A Progressive Digital Media business

COMPANY PROFILE

Southwest Airlines Co

REFERENCE CODE: DEFBDE99-9B78-4A63-BE9C-7EA7568D476E

PUBLICATION DATE: 25 Jul 2018
www.marketline.com
COPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED
Southwest Airlines Co
TABLE OF CONTENTS

TABLE OF CONTENTS

Company Overview ........................................................................................................3

Key Facts ......................................................................................................................... 3
SWOT Analysis ...............................................................................................................4

Southwest Airlines Co Page 2

© MarketLine
Southwest Airlines Co
Company Overview

Company Overview

COMPANY OVERVIEW
Southwest Airlines Co. (Southwest Airlines or “the company”) is a passenger airline company that
primarily offers scheduled air transportation in the US and near- international markets. The company also
provides point-to-point flight services that offer direct nonstop routing as compared to hub-and-spoke
service. In addition, it offer also offer high-frequency short-haul routes with long-haul nonstop service
between markets such as Los Angeles and Nashville, Las Vegas and Orlando, San Diego and Baltimore,
and Houston and New York LaGuardia and Oakland and Baltimore, the US. The company classifies its
fares into three major categories: Wanna Get Away, Anytime and Business Select. These fares include
two free checked bags, complementary soft drinks and snacks and also offer free live and on-demand
television in selected areas. It also offer various ancillary services such as EarlyBird Check-In (automatic
check-in), and transportation of pets and unaccompanied minors. Southwest also offers mobile
application that is compatible with both IOS and Android devices and an e-commece portal
southwest.com. for offering online ticket booking services. Southwest Airlines is headquartered at Dallas,
Texas, the US.

The company reported revenues of (US Dollars) US$21,171 million for the fiscal year ended December
2017 (FY2017), an increase of 3.7% over FY2016. In FY2017, the company’s operating margin was
16.6%, compared to an operating margin of 18.4% in FY2016. In FY2017, the company recorded a net
margin of 16.5%, compared to a net margin of 11% in FY2016.

The company reported revenues of US$5,742.0 million for the second quarter ended June 2018, an
increase of 16.1% over the previous quarter.
Key Facts

KEY FACTS

Head Office Southwest Airlines Co

PO Box 36611
Dallas
Texas
Dallas
Texas
USA
Phone 1 214 7924000
Fax
Web Address www.southwest.com
Revenue / turnover (USD Mn) 21,171.0
Financial Year End December
Employees 57,112
New York Stock Exchange Ticker LUV

Southwest Airlines Co Page 3

© MarketLine
Southwest Airlines Co
SWOT Analysis

SWOT Analysis

SWOT ANALYSIS
Southwest Airlines Co. (Southwest Airlines) is a passenger airline that provides scheduled passenger and
freight transportation services. Revenue growth, strong fleet base, low-cost fare structures and point-to-
point service strategy are the major strengths of the company, whereas dependence on single aircraft
and engine supplier and heavy dependence on passenger revenues remains as major areas of concern.
In the future, intense competition, labor costs in the US and stringent regulations could impact the
business operations. However, positive outlook for global tourism industry, network expansions and
initiatives could provide growth opportunities to the company.

Strength Weakness

Strong fleet base enhances ability to deliver effective Dependent on single aircraft and engine supplier could
service impact the operations
Point-to-point service strategy increases revenues Heavy dependence on passenger revenues could
Low-Cost Fare Structures helps maintain passenger increase risk
volume
Revenue Growth
Opportunity Threat

Network expansion initiatives to create a positive Intense competition could negatively impact margins
impact on topline performance Labor Cost in the US
Positive outlook for the global tourism industry Stringent government regulations likely to affect the
Strategic Initiatives enhance its future growth company’s progress
prospects

Strength

Strong fleet base enhances ability to deliver effective service

Southwest has a strong fleet network. Based on the US Department of Transportation's most recent data,
the company is the US's largest carrier in terms of originating domestic passengers boarded. The
company operated a total of 723 Boeing 737s aircraft as on December 31, 2016, of which 83 and 51 were
under operating and capital leases, respectively. Out of the 706 Boeing 737's aircrafts, served 100
destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near-
international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize,
Cuba, the Cayman Islands, and Turks and Caicos. In addition, it commenced services to
Cincinnati/Northern Kentucky International Airport offering its customers to access top 50 markets across
the 48 contiguous US States. It also added new domestic and international destination options and flights
to customers residing in California, the US. As of December 2017, the company offered international
services to 14 destinations through 16 international gateway cities within the 48 contiguous US States. It
also opened a new five-gate international concourse at Fort Lauderdale-Hollywood International Airport

