southwest Airlines.
Southwest Airlines Company          
Financial Ratios            
             
Key Financial Ratios Formulas 2004 2005 2006   Benchmark
LIQUIDITY RATIOS: Measures ability to meet maturing short-term obligation      
             
Current Ratio Current assets 1.10 0.94 0.90   2:1
  Current Liabilities          
             
Quick Ratio Current assets - Inventory 0.95 0.90 0.84   1:1
  Current Liabilities          
             
ANALYSIS: Liquidity ratios decreased from 2004 to 2006 which states that the company may face
complication in liquidating its assets, if needed in the short-term.    
             
LEVERAGE RATIOS: Measures the extend to which a firm has been financed by debt      
             
Debt-to-Total-Assets
Ratio Total debt 0.16 0.14 0.13   Less than .50
  Total assets          
             
Debt-to-Equity Ratio Total debt 0.33 0.30 0.26   Less than .50
  Total stockholders' equity          
             
Total Liabilities - Total Current
Long-Term Liabilities 0.30 0.21 0.24   Less than .50
Debt-to-Equity Ratio Total stockholders' equity          
             
1 - (Long-term Liabilty-Current
Capital Adequacy Liability) 0.69 0.79 0.76   40:60
  Total stockholders' equity          
             
ANALYSIS: Leverage Ratio shows that the company has strong financial position since all ratios are within
the 50% benchmark.    
Key Financial Ratios Formulas 2004 2005 2006   Benchmark
ACTIVITY RATIOS: Measures how effectively a firm is using its resources     Trend
             
Inventory Turnover Sales 47.66 50.56 50.20   Decreasing
  Inventory of finished goods          
             
Fixed Assets Turnover Sales 0.75 0.80 0.90   Increasing
  Fixed assets          
             
Total Assets Turnover Sales 0.58 0.53 0.68   Increasing
  Total assets          
             
ANALYSIS: Activity ratios have not observed much change indicating that Southwest Airlines needs to
work on its policy framework regarding inventory, purchase of assets so on and so forth.    
             
PROFITABILITY RATIOS: Measures management's overall effectiveness as shown by the returns generated
on sales & investment    
             
Gross Profit Margin Sales - Cost of goods sold Not Applicable    
  Sales          
             
Operating Profit Margin Earnings before interest and taxes 7.0% 11.0% 8.0%   Decreasing
  Sales          
             
Net Profit Margin Net income 5.0% 7.0% 5.0%   Decreasing
  Sales          
             
Return on Total Assets Net income 3.0% 4.0% 4.0%   Neutral
(ROA) Total assets          
             
Return on
Stockholders' Net income 6.0% 8.0% 7.0%   Decreasing
Equity (ROE) Total stockholders' equity          
             
ANALYSIS: Profitability Ratios shows decreasing mostly from the year 2005 to 2006 is clearly indication
that the company is not well in terms of profitability.    
C. INTERNAL ENVIRONMENT ANALYSIS  

  STRENGTHS WEAKNESSES
FINANCE    
Income   Net income has increased by $ 49 million or
Statement 8% from 2005 to 2006.
     
Decline in profitability ratios from comparable
years 2005-2006: Operating Profit Margin 11%
to 8%, Net Profit Margin 7% to 5%, and ROE
    8% to 7%
     
     
Balance Sheet Lowly leverage from comparable years 2005-
2006: Debt-to-Total asset ratio 0.14 to 0.13,
Debt-to-equity ratio 0.30 to 0.26, and Long-
term Debt-to-equity ratio 0.21 to 0.24  
   
MARKETING    
     
Product Southwest operated 483 Boeing 737s single
type.  
     
  The company offer a short-haul, high frequency,
low fare and point-to-point carrier services.  
     
     
The company offer a bottle of premium whiskey
Promotion for purchase of full-fare ticket at $26.  
     
C. INTERNAL ENVIRONMENT ANALYSIS  

  STRENGTHS WEAKNESSES
Southwest Airline has television commercial
"Flight Attendant" which was named in
 Promotion Adsweek's "Best spots."  
     
Southwest Arlines promises safe, reliable,
frequent, low cost air transportation that is
  topped off with outstanding services.  
     
O&M    
The management avoids trendy management
program, avoids formal and documented
strategic planning, spend more time at
planning parties than writing policies, and
    once settle a legal dispute by arm wrestling.
     
     
The company truly believes that the
    employees comes first, not the customers.
     
     
MIS    
Southwest is the first airline established a
  homepage on web.  
     
