Monday, August 29, 2011

Air Travel

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Southwest Airlines Co. (Southwest) is a major domestic airline that provides primarily shorthaul, high frequency, point-to-point, low-fare service. Southwest was incorporated in Texas and commenced Customer Service on June 18, 171 with three Boeing 77 aircraft serving three Texas cities - Dallas, Houston, and San Antonio. Today Southwest operates over 00 Boeing 77 aircraft in 58 cities. Southwest has the lowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest fares. Southwest also has one of the best overall Customer Service records. LUV is their stock exchange symbol, selected to represent our home at Dallas Love Field, as well as the theme of their Employee and Customer relationships.

Objective and Scope

‘The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.’ (

Southwest Airlines will fly any plane, as long its a Boeing 77, and let passengers sit anywhere they like, as long as they get there first. Sticking with what works, Southwest has expanded its low-cost, no-frills, no-reserved-seats approach to air travel throughout the US to serve about 60 cities in 0 states. To curb maintenance and training costs, the airline uses only Boeing 77s; it operates about 60. Southwest offers ticketless travel to trim back-office costs and operates its own reservation system. The airline boasts a highly participative

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corporate culture and only one strike during its 0-year history. It has also enjoyed straight profitable years. Southwest is expanding service to the eastern US.

Location Strategy

Southwest currently serves 5 airports in 58 cities in 0 states. Based

in Dallas, Southwest currently operates more than ,700 flights a day.

The objective of location strategy is to maximize the benefit of location to the firm. Companies make location decisions relatively infrequently, usually because demand has outgrown the current plants capacity or because of changes in labor productivity, exchange rates, costs, or local attitudes.

Location options include

· Expanding an existing facility instead of moving

· Staying at current location while opening branches elsewhere

· Shutting down existing location and starting over at a new one.

There are 5 factors that effect location decisions. They are

1. Market economics

. Better international communications

. More rapid travel operations

4. Ease of capital flow between branches

5. Cheaper labor

For example, Southwest airlines recently accounced future growth plans. On June , 00, Southwest will initiate new nonstop service between Chicago Midway and San Diego with three daily nonstop flights. A seven-day advance purchase fare of $8 each way based on a round-trip purchase is available on this new nonstop service through June . On the same day, Southwest also will add two daily nonstop flights between Phoenix and Orange County, bringing to five the total of daily nonstop round-trip flights between the two cities. Southwest

Airlines are utilizing the location strategy of staying at current location while opening branches elsewhere.

Managing Quality

Managing Quality is essential to any business. Quality, itself, is the ability of a product or service to meet customer needs. Quality does not only rely on the

typical finished goods or related services. Quality is based on and encompasses many different aspects. Quality is important because it is used as a basis for a company’s reputation. Perceptions about a company’s goods and services can be based on the reputation, whether good and bad. Southwest ranked second among companies across all industry groups, and first in the airline industry in the magazine’s 00 America’s Most Admired Companies List.

At Southwest Airlines, they have always governed the way they conduct business. It highlights their desire to serve Customers and gives Southwest direction when o make service-related decisions. Southwest feels it is another way of saying, we always try to do the right thing!. Their customer focus and commitment has led the way to the airline industrys best cumulative consumer satisfaction record, according to statistics accumulated and published by the U.S. Department of Transportation. In addition, Southwest’s bold decision to maintain its operations at status quo post-September 11 has enabled it to gain market share. However, as the industry continues to ‘ramp up’, industry pricing is likely to remain under pressure.

Key Investment Positives

Southwest is regarded as the best situated US airline (Citigroup valuation). Southwest possesses the lowest unit operating costs and the strongest financial position. With the rest of the commercial airline system having cut about 0% capacity following the terrorist assaults (NY Times November 1, 00), only

Southwest has maintained its full flight schedule. The airline is likely to gain market share, because some other carriers have shut down their low-cost airline subsidiaries. Southwest could benefit in the intermediate term it maintains the status quo. It concentrates mainly on flights to small cities, avoiding congested airports in metropolitan areas. Moreover, Airline industry officials generally believe that larger, international carriers more likely be terrorism targets. Southwest should start growing again before the rest of the industry, as the airline is to expand capacity by taking delivery of new planes throughout 00. This will further accelerate Southwest’s market-share gains.

