Historical Financial Statements (Income Statement, Balance Sheet and Statement of Cash Flows) from the 3 most current years southwest airlines. These should be downloaded from the SEC website

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Southwest Airlines

By Joseph Redfearn

Liberty University

BUSI690

March 9, 2023

Introduction

“And any active-duty military with a valid military ID feel free to board at this time.” This statement over the loud speaker allowing me to be lazy and not set an alarm on my phone to check into my flight the second I’m allowed to and no matter what board after the A boarding is why I personally fly Southwest Airlines. However, this is not the case for everyone, btu there is an abundance of reasons why over 123 million people agree with me and chose to fly with Southwest last year. These reasons could range from the fact that Southwest doesn’t charge baggage fees, that Southwest has flexible cancelations for their flights, or it could be that Southwest offers the same standard flight experience as their competitors normally at a fraction of the cost. While Southwest Airlines is a successful company with a 20-billion-dollar valuation they are far from perfect and can expand on their current mission statement and make some improvements to make it so that there is no question in people’s mind what airline they want to fly with for their next vacation.

Existing mission Statement

Southwest Airlines does not have an outright mission statement, but rather two statements; their purpose and their vision. The Purpose according to the front page of Southwest Airlines website is “To connect People to what's important in their lives through friendly, reliable, and low-cost air travel” and the vision statement just underneath the purpose statement is “To be the world's most loved, most efficient, and most profitable airline.” (Southwest Airlines 2023). These statements combined create Southwest Airlines mission statement. This mission statement is warm and heart felt statement that anyone can read and support however, this mission statement only addresses 7 out of the 9 components that all great mission statements are comprised of. The first component is the customers and unfortunately Southwest’s mission statement does not particularly address a customer base (1). The mission statement does address the product and service that Southwest offers by stating “air travel” (2). Unfortunately stating air travel does not address where this firm actually competes geographically because southwest is solely a north American based airline (3). Southwest’s mission statement may not get into the technology of the company past “efficient, reliable, low-cost air far,” but that would imply that the company is technologically current (4). Southwest states verbatim that they want to be “the most profitable airline” in their vision statement which would address their emphasis on the concern for survival (5). Southwest is most known for how they were a market disruptor in the philosophy for airlines and their mission statement reflects that by stating that Southwest wants the trifecta of being “friendly, reliable, and low costs” (6). Southwest’s different philosophy from other airlines is also their “Self-concept” and competitive advantage of being “friendly, reliable, and most importantly low cost” (7). In recent years most corporate companies have focused on their triple bottom line and southwest targets this by stating that they are attempting to be “the most efficient” airline in their vision statement (8). When southwest states that they want to be a “friendly” airline this is southwest stating that they value their employees because their kindness and training are also a differentiating factor between Southwest and other competitive airlines.

Current Objectives

Southwest’s current objectives as a company are broken up into two categories; an objective set for the company focused externally to provide a service to their customers and an internal set of objectives set to emphasize the importance of their employees. The first promise southwest made is their company promise that states “Southwest will provide a stable work environment with equal opportunity for learning and personal growth. Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer” (Southwest 2023). The second objective that southwest stives to achieve is their internal promise to their employees that states “I will demonstrate my Warrior Spirit by striving to be my best and never giving up. I will show my Servant’s Heart by delivering Legendary Customer Service and treating others with respect. I will express my Fun-LUVing Attitude by not taking myself too seriously and embracing my Southwest Family” (southwest 2023). It is important to highlight southwest current objectives because it does, they do not concern monetary milestones, but rather focus on the experience for not just their customers, but also their employees. This is critical because Southwest Airlines' entire business model is important, but “arguably the most valuable competitive advantage has been its deep focus on hiring the right people. Southwest prides itself on being a people-oriented airline that operates with friendly and approachable employees and team members”

(Li 2021). By aligning your business objectives to your strengths and differentiated strategy southwest is able to achieve and maintain success in the current market.

Current Strategy

Southwest’s currents strategy most resembles “Michael E. Porter’s low-cost leadership strategy. According to this strategy, leadership chooses to keep costs low to compete with other competitors, which is advantageous for long-term success. This type of strategy is more concerned with stability rather than potentially taking a risk for growth. This strategy was extremely successful. As of August 27, 2020, Southwest Airline’s net worth is approximately $21.86 billion dollars (Cardenas 2021). This strategy does not cater to the upper-class or to a lucrative businessman or women, but rather the average American worker or family, which aligns with their mission statement to provide friendly, reliable, and low-cost air travel to the customer all while attempting to become the most loved, efficient, and profitable airline in the market.