INTERNAL FACTOR EVALUATION ( IFE ) MATRIX      
Assessment of the strengths and weaknesses of the company

Key Factors Weight Rating Weighted

        Score
Strengths      
1Lowly leverage from comparable years 2005-2006: Debt-to-Total asset ratio 0.14
to 0.13, Debt-to-equity ratio 0.30 to 0.26, and Long-term Debt-to-equity ratio 0.21 0.25 3 0.75
to 0.24
2Southwest operated 483 Boeing 737s single type. 0.10 2 0.20
3The company offer a short-haul, high frequency, low fare and point-to-point
0.20 2 0.40
carrier services.
4The company offer a bottle of premium whiskey for purchase of full-fare ticket at
0.08 1 0.08
$26.
5Southwest Airline has television commercial "Flight Attendant" which was named
0.10 2 0.20
in Adsweek's "Best spots."
6Southwest Arlines promises safe, reliable, frequent, low cost air transportation
0.12 2 0.24
that is topped off with outstanding services.
7Southwest is the first airlines established a homepage on web. 0.15 2 0.30
    1.00   2.17
Weaknesses      
1Net income has increased by $ 49 million or 8% from 2005 to 2006. 0.25 -2 (0.50)
2Decline in profitability ratios from comparable years 2005-2006: Operating Profit
0.30 -3 (0.90)
Margin 11% to 8%, Net Profit Margin 7% to 5%, and ROE 8% to 7%
3The management Rating scale:
avoids trendy management program, avoids formal and
documented strategic planning, spend more time at planning parties than writing 0.23 -1 (0.23)
policies, and once settle a legal dispute by arm wrestling.
4The company truly believes that the employees comes first, not the customers. 0.22 -2 (0.44)
    Strengths : Weaknesses :      
  Strong +1 Weak -1   1.00   (2.07)
TOTAL 0.10
Stronger +2 Weaker -2    

Strongest +3 Weakest -3
Conclusion:
The IFE Matrix shows that the strengths of
Southwest Airline’s strengths were able to
overcome its weaknesses. Strength #1 is
considered the strongest, weakness #2
also is the weakest.
III. ASSUMPTIONS            

1. General Environment Stability

The general environment is stable due to the following reasons:

- Increasing population
- Increasing disposable income
- Continues development in technology or technological advancement

2. Industry Growth Prospects

The industry growth prospect is good due to the following reasons:

- Shifting of airfare from high class to low cost due to recent terrorist attacks happening.
- All carriers continually strives in a first place in Air Travel Consumer List report by the DOT
- Inspite of new security measures, increases in liability for lost luggage, rising energy cost,
and dramatic increases in labor expenses hampered major airlines performance, they
cut their capacity while tapping their lines of credit and hunting for more sources of cash.
III. ASSUMPTIONS          

3. Financial Strength of the Company and its Competitive Position

The financial position of the company is strong because the balance sheet is strong. The
liquidity ratios and profitability are declining; and the company is lowly leverage.

Liquidity ratio is declining. Current ratio from 0.94 in 2005 to 0.90 in 2006 and
Quick ratio from 0.90 in 2005 to 0.83 in 2006. These indicates that the company
may face complications in liquidating its assets, if needed in the short-term.

Leverage ratio. The company is lowly leverage because all ratios are within 50%
benchmark. Comparable years 2005-2006: Debt to Total Asset (0.10 to 0.12),
Long-Term debt-to-Equity (0.29 to 0.26), Debt to Equity (0.21 to 0.24)

Profitability ratio is decreasing. Comparable years 2005-2006: Operating Profit

Margin Margin 11% to 8%, Net Profit Margin 7% to 5%, ROA 4% remained to 4%
and ROE- 8% to 7%.

Competitive Position
In Competitive Profile Matrix, it shows that the United Airlines has the most
competitive advantage among five rival companies in the industry followed by
the Southwest Airlines.
THE GRAND STRATEGY MATRIX        

                       
        RAPID MARKET GROWTH        
                       
    Quadrant II     Quadrant I      
    1. Market development     1. Market development    
    2. Market penetration     2. Market penetration    
    3. Product development     3. Product development    
    4. Horizontal integration     4. Forward integration    
    5. Divestiture       5. Backward integration    
    6. Liquidation       6. Horizontal integration    
              7. Related diversification    
                       