Southwest Airlines Co Page 4

© MarketLine
Southwest Airlines Co
SWOT Analysis

(FLL). It also sourced 39 new 737-800 aircrafts, 13 new 737 MAX 8 aircrafts, and 18 pre-owned Boeing
737-700 aircrafts from Boeing. The company's strong fleet base enhances its ability to deliver effective
service to its customers and also allows it to quickly respond to opportunities available in the various
service locations. For instance, the company’s trips flown increased from 1,311,149 million in 2016 to
1,347,893 million in 2017. In addition, its average seat miles increased from 1,48,522 million in 2016 to
1,53,811 million in 2017, representing a Y-o-Y growth of 4%. Approximately 130,256,190 million of
revenue passengers and 157,677,218 million of enplaned passengers were served in FY2017. Hence,
the company's strong fleet base enhances its ability to deliver effective service to its customers and also
allows the company to quickly respond to opportunities available in the various service locations.

Point-to-point service strategy increases revenues

Southwest provides point-to-point service, rather than the 'hub-and-spoke' system which is primarily used
by majority of airlines in the US. The hub-and-spoke system concentrates most of an airline's operations
at a limited number of central hub cities and serves most other destinations in the system by providing
one-stop or connecting service through a hub. Any issue at a hub, such as bad weather or a security
problem, can create delays throughout the system. In this regard, Southwest implemented point-to-point
route structure that offers direct non-stop routing service as compared to hub-and-spoke service.
Approximately 76% of the company's customers flew nonstop, and the average aircraft trip stage length
was 754 miles, with an average duration of approximately two hours. Southwest Airlines' point-to-point
service has also enabled it to provide its markets with frequent, conveniently timed flights at various
competitive low fares. For instance, the company currently offers 19 weekday roundtrips between Dallas
Love Field and Houston Hobby, 12 weekday roundtrips between Burbank and Oakland, 12 weekday
roundtrips between San Diego and San Jose, eight weekday roundtrips between Denver and Chicago
Midway, and 10 weekday roundtrips between Los Angeles International and Las Vegas, the US. The
company balances its high-frequency short-haul routes with long-haul nonstop services between cities
such as Los Angeles and Nashville, Las Vegas and Orlando, San Diego and Baltimore, and Houston and
New York LaGuardia and Oakland and Baltimore. As of December 2017, Southwest Airlines served 675
nonstop city pairs. Thus, the point-to-point service strategy enables the company to achieve better asset
utilization and reliable on-time performance, which in turn helps it increase its revenue and tap profitable
markets.

Low-Cost Fare Structures helps maintain passenger volume

The company is known for low-cost air services in the US and the related regions in operate. Southwest
fare structure comprise of three categories: Wanna Get Away, Anytime, and Business Select. These fares
include two free checked bags, complementary soft drinks and snacks and also offer free live and on-
demand television in selected areas. Its Wanna Get Away fares are the lowest fares and are non-
refundable and its Anytime fares and Business Select fares are refundable and the generated funds are
applicable towards future travel on Southwest Airlines. On an average, the company has lower unit costs
than majority of airline carriers operating in the US. The company’s load factor was 83.9% in FY2017.
The company is also focused on reducing fuel consumption and enhancing fuel efficiency through fleet
modernization and other fuel initiatives. Southwest continued to replace its older aircraft with newer
aircraft that are less maintenance intensive and provides enhanced fuel efficient services. In this regard,
the company replaced all of its Boeing 737-300 aircraft from its fleet and started operating scheduled
services through its new Boeing 737 MAX 8 aircraft. The Boeing 737 MAX 8 reduces the fuel usage and

Southwest Airlines Co Page 5

© MarketLine
Southwest Airlines Co
SWOT Analysis

CO2 emissions. As of December 2017, the company operated 13 Boeing 737 MAX 8 aircrafts. The
company’s efforts to reduce fuel consumption have enabled it to improve its average seat miles (ASM)
per fuel gallon consumed, which increased from 74.4 in FY2016 to 75.2 in FY2017.

Revenue Growth

The company reported strong revenue growth in FY2017. Strong growth in revenue helps the company
gain investors' confidence and improving its ability to allocate adequate funds for future growth prospects.
In FY2017, Southwest reported revenues of US$21,171 million as compared to US$20,425 million in
FY2016, indicating a growth of 3.6%. The growth in revenue was primarily due to 2.9% increase in
passenger revenues, 1.2% increase in freight revenues and 11.9% increase in other revenues. This was
primarily due to 3.6% increase in capacities, increased demand from freights, 70% increase in revenue
associated with cardholder spending’s on the Company's co-branded Chase Visa credit cards and 30%
increased growth from ancillary service revenues driven by 8.7% increase in EarlyBird Check-In services.

