StudyBoss » Airline » Southwest Airlines Financial Analysis

Southwest Airlines Financial Analysis

Southwest Airlines operates as a major passenger airline that provides scheduled air transportation in the United States and near international markets (southwest. com). In addition, at December 31, 2016, South West functioned with a total of 723 Boeing, 737 aircraft and 101 destination in 40 states, the Commonwealth of Puerto Rico, and eight near International countries such as Mexico, Jamaica, The Bahamas, Aruba, The Dominican Republic, Costa Rica, and Cuba (Nasdaq. com). Southwest was originally established as a “point to point” airline company.

Southwest grew from serving domestic aircraft from its inception, to serving international aircraft as 2017. Since international aircraft has been very successful, South West airline decided to expand its presence more in international markets (the Caribbean) by creating an international hub at Houston Hobby Airport. One of the strategy that South West does to conduct business internationally is focus on cost discipline and profitability providing customers with lower fares and big saving.

South West Strategy consist of the use of a single aircraft type, the Boeing 37, Southwest’s operationally efficient point to point route structure, and its highly productive employees. Moreover, South West will be able to serve International markets by planning to upgrade its fleet by adding Boeing 737 Max jetliners to it, in 2017. The 737 Max is a larger, more furl-efficient engine, which could help the carrier extend the distance it can fly. It will also be ordering more BA 737-800s, which would allow the company to fly long-haul distances (Nasdaq. com/article).

In addition, approximately $ 383 million, $ 287 million, and $226 million were attributed to foreign operations (Southwest. com). South west has followed its Mission of provide customers with the high standards of customer service and provide customer with the lowest fare in the airline industry. South West believe that that by delivered highest quality of customer service with a sense of warmth, friendliness, individual pride, and company spirit will help the company to became one of the largest and the only profitable carrier in the airline industry (southwest. com).

Operation Costs Southwest labor cost accounts for about 37% of its operating costs. For instance, Southwest focus on controlling costs also includes ongoing work to reduce fuel consumption. In addition, full and oil expense remained the company’s second largest operating cost. Moreover, Southwest focuses on reducing fuel consumption and improving fuel efficiency through fleet modernization and other fuel initiatives. For example, Southwest use to replace its older air craft with newer aircraft that are less maintenance intensive and more fuel efficient (southwest. com/annual report).

Furthermore In 2016 Southwest announced its first international service from Oakland international Airport and San Diego international Airport with daily flights from Oakland to San Jose del Cabo/ Los Cabos and Puerto Vallarta scheduled to begin in February 2017 and from San Diego to San Jose del Cabo. In addition, by 2017 South west is planning to expand its flights internationally for South Florida to a total of eight international nonstop destinations to the Caribbean. As well, South West will use 5% or 15% of its gross revenue for marketing promotions, sales and services focused in the Caribbean market.

Also, Southwest will increase the training budget and compensation policy to training its employees. Additionally, Southwest introduce a technology of a new schedule optimization tool to assist with creating flight schedules that better reflect customers demand (Southwest. com). Shedulling Southwest schedulled in June 2017 to offer new dayly international nonstop service from Fortderdale to the Caribean. Southwest plan is to complete a new five gate international terminal at the FT lauderdale international aiport (FLL), by June 2017 Soutwes. com/anuual report).

In addition Soutwest will began shecudell in international service from Fort Lauderdale with daily service to , Bahamas and the caribean. Its fleet consists exclusively of Boeing 737 aircraft making simpler to schedulling, operations and flight maintenance (southwest. com/nualreport). Balance sheet Balance sheet analysis – Quartely Results from 31-Mar-2016 – 31 mar -2017. Balance sheet is a list of the assets, liabilities, and stockholders equity as of a specific date, usually at the close of the last day of a month or a year (Warren, Reeve & Duchac, p. 6).

Additionally, the ability of a company to convert assets in to cash is called liquidity, while the ability of a company to pay is debts is called solvency. (Warren, Reeve & Duchac, p. 703). Current radio: Is another method to measure Southwest liquidity base on the balance sheet. It calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. For most industrial companies, 1. 5 is an acceptable current ratio.

As the number approaches or falls below 1 which means the company has a negative working capital, the company will need to take a close look at the business and make sure there are no liquidity issues. Current ratio = current assets / current liabilities According to balance sheet of Southwest Quarterly results (USD $ in millions) from31 Mar-20016- to Mar-2017, current assets and current labilities are: Table #1 Southwest Airline 31 Mar- 2017 31 Dec – 2016 31 Sep – 2016 31 Jun – 2016 Current Assets 4,658 4,498 4,839 4,469 Current Liabilities 7458 6844 7816 7833 Total Assets 23,763 24,772 23,045 22,447

Total Liabilities 15,559 16,331 14,998 14,626 Inventories 356 337 331 328 Total equity 8204 8441 8047 7821 Current Radio 0. 62 0. 66 0. 62 0. 57 Quick radio 0. 58 0. 61 0. 58 0. 53 Debt- Ratio . 65 . 65 . 65 . 65 Debt- Equity . 001 . 193 . 186 . 187 Analysis: According to the table # 1, Southwest current radio is under 1 for the last 4 quarter. Southwest has to increase its working capital to eliminate any liquidity issues. Quik Ratio: is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short term obligations with its most liquid assets.

Qick ratio formula = current assets – Inventories / current liabilities Analysis: According to table # 1, Quick radio for the last 4 quarters of Southwest airline is under 1. This low quick ratio is an indicator of Southwest is over levaaged, strungling to maintain or grow sales and collecting receivables too slowly. Debt- Ratio is a solvency ratio that measures a company total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company’s ability to pay off its liabilities with its assets.

Debt- Ratio shows how many assets the company must sell to pay off all of its liabilities www. myaccountingcourse. com\financial -ratios). So, the higher the percentage of total liabilities (debt), the riskier the company. Formula Debt- ratio = Total Liabilities/Total assets In addition, a lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower debt ratio also has lower overall debt. For instance, a debt ratio of . 5 is often considered to be less riky. This mean that the company has twicw as many assets as liabilities.

Analysis: According to Tabel # 1, Soutwest Debt-ratio is under 1. This mean that Southwest has twice as many assets as liabilities. Acoording to the quick ratio analisys Southwest is a stable company. Debt to equity ratio is a long term solvency ratio indicates the soundeness of long term financial policies of a company. It shows the relation between the portion of assets financed creditors and the portion of assets financed by stockholders ( www. accontingformanagement. org).

Analysis: According to table # 1 Soutwest Debt- ratio for the last 4 quarters is under 1. This mean that Southwest has a high protectction for its money. For instance, an equity ratio under one is considered sastifactory for most of the companies. Last, Southwest operating expenses grew faster than capasity in 2016. Operating expenses per available seat mile ( CASM) increase 0. 4 percent, year to year. Fuel amd oil expenses, Casm inrease 1. 6 percent. In addition, South west cash flow from operations ending 2016 was $4. 29 billion, and they free cash flow was $2. 25 billion. Total operating revenue for year ending 2016 was 20,425,000.

Souwest will use from 5% to 15% from total revenue to advertise its new market which is the Cribeen. According to Southwest balance sheet provided by journal, southwest is a stable company by the quarter 1, 2017. Southwest is able to return free cash to its investors through dividends. As Southwest cash flow continue grow, they will be able to increase its dividend and share repurchase by 2017, and 2018. For example, in year ending 2016, Southwest returned $ 1. 97 billion to shareholders in 2016, through $ 222 million in dividend and $ 1. 75 billion in share repurchase (Southwest. com).

Cite This Work

To export a reference to this article please select a referencing style below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.