WEAK                 STRONG  
COMPETITIVE               COMPETITIVE
POSITION                 POSITION
    Quadrant III     Quadrant IV      
    1. Retrenchment       1. Related diversification    
    2. Related diversification     2. Unrelated diversification    
    3. Unrelated diversification     3. Joint ventures      
    4. Diversification                
    5. Liquidation                
                       
                       
        SLOW MARKET GROWTH        
                       
Southwest Airlines lies in Quadrant II, which indicates that it is
part of a rapid market growth and weak competitive position. The
possible strategies are: Market development, Market
penetration, Product development, and Divestiture. These
strategies requires intensive efforts as the company needs to be
improved more, maintained its competitive position with existing
airfare services and also to be able to increase market share in
expanding market through selling 100% other asset.
IV. PROBLEM STATEMENT               

Financial Problem
The company's profitability is decreasing. It is clearly shows the
decline in profitability ratios from comparable years 2005-2006:
Operating Profit Margin 11% to 8%, Net Profit Margin 7% to 5%,
and ROE 8% to 7%

Non-Financial Problem

Due to recent terrorist attacks, competitors are also expanding

and developing low-fare flight program which is the main
product/services of the company.
V. ALTERNATIVE COURSES OF ACTION
Market Development – Introducing present products or services
ACA # 1. into new geographical area.
Since Southwest Airlines is currently served 63 cities in 32 states and
operates more than 3,200 flight. The company can develop its market
in some other remaining state in the U.S. and expand to international
market such as Europe particularly in France, Italy and also in Canada.

Product Development – Seeking increased sales by improving

present products or services or developing new ones through product
ACA # 2. innovation, product augmentation.
The company has currently operates one line of airfare services and
that is short-haul, frequent, low cost airfare/carrier. Southwest
Airlines can develop new line airfare services that is for upper class or
for business class airfare services to capture growing businessmen
travelling domestically and internationally.
QUANTITATIVE STRATEGIC PLANNING MATRIX          

      ACA #1 ACA #2

Evaluation Criteria Weigh Market Product

t Development Development
 

      AS TAS AS TAS
  Attractiveness          

1Market Leadership
-It will strengthen its market leadership by increasing market share in
0.50 2 1.00 1 0.50
  remaining states in the US and also in international market.
-Maintain its top position in the industry by focusing on market
  development
2Competitive Advantage
  -Southwest is concentrated in short-haul trips or low cost airfare. 0.20 1 0.20 2 0.40
-The company will continue to improve its products through R&D
  study to be more competitive.
Rating scale:
3Financial Strength
-It will increase revenue by generating revenues in market expansion 0.25 2 0.50 1 0.25
in some other remaining states in US and expand also in international
  market. Attractiveness : Risks :
4Industry Attractiveness
Attractive +1 Risky -1
More Attractive +2 Riskier 0.05 -2
2 0.10 1 0.05
-It will improve its imge and reputation through participating some
  travel shows in television as part of advertising and promotion.
  Total 1.00  1.80  1.20
QUANTITATIVE STRATEGIC PLANNING MATRIX          

      ACA #1 ACA #2

Weigh Market Product

Evaluation Criteria
t Development Development
 

      AS TAS AS TAS
  Risks          
1Market Leadership
-Competitors tends to adapt also low cost aifare services due to
  recent terrorist attack happenings. 0.05 -1 -0.05 -2 -0.10
-New line airfare services introduced to the market can easily be
  copied or imitated by competitors.
2Competitive Advantage
-Uncertain if the new line of airfare services will hit for the
  businessmen and in international market. 0.50 -1 -0.50 -2 -1.00
-Introduction of new line of airfare services can be done also by
  competitors.
3Financial Strength
-Present market is already saturated. It would mean great amount to
  be allocated for marketing strategies. 0.25 -1 -0.25 -2 -0.50
-Research and development requires high capitalization and Fixed
  costs associated to market development is high.
4Industry Attractiveness
-With the development of the new market, competitors are expected 0.20 -1 -0.20 -2 -0.40
to arrive increasing competition in the industry in which Southwest
  Airlines operates.
  Total 1.00  -1.00  -2.00
  Net Score     0.80   (0.80)
Conclusion:
The QSPM shows that ACA # 1 Market
Development strategy is the most attractive
among the two alternatives.
Strategic Management II:
- SWOT Matrix
- Action Plan
- Projected Income Statement (5 year projection)
- Projected Balance Sheet (5 year projection)
- Projected Cash Flow (5 year projection)
- Projected Financial Ratios (5 year projection)
Thank you…