New Mission Statement

Southwest is currently a successful company with a solid mission statement. However, this does not mean that there is no room for improvement, but this does not mean southwest has to be overhauled as a company. As a consultant working to improve Southwest Airlines as a company, we do not need to completely flip the public perception of southwest, but rather just let the public know that southwest is better now than they used to be. So, what better way to do that then starting with the mission statement and not changing it completely, but just adding to it to make it a little better. Southwest’s new mission statement would be “Helping the working-class travel and enjoy what’s important in their lives through friendly, reliable, and low-cost air travel though North and central America while becoming the world’s most loved, efficient, and profitable airline.” This is very similar to the previous mission statement, but takes a few more words to really illustrate the who and where their mission statement is applicable too. This will help the company tie all actions back to this one statement, which now is representative of all of the company’s stakeholders and achieves all of the nine components of a great mission statement. This mission statement now defines the customer base of the Southwest Airlines as the working-class demographic, which is southwest’s target demographic (1). Maintains the low-cost airline service portion of the previous mission statement (2). This new mission statement addresses the specific geographic area where Southwest competes for flights, North and Central America, which encompasses all of Southwest Airline’s current flight plans (3). This statement also maintains the “efficient” aspect from the previous mission statement depicting how southwest is attempting to continue to be innovative in their processes to continue to keep flights low in price for their customers (4). The concern for survival would now be condensed into one mission statement as opposed to being separated into the previous vision statement of becoming the world’s most profitable airline (5). The philosophy of the company is illustrated in the friendliness and reliability of the service they are providing (6). The major competitive advantage of southwest is still defined in the mission statement by attempting to be a reliable and low-cost airline (7). The triple bottom line aspect of the first mission statement would be kept in the reliability aspect of the new mission statement (8). Finally, Southwest is known for their employees being incredibly friendly and another factor that separates Southwest from other airlines, which is depicted in the friendly low-cost airline and the following line about being the most loved airline (9). Just because southwest’s mission statement needed some slight reworking does not mean that their current business model needs to be revamped as we turn towards the current strengths of southwest airlines.

Analysis of Current Business model

SWOT Analysis

Strengths

LUV culture is what separates southwest from other comparable companies. This LUV Culture is the culture that exists at Southwest airlines that is “woven into all aspects of our business, from how we treat each other to how we provide Next-Level Hospitality to our customers. All employees are responsible for preserving and invigorating our Culture, regardless of position or tenure, which strengthens our culture of caring” (Thompson 2018). This emphasis is what helps southwest create an intangible atmosphere that can’t be replicated or purchased by their competitors.

Southwest is known for having the most affordable flights when compared to their competitors. Southwest also offers low far calendar deals where customers can purchase flights as cheap as 49 dollars for a one-way ticket and round fair trips for 99 dollars.

Southwest Airlines has ranked in the Forbes top 100 companies for America’s best large employers and customer experience every year for the past decade. No other airline company has managed to be in both of these lists in the same decade.

During peak season Southwest flies over 4,000 flights daily. Southwest is able to do this due to the simple flight paths Southwest flies by limiting their flight plans to solely the north American region. This limits the necessary maintenance needed for each air craft thus reducing the amount of time the aircraft has to be grounded and increasing the availability for that aircraft to be in the sky.

Before the covid 19 pandemic southwest went 49 straight years with consecutive profitability. This constant profitability allowed southwest to invest more into the company, the culture, and into research and development, which can be attributed to Southwest’s success today.

Southwest is currently the 4th largest and highest valued airline company in the world with a 20.3-billion-dollar valuation. This just 1 billion dollars behind the third highest ranked company, American Airlines and is almost 10 billion dollars higher than the closest competitor in US Airways. This shows just the financial strength that the brand value of Southwest has being able to compete with major international airlines.

Southwest’s aircraft fleet is comprised solely of Boeing 737 aircraft, which allows Southwest to cut back on maintenance costs as they only have to repair one single type of aircraft and only have to higher maintainers to work one style of aircraft. This means that Southwest is able to be more efficient in maintenance scheduling, flight plans, refueling times, etc.

Being the 4th largest airline in the world means that Southwest is a pretty dominant player in the airline market, which is very beneficial in an industry that has such a strong reputation for being influence so heavily by lobbying. This allows Southwest to leverage their connections and resources to lobby against any legislature that could have a negative impact to the airline market.

