Case Prepared By: Corey Daigle, Seth Fraser, and Megan Foreman

Overview
Southwest Airlines – Who we are, What we do, and How we got here
Mission and Vision
Internal Assessment
- Financial Condition
- IFE Matrix
External Assessment
- EFE Matrix
- CPM Matrix
Strategy Formulation
- SWOT Matrix
- Space Matrix
- IE Matrix
- Grand Strategy Matrix
- QSPM Matrix
- Matrix Analysis
Strategic Planning for the Future
EPS/EBIT
Implementation
2004 Financials
Southwest in the News
 Southwest Airlines Co.
Headquarters: P.O. Box 36611
2702 Love Field Drive
Dallas, TX 75235
Phone: 214-792-4000
Stock Symbol: LUV (NYSE)

all graphics and information found on Southwest

Airlines website at www.iflyswa.com or
www.southwest.com
Who We Are and What We Do
Major domestic airline that provides short haul,
high frequency, point-to-point, low fare service
Incorporated in Texas and commenced Customer
Service on June 18, 1971 with 3 Boeing 737
aircrafts serving 3 cities – Dallas, Houston, and
San Antonio
Today, SW operates over 400 Boeing 737
aircrafts in over 59 cities
Lowest operating cost structure in the domestic
airline industry and consistently offers the lowest
and simplest fares
 Fun Facts
In 2004, SW served:
49 million cans of soda, juices, and water
8.1 million alcoholic beverages
3.3 million bags of pretzels
95.3 million bags of peanuts
 Innovation
1st airline to offer a profit-sharing plan to
employees beginning in 1979, employees
now own about 10% of company stock
1st major airline to offer “ticketless” travel
system-wide
1st major airline to enter information
superhighway by creating its own web page
1st airline to offer online booking
 How We Began
32 years ago, Rollin King and Herb Kelleher
got together and on a cocktail napkin they
came up with a simple notion that turned
into the 4th largest airline
- If you get your passengers to their
destinations when they want to get there, on
time, at the lowest possible fares, and make
darn sure they have a good time doing it,
people will fly your airline.
 Existing Mission Statement

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.
 New and Improved
The mission of Southwest Airlines is to provide
excellent customer service and timely air travel at
an affordable price for markets in the United
States. We commit ourselves to the highest
standards of integrity in doing what is best for our
passengers, the airline industry, our employees
and our stockholders. By using the latest
technology in engine maintenance, we ensure
safety, efficiency, and keep fuel emissions below
governmental regulations. Through this mission,
we at Southwest ensure high company spirit and
long term financial prosperity.
 Vision Statement

To provide the most affordable, reliable, and

comfortable air transportation in the world.
 Delta’s Vision
Since the founding of Delta Air Lines, our company has stood
for safe and reliable air transportation, distinctive customer
service, and hospitality from the heart. Our vision is for Delta
to build on its traditions and always to meet our customers’
expectations while taking service to even higher levels of
excellence. We are a leader in a business we know best—
airline transportation. We intend to be an even greater
company and will focus our time, attention, and investment
on building that leadership. We are dedicated to being the
best airline in the eyes of our customers. We will provide
value and distinctive products to our customers, a superior
return for investors, and challenging and rewarding work for
Delta people in an environment that respects and values their
contributions.
* From www.delta.com
 Financial Condition
Overall

Posted a profit for 31st consecutive year

Airline industry as a whole suffered a net loss

for 3rd consecutive year
Strong Financials (End of 2003)
- 1.87 billion in cash on hand
- fully available bank revolving credit of
575 million
- unmortgaged assets of over 5 billion
- debt to capital ratio of less than 40%
(includes leases as debts)

