Term Paper: Southwest Airlines Before 1978

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[. . .] Short-Term Liquidity Ratios

To measure Southwest's ability to meet its short-term financial obligations and to assess the ability of the company to convert current assets to cash to reduce current liabilities, we must look at the company's short-term liquidity ratios. The short-term liquidity ratios are used in the evaluation of short-term liquidity to convert current assets into cash in order to reduce the financial obligations of the company as they arise (Horngren, 1996). These ratios are particularly significant to the creditors and investors of a company because they determine the ability of that company to pay off their debts.

In addition, investors focus on the company's definition of current assets and current liabilities since these factors have a direct impact on the amount of available working capital of a company. Typically, a current ratio of 2:1 and a quick ratio of 1:1 are considered to be acceptable (Irwin, 1994).

Financial Ratios for Southwest Airlines

Current Ratio

Quick Ratio

As demonstrated in the table above, Southwest's quick ratio also has remained under 1:1, which is the benchmark value for this ratio. The company has also maintained a higher than average current ratio. These trends indicate that Southwest is in a good position than its competition to meet its short-term financial obligations.

Profitability Ratios

Profitability ratios can be used to determine the profitability of Southwest Airlines. These ratios help evaluate the company's ability to monitor and control expenses and to earn a profit on resources committed to the business. Thus, by looking at these numbers, we can better assess the company's strengths and weaknesses, operating results and growth potential. These ratios measure how successfully the assets are being used to generate net income and sales. The higher the ratio, the more successfully a company is using their assets.

Profitability Ratios for Southwest Airlines

Financial Ratios

Gross Profit

Return on Stockholder's Equity

Return on Total Assets

The gross profit percentage suggests whether the profits will cover operating expenses. Southwest Airlines has a relatively high gross profit rate, mainly due to low operating costs, which gives the airline a competitive edge. Return on stockholder's equity determines the successful use of resources provided by stockholders. Southwest Airlines has had a significant increase in this ratio over the past few years.

Leverage Ratios

Leverage ratios are effective in assessing the debt levels of Southwest Airlines. The main focus of these ratios is the entity's ability to make payments to long-term creditors. Both creditors and shareholders are interested in these ratios and look for low ratios when making investment decisions. These ratios demonstrate the company's ability to withstand poor business conditions without suffering net losses or insolvency.

Leverage Ratios for Southwest Airlines

Financial Ratio

Debt-to-Total Assets


This table shows a decreasing trend in all of the above ratios from 2000 to 2002. This demonstrates the continuous stability of Southwest Airlines and its ability to meet its long-term obligations successfully without encountering net losses or insolvency.

Dividend Ratios

Divident ratios help determine the return on investment for Southwest Airlines.

Financial Ratio




The recent decline in the market has affected the Southwest Airline's market price. The dividend-yield for the airline is very low, which means that the company is most likely reinvesting their profit in the future expansion of the company. Investors who plan to see a big cash return on their investment annually would avoid investing in Southwest Airlines.

III. SWOT Analysis

Southwest Airline's success is largely attributed to its ability to find a niche in the airline industry and tailor its growth to focus on that niche (Freiberg, 1996). By analyzing the company's strengths and weaknesses using a S.W.O.T. analysis, this paper aims to identify the direction Southwest should take in the future.


Southwest Airline has separated itself from traditional airlines by creating a strong, fun, employee-oriented culture. The company's mission statement stresses these aspects of the business. As a result, the company has developed a loyal employee base that works hard to achieve Southwest's goals. Southwest has also managed to gain loyal customers by offering relatively low cost airfares. The company's commitment to offering a low fare structure to customers has made air travel more affordable to many consumers and has caused a consistent increase in demand for expansion into new markets, as well as increasing price competition within the cities it caters to.

Southwest's founders believed in things that its competitors did not, resisted the temptation to expand rapidly, in both personnel and markets. Southwest avoided the transcontinental and international markets, enabling the company to concentrate on steady growth. The management understood that they were in a price sensitive market, so they chose to eliminate any extra amenities in airline travel, reducing costs and ultimately offering low fares to consumers.

Southwest Airlines focuses on internal strengths and efficiencies, including rapid turnaround time, reusable boarding passes, and single style aircraft, to significantly reduce its overhead. Its low-cost existence allows the company to be more flexible in embracing new opportunities. Southwest claims to welcome new competition against their strategy, insisting that competition only makes them stronger. In maintaining consistent management, Southwest has managed to maintain and improve its corporate and culture vision. Creativity in marketing and negotiation in the face of an obstacle is one of the company's greatest strengths.


Southwest Airlines has expanded its business so much that it must start to enter more markets where it faces competition by the larger carriers. The company currently operates only in the United States, concentrated in the western regions. Southwest's lack of expansion into transcontinental markets and international markets may cause Southwest to buy a variety of planes.

Southwest Airlines may be losing a significant amount of customers by not catering to business travelers. The company does not have a first-class section on its planes nor does it offer seat reservations. It also fails to offer meals to passengers, instead offering just peanuts and pretzels. This is unacceptable for some markets.

As the company grows, its ability to react to threats of new entries into their market may decrease. Relying on a single type of aircraft and manufacturer, Southwest may be negatively affected by any increases in cost or defects in company planes.


Southwest Airlines' financial strength and consumer loyalty position the company for many new opportunities. Many efforts by competitors to match Southwest's service and prices have been decreased due to operational and financial difficulties, so the company faces little competition right now. In addition, the major competitors have higher operational costs so they have less room to expand.

Southwest's strength and financial status are good reasons for investors to support growth into new markets. Southwest has not yet explored international and transcontinental markets, although research shows entry into these markets would be welcomed. As major carriers focus on international markets, Southwest also has the ability to enter the markets the larger companies have abandoned.


As Southwest continues to grow, it faces many potential threats. Many major airlines are aggressively competing with Southwest for its market position. For instance, United Airlines recently launched its "We are going to match Southwest" strategy, which places Southwest in a highly competitive environment, as reputable airlines struggle to match Southwest's service and prices. Major competitors have the resources to improve Southwest's idea by offering things that Southwest does not, like seat reservations, first-class sections, and more flights.

In addition, like all airlines, Southwest faces threats from external forces. Fear of terrorism has caused customers to look into alternative forms of transportation, such as high-speed railway, weakening demand for air travel. In addition, Southwest faces threats from higher fuel costs and new taxes.


Southwest Airlines' Competitive Advantages and Disadvantages

Southwest Airlines is currently one of the largest U.S. airlines and has managed to remain a profitable company, despite the recent economic blows to the airline industry. To continue its future dominance in the low-fare, short-haul market, Southwest must increase its roster of destination cities, expand its services to those cities already served, and purchase additional aircraft. These strategies will continue to enable Southwest to operate at a low cost.

According to Forbes Magazine, "The one thing that the top ranking companies in the survey have in common is culture. A company's culture, like a person's character, drives reputation. It should come as no surprise that a company whose culture honors customers, employees and shareholders alike have excellent reputations."

Southwest's culture has effectively strengthened the airline. This culture includes beliefs, expectations, rituals, communication patterns, symbols and reward structure. Culture does not refer to secret plans and strategies. Instead, it involves a mixture of trust and loyalty. Kelleher refers to culture as one of the most precious commodities a company has. Thus, he believes that all employees, from the CEO to the janitors, must concentrate more on maintaining a positive culture than on anything else.

Kelleher believes that Southwest's formula to success is as follows (Freiberg, 1996):

Blaze new trails.

Do not rest on the success of others.

Finding out… [END OF PREVIEW]

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