Financial Strength

Southwest in financial terms is the strongest carrier in the United States, if not the world. The company generated positive cash flows and was profitable in the 4th quarter of 001 (Southwest’s annual report), when the rest of the US Airline industry had losses totaling about $ billion in the worst period in aviation history. Southwest’s ratio of debt to total capitalization was 40% at the end of 001, when the company had $. billion in cash. Southwest focuses on short-term stabilization and maintenance of its cash position. Lower fuel prices and travel-agent commissions should produce about $80 million in annual savings, offsetting expected security and insurance costs. Southwest plans to increase yields and fares steadily through 00, though revenue per available seat mile faces pressure from weak demand. The airline’s capital spending in 001 totaled

almost $1 billion, and Southwest has targeted outlays of about $600 million for 00 and $1.1 billion for 00.

Simple Operating Model with Low Cost Structure

Southwest’s use of only one aircraft type, the Boeing 77, and its no-frills service and ticketless operations have enabled the carrier to maintain a low-cost structure, compared with its competitors. Southwest does not operate a hub and spoke system and does not have any international operations. Thus, security will not be as difficult for Southwest to enforce as anticipated for most other carriers.

Capacity Expansion

With many airlines worldwide having pared capacity 0% because of the unprecedented drop in customer demand following the hijacking attacks, the jetliner market is glutted and Southwest could buy used 77s at low prices. The carrier did not reduce its capacity after the terrorists attacks. As the rest of the industry struggles to resume growth, Southwest plans to receive 1 new aircrafts and will retire some older planes over the course of 00, for a net addition of 11 airplanes representing capacity expansion of .5 to 4 %. The airline plans an annual capacity growth rate of 8% through 01.

Growth Opportunities

The airline has a history of communities petitioning for its service, which, in addition to market-share shifts to Southwest from the industry’s capacity reduction, should provide ample growth prospects. The chance to add aircraft at bargain prices could open the door for Southwest to augment its growth by becoming more of a contender in markets for long-haul flights, which account for only 15% of the routes in its system now. Southwest could shift its short-haul strategy to enter long-haul markets more aggressively. The airline may be a viable competitor to high-cost carriers in specific markets.

Internet Site is one of the world’s busiest travel sites on the Web. The airline has added features for rental-car and hotel reservations to its Internet site, and plans more additions.

Productivity Advantage

Southwest derives its cost advantage from productivity and not labor-rate advantages. Southwest will need to continue to pay a market wage, but that it should be more successful than other carriers in achieving productivity gains to offset any increases. Therefore, the cost gap between Southwest and the rest of the industry could grow if airline consolidation continues.

Personnel Needs

Southwest employees more than ,000 employees throughout their system. Last year alone, Southwest reviewed 14,81 resumes, which resulted in 6,406 new hire employees in 001. Successful candidates must be an altruistic, outgoing person who likes to serve others and enjoys working with a team, we want you. If youre the kind of person who enjoys a more secure, more regimented, more inflexible, more rule-governed type of environment, that doesnt mean that youre a bad person, you are not compatible with Southwest’s personnel needs. Southwest has not had contested labor negotiations, which have occurred in most of the Airline industry. Agreements on new contracts should be reached more easily, as about 100,000 workers in the industry have been furloughed because of travel slump; Southwest has remained steadfast in not laying off any employees. Though Southwest appears mindful of gains by labor at other carriers, its pilots’ fortunes, i.e. stock options, have soared with the airline. Its pilots also are free to realize gains when options vest, rather than wait for retirement.