* From 2003 Annual Report

 Net Income increased 83.4% in 2003
Operating Revenue increased 415 million
(7.5%)
400 million (7.5%) increase in passenger
revenues
5.6% increase in revenue passenger
miles
4.2% increase in added capacity as
measured in available seat miles
Addition of 13 aircrafts in 2003
* From 2003 Annual Report
 Key Financial Ratios
Southwest Industry Sector S&P 500
Valuation Ratios
P/E Ratio 24.72 23.71 25.41 24.01
Price to Sales 1.84 1.24 1.62 3.33
Dividends
Dividend Yield .14 .27 1.38 2.04
Payout Ratio 3.18 1.88 23.05 26.78
Growth Rates %
Sales vs 1 Yr Ago 7.52 12.79 8.27 11.90
EPS – 5 Yr Growth -.26 -2.27 6.80 12.15
Financial Strength
Quick Ratio 1.16 1.20 1.18 1.26
Total Debt to Equity .30 1.19 .59 .85
 Southwest Industry Sector S&P 500
Profitability Ratios
%
Gross Margin 29.97 26.52 33.15 47.32
Net Profit Margin 7.46 5.27 6.77 13.12
Management
Effectiveness %
Return on Assets 4.69 4.71 6.66 6.40
Return on 5.63 6.51 8.59 9.97
Investment
Return on Equity
9.41 11.68 14.57 18.71
Stock Information
LUV compared to Airline Industry
 Net Worth Analysis
Cash Value of Southwest Airlines at year-end
2003
1. Equity + PIC + RE = $4930
2. Net Income x 5 = $2210
3. SP (14.5)/EPS(.66)xNI(398) = $8879
4. # Shares Outstanding x SP = $11446

Method Average = $6886

 Strengths / Weaknesses
Strengths –
1. High capacity usage
2. Named the best low cost airline leader for the last three
consecutive years
3. Diversity in upper management
4. Revenues increase by 8 percent to 5.94 billion in fiscal
year 2003
5. Net income increased 83 percent to $402 million in fiscal
year 2003
6. Dominates the short haul segment of airline industry
7. Fourth largest domestic airline
8. In 2003 Southwest posted a profit for the 31st consecutive
year
Weaknesses –
1. No international flights
2. No segmented seating
3. Dependent on a single producer
4. Lack of exposure towards online booking agencies
5. Four out of five employees are members of the union
6. Carry a small amount of freight and cargo
7. Do not use chat communication such as e-mail
8. Do not offer morning flights
Key Internal Factors Weight Rating Weighted
Score
Strengths

1. High capacity usage 0.08 4 0.32

2. Named the best low cost airline leader for the last three consecutive years 0.10 4 0.40

3. Diversity in upper management 0.04 3 0.12

4. Revenues increase by 8 percent to 5.94 billion in fiscal year 2003 0.05 3 0.15

5. Net income increased 83 percent to $402 million in fiscal year 2003 0.08 4 0.32

6. Dominates the short haul segment of airline industry 0.10 4 0.40

7. Fourth largest domestic airline 0.03 3 0.09
8. In 2003 Southwest posted a profit for the 31st consecutive year 0.10 4 0.40

Weaknesses
1. No international flights 0.09 1 0.09
2. No segmented seating 0.03 2 0.06
3. Dependent on a single producer 0.05 2 0.10
4. Lack of exposure towards online booking agencies 0.05 2 0.10
5. Four out of five employees are members of the union 0.02 1 0.02

6. Carry a small amount of freight and cargo 0.02 2 0.04

7. Do not use chat communication such as e-mail 0.03 2 0.06
8. Do not offer morning flights 0.03 2 0.06
TOTAL 1.00 2.73
 External Audit
Opportunities
1.National and international markets

2.Growth of older generation

3.Industrial research and development

4.Growth of Hispanic population

5. New technology opens the door for new products/services

6.Increased Internet advertising

7.Longer flights

8. Growth of business and leisure travel

 Threats
1.Decline of leisure travel due to economy and terrorism

2. Competing online ticket reservation systems.

3.New government regulations that make operations costlier.

4.Demand for air travel has dropped sharply since September 11th.