Weaknesses

The specific lack of diversification that could have negative impacts on Southwest as an airline is the actual diversification of their revenue. In 2019 “In FY2019, Southwest Airlines’ reported $22.4 billion total revenues to consist of $20.7 billion as passenger revenue making up 93% of total revenues while freight revenue was $172 million, which is less than 1%” (Gupta 2023). This leaves Southwest vulnerable if there was anything that affected passenger revenue like the limiting of domestic and international travel due to a potential health concern like we saw in 2019 with Covid-19 where other companies have a certain percentage of their fleets dedicated to freight shipment were able to maintain some profits during the same time period.

Southwest Airlines does not offer any international flights (excluding Mexico and some select Latin American countries. These means that southwest is completely dependent on the US market and will be as volatile as the US market without having eggs in any other basket to soften the financial blow that an American recession would cause.

While it is a strength to only use one aircraft this can also be a weakness. When Boeing pushed out the 737 Max Southwest acquired 31 of these aircraft as they were the new iteration of the plane they operate. On March 13, 2019 the FAA grounded all 737 Maxes due to some technical issues, which meant that 31 out of the 700 aircraft in southwest’s arsenal were grounded for an uncertain amount of time, which led directly to the loss of revenue when southwest had to cancel hundreds of flights daily to accommodate the recall of these defective planes.

A unique selling proposition that is perceived as a good that helps make the company different from others. At first southwest had a clear unique selling proposition by not charging for checked bags and having televisions on every seat, but now those are standard with most airlines besides the ultra-low-cost airlines of spirit and frontier.

Southwest is able to offer flights so cheap because they have very little deviation in their route structure. This also means that southwest only flies into larger airports and only domestic flights. This means that Southwest is intentionally leaving a separate market completely untapped

Just as mentioned with the grounding of the Boeing 737s if there any supply chain issues with this on specific aircraft that will ground the entire flight and slow down maintenance for the entire fleet. This could be something as small as the ball bearings for the landing gear of the aircraft or to the electronics in the avionics of the aircraft.

This past Christmas season, 2022, Southwest had to cancel hundreds of flights due to severe weather conditions. This also meant that southwest had to bring in their employees to help operate these flights during harsh weather conditions. Unfortunately, this led to some unrest in the maintenance department especially the luggage department. This lack exodus of workers in the luggage department over the holidays resulted in over 40,000 misplaced or lost luggage bags or 4 out of every 100 bags being lost. Southwest is still recovering from the social backlash that this instance brought to light.

Southwest is not effectively managing their inventory or their cash cycle. This inventory mismanagement is also directed at the use of the same aircraft for their entire fleet. Southwest has run into supply chain issues before and now over orders to have a higher surplus of necessary equipment so that they don’t have to ground any planes, but this does deplete Southwest’s cash reserve.

Opportunities

Southwest has just recently started offering flights outside of the continental united states to include Hawaii and Mexico. Continuing to expand into these unsaturated markets could help propel Southwest into an airline with true global reach.

Just this past year southwest added apple pay as an option for booking flights, but southwest needs to continue down this e-purchase road to make the purchasing of flights, in flight purchases, and even reward points more accessible to the customer.

As mentioned in the lack of diversification of revenue southwest is leaving the freight transport market almost completely underutilized as a revenue source. This would help not only diversify southwests revenue but as a 6 trillion-dollar industry this has the potential to drastically increase southwest’s revenue.

As we become a more advanced technological society Southwest needs to continue to advance their technology to help make the customers experience even more enjoyable. One example of this could be investing in biometric kiosks to help decrease the wait associated with boarding time and help planes take off faster so less flights are delayed.

Southwest started out as a “short hop” airline, but as remote working becomes more prevalent and more millennials enter the work force, we are seeing more and more customers are booking further distance flights specifically round the holidays, which indicates that more people are living further away from home then previously. Southwest can increase their cross country and coast to coast direct flight options.

Ultra-low-cost airlines are the airlines like Frontier and Spirit. These airlines unbundle their fairs, which means that “whole fare is broken into components that the passengers can choose to eliminate. Unbundling leaves anything over the base fare optional. Although Southwest offers low fares, it is a low-cost carrier and not an ultra-low-cost carrier (Sudhakaran 2023). This means that southwest would be able to provide even lower than the ultra-low-cost niche with a very comparable southwest experience for their customers, an example of this is if a customer doesn’t need their two free checked bags or one of their carry-ons, they would be able to purchase an even cheaper $99 round trip flight.