Weakness

Dependent on single aircraft and engine supplier could impact the operations

The company is dependent on Boeing as its sole supplier for aircraft and many of its aircraft parts and is
dependent on other suppliers for certain other aircraft parts. Although Southwest Airlines is able to
purchase some aircraft from parties other than Boeing, most of its purchases are directly sourced from
Boeing. Therefore, the company would be materially adversely affected in the event of a mechanical or
regulatory issue associated with the Boeing 737 aircraft type, whether as a result of downtime for part or
all of the company's fleet or because of a negative perception by the flying public. For instance,
Southwest Airlines operated a total of 706 Boeing 737 aircrafts, of which 53 aircraft are under operating
lease and 69 aircrafts are under capital lease respectively. The company is also dependent on sole
suppliers for aircraft engines and certain other aircraft parts. Thus, if the company is unable to acquire
additional aircraft from Boeing, or if Boeing is unable or unwilling to make timely deliveries of aircraft or to
provide adequate support for its products, it could have a serious impact on company's operations.

Heavy dependence on passenger revenues could increase risk

Southwest Airlines is highly dependent on passenger service revenue. In FY2017, the company’s freight
transportation services reported revenues of US$173 million, which as a percentage stood at 0.9% of the
company’s total revenues and US$19,141 million from passenger services accounting for 99.1% of the
company’s total revenues. The company has not yet completely leveraged its strong domestic network
towards increasing its cargo revenues, which could lend more stability to its revenues. The cargo
business has lower demand elasticity than the passenger business and serves as a natural hedge
against higher jet fuel prices. Therefore, a low level of cargo/freight operations exposes the company's
dependence on passenger revenues, which increases its risks of operating in an environment
characterized by rising fuel costs.

Opportunity

Southwest Airlines Co Page 6

© MarketLine
Southwest Airlines Co
SWOT Analysis

Network expansion initiatives to create a positive impact on topline performance

The network expansion initiatives undertaken by the company in the recent past would enhance the
company's growth prospects. For instance, in March 2018, the company decided to schedule more
number of flights to link cities across the US from October 2018. These include daily nonstop service
between Houston (Hobby) and Columbus, Ohio, Houston (Hobby) and Louisville, Kentuchy and
Denverand Memphis, Tennessee, the US and weekly nonstop service on Sundays between Oklahoma
City and Nashville, Tennessee and Denver and El Paso, Texas, the US. In addition, it is planning to
invest in Phoenix, the low-cost carriers for adding more number of flights in popular routes across the
country. In January 2018, the company decided to offer five daily services from Seattle-Area Airport to
Paine Field’s Snohomish County Airport, the US. In November 2017, the company started international
flight services from South Florida’s Ft. Lauderdale-Hollywood International Airport (FLL) to Providenciales
International Airport (PLS) in the Turks and Caicos Islands. It also stated ad new service between South
Florida Ft. Lauderdale-Hollywood International Airport (FLL) to both San Jose, Costa Rica (SJO), and
Punta Cana, Dominican Republic (PUJ). This allows the customers to have non-stop access from Fort
Lauderdale to 10 destinations in Latin America and the Caribbean. In August 2017, the company
announced its plans to provide 20 new non-stop routes and increase the flight frequency to 27 existing
routes and new opening international gateways for California travelers by April and May, 2018. In July
2017, the company started daily nonstop flight services between Fort Lauderdale and Aruba and
Milwaukee and Houston (Hobby) and the flight operations will start by March, 2018. In June 2017,
company launched eight flight services from Cincinnati/Northern Kentucky International Airport (CVG) and
Chicago Midway (MDW) and three new services from Cincinnati/Northern Kentucky International Airport
(CVG) and Baltimore/Washington International Airport (BWI). In the same month, it also announced its
plan to start a non-stop route connecting San Diego and Tampa, the US.

Positive outlook for the global tourism industry

The global tourism industry is booming which could boost the demand for the company's services.
According to the World Travel & Tourism Council (WT&TC), the direct contribution of T&T industry to the
world’s GDP, is expected to increase by 4% per annum during the forecast period (2017-2027), to reach
US$3,537.1 billion in 2027, in comparison with US$2,306 billion in 2016. Moreover, the industry's total
contribution to GDP may increase to US$1,512.9 billion in 2027. Furthermore, rise in investments in T&T
industry to US$1,307.1 billion in 2027, is likely to boost activities within the T&T industry. In addition, the
decline in the global oil prices is expected to further lower transport costs and boost economic growth by
lifting purchasing power and private demand in oil importing economies. This growth in world tourism
industry will enhance airline business. Thus, a growing end market auger well for the company as it is
well positioned to capitalize on the growing global tourism industry.