5.Gas and oil price fluctuations.

6.Terrorist attacks.

7.Increased restrictions to limit noise (including restrictions on types of

aircraft used and limits on number of operations)

8. Annual airline security costs have increased.

 EFE Matrix
Key External Factors Weight Rating Weighted Score

Opportunities

1. National and international markets 0.03 2 0.06

2. Growth of older generation 0.05 2 0.10

3. Industrial research and development 0.02 3 0.06

4. Growth of Hispanic population 0.05 3 0.15

5. New technology opens the door for new products/services 0.04 3 0.12

6. Increased Internet advertising 0.06 3 0.18

7. Familiarity of Generation X with air travel and technology 0.07 3 0.21

8. Growth of business travel 0.06 3 0.18

Threats

1. Decline of leisure travel due to economy and terrorism 0.10 3 0.30

2. Competing online ticket reservation systems 0.11 3 0.15

3. New government regulations that make operations costlier 0.03 4 0.12

4. Demand for air travel has dropped sharply since September 11 0.10 2 0.32

5. Gas and oil price fluctuations 0.06 3 0.18

6. Terrorist attacks 0.15 3 0.45

7. Increased restrictions to limit noise (including restrictions on types of aircraft used and 0.03 2 0.06
limits on a number of operations)

8. Increasing annual airline security costs. 0.04 2 0.08

TOTALS 1.00 3.04

 Competitive Profile Matrix
Southwest Delta American Airlines

Critical Success Weight Rating Weighted Rating Weighted Score Rating Weighted Score
Factors Score

Advertising .15 3 0.45 4 0.60 2 0.30

Product Quality .11 3 0.33 4 0.44 4 0.44
Price
.14 4 0.56 2 0.28 2 0.28
Competitiveness
Management .09 4 0.36 3 0.27 3 0.27
Financial
Position .14 4 0.56 2 0.28 1 0.14
Customer
Loyalty .08 3 0.24 3 0.24 2 0.16
Global
Expansion .06 1 0.06 4 0.24 3 0.18
Market Share
Reward .05 2 0.10 3 0.15 3 0.15
Programs .05 2 0.10 4 0.20 2 0.10
Security
.13 3 0.39 3 0.39 3 0.39

Total 1.00 3.15 3.52 2.41

 SWOT
Strengths Weaknesses
1. High capacity usage. 1.No international flights.
2. Named the Best Low 2.No segmented seating.
Cost Airline leader for the 3.Dependent on a single
last three consecutive producer. (Boeing)
years. 4.Lack of exposure
3. Diversity in upper towards online booking
management. agencies.
4. Revenues increased by 5.Four out five employees
8% to 5.94 billion in fiscal are members of the union.
year 2003. 6.Carry a small amount of
5. Net Income increased freight and cargo.
83% to $402million in fiscal 7.Do not use chat
year 2003. communication such as e-
6.Dominates the Short mail.
haul segment of Airline 8.Do not offer morning
Industry. flights.
7. Fourth largest domestic
airline.
8. In 2003 Southwest
posted a profit for the 31st
consecutive years.
Opportunities S-O Strategies W-O Strategies
1.National and 1. Expand into other 1. Expand into Canada.
International Markets countries or new cities. 2. Expand into Mexico.
2.Growth Of Older (S2, S6, S7, O1, O7) (W1, W2, W3, O1,
Generation O3, O6, O7)
3.Industrial Research and
Development
4.Growth of Hispanic
Population In U.S.A.
5.New Technology Opens
the Door for New Products/
Services
6.Increased Internet
advertising
7.Longer flights
8.Growth of business and
leisure travel

Threats S-T Strategies W-T Strategies

1.Decline of leisure travel 1. Increase advertising
due to economy and for southwest.com.
terrorism (S8, T2)
2.Competing online ticket
reservation systems.
 SPACE Matrix

 Y axis
 Financial strength +5 +1 worst to + 6 best
Y axis: 5 + (-3) = 2
 Environmental stability -3 -1 best to –6 worst