As artificial intelligence becomes more and more abundant Southwest needs to continue to exploit this capability to help with customer service by adding a chat bot technology feature like most banks have already adopted, automated airplane data compilation to help with trend analysis and potentially cut down on costs, or even dynamic pricing to help maximize the sales of Southwest airline tickets.

Southwest currently places a drastic emphasis on their employees as they pride themselves on being the most friendly and enjoyable flight experience, which is supported by them having the highest rated customer satisfaction rating of all leading airlines. However, if southwest dove into the international flight market they would also gain access to the global market of hospitality workers and would have an even wider pool of applicants to help further increase their customer satisfaction.

Threats

Travel is a luxury good, which means that the better the global economy is the more trips people can afford to take. This also means that if there is a global recession then people will immediately cut back on the amount of travel they are taking. A global recession will drastically affect Southwest’s revenue.

Southwest is in the process of upgrading their aircraft to the Boeing 737 Max. Anytime a company is in the process of replacing a fleet of vehicles there is always the threat of a delay in production, a recall, or even a cancelation. From 2019-2022 there were several incidents that grounded the Boeing 737 Max, which forced Southwest to have to cancel numerous flights. While the 737 Max is flying normally for now if the FAA grounds this aircraft again this will cut deeply into southwest’s revenue.

There is always the chance for negative public documents to come to light. One example of this was in 2019 when the US government released documents showing how Southwest had been flying jets without confirmed maintenance records over the past two years and had put over 17 million passengers at risk if there were to have been an issue with that aircraft. This would make any lifelong customer rethink what airline they want to fly next.

Southwest is currently in their own segment of the airline industry where they are slightly below Delta and United Airlines that offer first class and business class seats and the ultra-low-cost airlines of allegiant, frontier, and spirit. However, this could easily change if one airline on either side of southwest decided to adjust their target market and became an intense competitor directly with southwest. This could also happen if the United States were to invest into other means of transportation like a modernize highspeed railroad decrease the need for as many inter-America flights.

With the recent increase in fuel prices due to global economic sanctions there has been a 100% increase in jet fuel prices, which have directly increased the overall price of flights as well. If this increase in fuel prices continues then it would be anticipated that more and more customers would not fly as frequently, resulting in less revenue for the airline.

The FAA has recently begun placing more stringent regulations on all airlines, especially Southwest. In 2020 southwest purchased 50 Boeing 737’s from an international partner and the FAA grounded all of these planes to conduct further and more detailed inspections than their other recently acquired planes reducing the number of flights southwest was able to support.

As we see a growth in more working-class Americans shifting to full time remote work jobs and the advancement of technology the need for travel for business purposes is greatly decreasing, which will continue to decrease the revenue of all airlines.

While this is probably the first threat that comes to mind for everyone who survived the covid 2019 pandemic, but if there is another global pandemic or health scare that forces travel to come to a screeching halt the airline industry and the entire travel industry will hurt deeply.

TOWS

Strength and Opportunity

As more and more passengers begin to travel again, we see that “air travel passengers are projected to reach 4 billion in 2024, exceeding pre-covid 19 levels. To deal with such a huge number of passengers, airlines need to innovate and integrate with emerging technologies like AI and machine learning. AI in aviation has the potential to increase urban air mobility, improve airline safety, automate flight scheduling, and enable predictive maintenance of airplanes” (Ripoli 2022). AI is only going to integrated into more processes moving forward and this could emphasis will only help Southwest achieve their mission statement of becoming the most efficient airline out there.

Currently more Americans, especially the millennial class, are becoming more and more comfortable with living further from their home state. This increasing popularity combined with the freedom that working remote has provided the average American there has been a flood of younger workers living in densely populate hub cities like Denver, Los Angeles, Scottsdale, etc. Southwest needs to capitalize and offer more longer distance flights to these hub areas. Not saying that Southwest needs to drop their smaller connecting style flights and only offer flight plans from LAX to JFK. Increasing the availability of direct flights to desired hubs and lowering similar connecting flight plans that end up at the same location will be more attractive to this target demographic.

Ultra-low-cost Airlines are able to offer flights at such a low cost by de-bundling their package. If a 99 dollars southwest round trip includes two free carry-ons and two free checked bags then could southwest offer flights for 69 dollars and then charge 20 dollars per carry on bag? Could this potentially pull customers from frontier flights and take over a portion of the ultra-low-cost airline market?