Key Investment Risks

Southwest’s operations make the carrier more appealing to the leisure traveler than the business traveler. In economic downturns, leisure travelers may reduce or eliminate discretionary travel.

Safety Concerns and Costs

Airlines face additional costs for new security procedures in the industry. New rules on luggage require all checked bags and their owners to be aboard each plane to get clearance. Also, starting in December 00, airlines must screen all luggage, which will require expensive new detection machines, installation of which also necessitate costly renovations at airports.

Increased Competition

In some markets, Southwest faces low-fare, low-cost airline alternatives. And other low-cost operators, JetBlue, have entered long-haul markets profitably. Southwest also is subject to competition form surface transportation, i.e. cars, trains, owing to the carriers short-haul routes.

Lack of Alliances with Other Airlines

These alliances provide passengers from other airlines to complete itineraries.

Financial Statistics (

Southwest Airlines Co. (LUV)Industry Airlines Current P/E 1.5

Last Updated 0-Apr-0

Analyst Consensus Recommendation .

1.0 - 1.5 Strong Buy 1.6 - .5 Buy .6 - .5 Hold .6 - 4.5 Underperform 4.6 - 5.0 Sell

Qtr Mar/00 Qtr Jun/00 FY Dec/00 FY Dec/00

Current Mean EPS 0.04 0.18 0.61 0.

Number of Brokers 1 10 1 11

Year Ago EPS 0.15 0. 0.51 0.61

Current High 0.07 0. 0.6 1.08

Current Low 0.00 0.1 0.50 0.70

Median 0.04 0.1 0.6 1.00

Standard Deviation 0.0 0.0 0.06 0.11

Current vs. Year Ago -7% -18% 1% 5%

Report Date 1-Apr-00(week of) 1-Jul-00(week of)

Reported Quarters

Last Qtr Qtrs Ago Qtrs Ago 4 Qtrs Ago

Previous Estimate 0.00 0.10 0. 0.15

Previous Actual EPS 0.04 0.10 0. 0.15

Earnings Estimate Revisions and Trends

QtrMar/00 QtrJun/00 FYDec/00 FYDec/00

Current Mean 0.04 0.18 0.61 0.

7-Days Ago Mean 0.04 0.18 0.61 0.

0-Days Ago Mean 0.06 0.1 0.65 0.5

60-Days Ago Mean 0.06 0.1 0.65 0.5

0-Days Ago Mean 0.05 0.18 0.6 0.7

Up Revisions Last 7 Days 0 0 0 0

Up Revisions Last 0 Days 0 0 0 0

Down Revisions Last 7 Days 1 0 1 0

Down Revisions Last 0 Days 8 4 8

Consensus Recommendations Long Term Growth Rates

Current Mean . Next 5 Years - Median 1.5

Number of Brokers 1 Number of Brokers 10

Industry Mean .1 Industry Growth Rate .1

7-Days Ago Mean .4 Next 5 Years High 0.0

0-Days Ago Mean . Next 5 Years Low 10.0

60-Days Ago Mean .

0-Days Ago Mean . Last 5 Years Actual 7.

Sector Mean .16

WSJ/DJ US Mean .1

Comparative Estimates and Trends

Qtr Jun Qtr Jun CY 00 CY 00

Company 0.0 0.18 0.60 0.

Current vs. Year Ago Change -80% -18% 17% 5%

Industry - Airlines -.8 NA -15.65 .18

Current vs. Year Ago Change -70% NA 5% 158%

Sector - Consumer Cyclicals .8 .45 .11 1.7

Current vs. Year Ago Change 4% 111% 6% 5%

WSJ/DJ US - Universe .87 .70 11.84 14.71

Current vs. Year Ago Change 14% 17% 0% 4%

Ratios Relative To Company Industry Sector WSJ/DJ US

P/E on Calendar Year Mean 1.6 NA 0.0 .0

PEG on Calendar Year Mean 1.6 NA .6 1.7

Sources used

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