Strategic Initiatives enhance its future growth prospects

The company has signed several partnerships with e-commerce websites in order to enhance air tickets
booking experience for its customers. For instance, in November 2017, the company in collaboration with
Carla Fernandez , a Mexican fashion designer developed upcycled fashion accessories through airplane
seat covers and handcrafted by indigenous artisans in seven Mexican communities. These include shoes,
bags, ponchos and key chains. In October 2017, the company started offering scheduled flight services

Southwest Airlines Co Page 7

© MarketLine
Southwest Airlines Co
SWOT Analysis

through Boeing 737 MAX 8 aircraft. Southwest's MAX 8 aircraft feature a single-class cabin with 175
seats that offer industry-leading personal space with 32 inches of seat pitch. The new aircraft is further
enhanced by the Boeing Sky Interior which offers an LED lighting sequence for each phase of flight and a
music-infused cabin experience featuring playlists for boarding and deplaning. In addition, the aircraft is
equipped with LEAP-1B engines that offer fuel-efficient services. in June, 2017 the company signed a
partnership deal with Booking.com which provides various offers and discounts on the booking of
Southwest Airlines Co. air tickets. This will allow Southwest.com visitors to select the Hotel and navigate
to a co-branded Southwest-Booking.com page. In May, 2017 the company made the carrier’s transition
agreement with Amadeus Altea, computerized software solutions for travel systems. Through this
agreement, Southwest Airlines could improve customer experience and increase the company’s revenue
performance by capitalizing the flexibility of the new computerized software solutions for travel systems.

Threat

Intense competition could negatively impact margins

The US airline industry is characterized by intense price competition, especially in domestic markets. The
company's primary competitors include other major domestic airlines, as well as regional and new entrant
airlines, surface transportation, and alternatives to transportation such as videoconferencing and the
Internet. The company's revenues are sensitive to the actions of other carriers with respect to pricing,
routes, frequent flyer programs, scheduling, capacity, customer service, comfort and amenities, cost
structure, aircraft fleet, and code sharing and similar activities. The company competes with other largest
major US airlines, including American Airlines Group, Delta Air Lines, JetBlue Airways, Alaska Air Group,
SkyWest, and United Continental Airlines, among others. Some of the company's competitors have
substantially greater financial resources, including more favorable hedges against fuel price increases
and lower cost structures than the company. In recent years, the domestic market share held by low-cost
carriers has increased significantly and is expected to continue to increase, which is dramatically
changing the airline industry. The increased market presence of low-cost carriers, which engage in
substantial price discounting, has diminished the ability of the network carriers to maintain sufficient
pricing structures in domestic markets. Hence, the increased competition could put a downward pressure
on price and market share, which could negatively impact the brand image of the company.

Labor Cost in the US

Increasing manpower costs could have an adverse effect on the company’s margins. In FY2017, Fossil
employed 12,300 associates for conducting its business operations. Increasing manpower costs could
impact its stability and operational efficiency. The tight labor markets, government mandated increases in
minimum wages and a higher proportion of full-time employees could result in an increase in labor costs.
The federal minimum wage rate in the US, which remained at US$5.15 per hour since 1998, increased to
US$5.85 per hour in 2008. It further increased to US$6.55 per hour in 2009 and to US$7.25 per hour in
2010. Though the average minimum labor wages remained same in 2018, many states and municipalities
in the country increased minimum wage rates even higher than the federal minimum wage rate due to the
higher cost of living. The federal minimum wage provisions are contained in the Fair Labor Standards Act
(FLSA). As of January 2018, the minimum wage rate in the US was US$7.5 per hour. The minimum wage
rate in 29 states and the District of Columbia is more than the federal rate. These wages range from

Southwest Airlines Co Page 8

© MarketLine
Southwest Airlines Co
SWOT Analysis

US$11 in Massachusetts, US$8.25 in Florida, US$8.25 per hour in Illinois, US$9.25 per hour in Michigan,
US$9.25 per hour in Maryland, US$10.1 per hour in Hawaii and Connecticut and US$10.5 in California.
The minimum wage in the District of Columbia reached US$12.5 per hour.

Stringent government regulations likely to affect the company’s progress

Airlines are subject to extensive regulatory and legal compliance requirements that result in significant
expenditures. For instance, the Federal Aviation Authority (FAA) is a authority body which regulates all
safety issues in civil aviation operations. FAA’s safety jurisdiction includes aircraft maintenance and
operations like equipment, ground facilities, dispatch, communications, flight training personnel, and other
matters affecting air safety. These will increase the aircraft operations cost significantly. The company
expects to continue incur expenses to fulfill the FAA's regulations. These authorization laws, regulations,
taxes and airport rates and charges have also been imposed from time to time that significantly increase
operating expenses or reduce profit margins. As a result, complying with such laws, regulations and
actions increases the operating costs of Southwest Airlines which could have a significant effect on its
profitability and margins.

Southwest Airlines Co Page 9

© MarketLine
Copyright of Southwest Airlines Co. SWOT Analysis is the property of MarketLine, a
Progressive Digital Media business and its content may not be copied or emailed to multiple
sites or posted to a listserv without the copyright holder's express written permission.
However, users may print, download, or email articles for individual use.