Weakness and Opportunity

One of southwest’s largest weakness as a company is that they only pull revenue from commercial travel. By expanding into freight travel with Southwest’s fleet of over 700 aircraft they would diversify their income streams, which would help mitigate any financial storm that would lower consumer travel. This additional profit margin of “Air Transport Services that net a profit margin as of December 31, 2022 of 10.71%.” (Harper 2022). An additional portion of your company that has had a constant 11% profit margin for over the past decade is just like diversifying your 401K appropriately with bonds to counter balance your riskier stocks.

Southwest offers over 4000 flights a day, but these flights are incredibly repetitive and Southwest needs to make adjustments on their flight plans due to seasonality, changing demographics, or even just off of what sports teams could be playing in the play offs. This also illustrates the need for southwest to differentiate from offering such a large amount of multi-stop flights. Americans are becoming increasingly less impatient and are now willing to maybe spend an extra 100 dollars to fly with united airlines if that means they don’t have a two-hour layover in Chicago Midwest or Dallas Fort Worth.

Southwest only offers flights that take off or land in the United States with a few of those touch points being in Mexico and surrounding Latin American countries. The European airline market is saturated with low-cost airlines and affordable high-speed trains, so it would not be profitable to break into the local international airline market, but southwest could attempt to break into adding more international “hopper” flights to and from European hubs.

Weakness and Threats

The Covid-19 pandemic opened the world’s eyes as to how fragile the global economy is. Some people are still recovering from the pandemic. This means that on top of having the loss of revenue from the travel ban Southwest is also losing the number of travels who can afford to travel and also losing a portion of business travelers who are now working remote jobs or conducting meetings via the distance meeting software they invested in during Covid. This only illustrates the need to diversify the sources of revenue that Southwest has by investing a larger portion of their air fleet to something along the lines of freight air travel.

Southwest has many positive aspects of their 737 aircraft fleet, but this does not mean they should stay away from diversifying their fleet. As we mention diversifying their routes and offering potentially transatlantic routes it is important to note that “Despite newer models of the 737 and A320 families having more than enough range to cross the North Atlantic 90% of transatlantic passenger flights are by widebody jets, with 757s accounting for most of the remainder” (Lloyd 2021). If southwest truly wants to expand into newer international flights they would need to invest in some larger aircrafts to compete with their competitors.

Southwest is an American company that flies primarily flights from one American airport to another American airport. This means that southwest is dependent on the price of jet fuel in America. If southwest expands into more international flights that means they would be able to diversify where they are acquiring oil. As jet fuel prices have skyrocketed in America this past year this has only increased the costs of flights almost directly proportionally. By diversifying the source of jet fuel this could lower effect that regional inflation would have on ticket price sales.

Strength and threats

Southwest has an overwhelming majority share in their current target market of trans American economy air travel. Due to this overwhelming majority, they can afford to pursue attempting to either jump into offering flights with more business class and first-class experiences or dropping down into the ultra-low-cost airlines. This would attract a larger pool of customers to choose southwest as their loyal airline while still staying true to their roots and offering the open boarding experience for all economy seats.

Southwest has a large fleet of aircraft at their disposal to replace any damaged aircraft. However, all of southwest’s airframes are a Boeing 737s. If there is an issue with this specific airframe or there is a supply chain issue in replacement parts for this aircraft then Southwest will have to ground a large portion of their fleet and cancel hundreds of flights. By diversifying their fleet, they would decrease the likelihood of this probability and reduce delays in maintenance for this specific air frame. This would unfortunately increase maintenance costs having to maintain two separate air frame platforms.

The ability to work from home is profoundly, and permanently, changing the way we travel. Now we see “more lenient office policies mean many workers can travel anytime, even during busy workweeks, as long as they can hit deadlines from far afield. That, in turn, has made it easier for people to travel more frequently and for longer amounts of time, sometimes unlocking farther-flung destinations” (Ekstein 2022). Now that there are more customers who are not confined to a 9-5 schedule there is a larger demographic of customers who are willing to travel more. Southwest needs to target this population by making Southwest a more supportive working environment. This could be by investing in airport lounges for their royalty members and adding free full service Wi-Fi in every flight, so customers can finish that last report while headed to their weekend getaway.

Group Map

The two key factors in this group map are Price and

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