 X axis
 Industry strength 3 1 worst to 6 best
X axis: 3 + (-2) = 1
 Competitive advantage -2 -1 best to -6 worst
 IE Matrix
 Segment Revenue EFE IFE

 Passenger $5.4 B 3.34 3.32

 Freight $1.1 M 3.20 3.80
 Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III

3.0 to 3.99

Freight
Southwest

Medium IV V VI

The EFE Total 2.0 to 2.99 Passenger

Weighted Score

Low VII VIII IX

1.0 to 1.99

Grow and Build

 RAPID MARKET GROWTH

Grand Strategy Matrix

Quadrant Quadrant I
II

WEAK

COMPETITIVE STRONG

POSITION COMPETITIVE

POSITION

1. Concentric diversification
Southwest

2. Conglomerate diversification

3. Horizontal diversification
Quadrant III Quadrant IV

4. Joint venture

SLOW MARKET GROWTH

Strategic Alternatives
Key Internal Factors Weight Expand Into Mexico Expand Into Canada

Strengths AS TAS AS TAS

1. High capacity usage 0.08 --- --- --- ---
2. Named the best low cost airline leader for the last three consecutive years 0.10 --- --- --- ---

3. Diversity in upper management 0.04 --- --- --- ---

4. Revenues increase by 8 percent to 5.94 billion in fiscal year 2003 0.05 --- --- --- ---

5. Net income increased 83 percent to $402 million in fiscal year 2003 0.08 2.00 0.16 4.00 0.32

6. Dominates the short haul segment of airline industry 0.10 3.00 0.30 2.00 0.20

7. Fourth largest domestic airline --- --- --- --- ---

8. In 2003 Southwest posted a profit for the 31 st consecutive year 0.10 --- --- --- ---

Weaknesses

1. No international flights 0.09 --- --- --- ---

2. No segmented seating 0.03 1.00 0.03 2.00 0.06
3. Dependent on a single producer 0.05 --- --- --- ---
4. Lack of exposure towards online booking agencies 0.05 2.00 0.10 1.00 0.05
5. Four out of five employees are members of the union 0.02 --- --- --- ---
6.Carry a small amount of freight and cargo 0.02 --- --- --- ---
7.Do not use chat communication such as e-mail 0.03 2.00 0.06 1.00 0.03
8.Do not offer morning flights 0.03 --- --- --- ---
Total 0.65 0.65
Key External Factors We ight Expand Domestic Routes Expand Freight Loads

Opportunities AS TAS AS TAS

1. National and international markets 0.03 2.00 0.06 4.00 0.12
2. Growth of older generation 0.05 --- --- --- ---
3. Industrial research and development 0.02 2.00 0.04 3.00 0.06
4. Growth of Hispanic population 0.05 3.00 0.15 1.00 0.05
5. New technology opens the door for new products/services 0.04 2.00 0.08 3.00 0.12
6. Increased Internet advertising 0.06 2.00 0.12 3.00 0.18
7. Familiarity of Generation X with air travel and technology --- --- --- --- ---
8. Growth of business travel 0.06 --- --- --- ---
Threats

1. Decline of leisure travel due to economy and terrorism 0.10 --- --- --- ---
2. Competing online ticket reservation systems 0.11 4.00 0.12 3.00 0.09
3. New government regulations that make operations costlier 0.03 --- --- --- ---
4. Demand for air travel has dropped sharply since September 11 0.10 --- --- --- ---
5. Gas and oil price fluctuations 0.06 --- --- --- ---
6. Terrorist attacks 0.15

7. Increased restrictions to limit noise (including restrictions on types of aircraft 0.03 --- --- --- ---
used and limits on a number of operations)
8. Increasing annual airline security costs. 0.04 3.00 0.12 2.00 0.08
SUBTOTAL 0.69 0.70

SUM TOTAL ATTRACTIVENESS SCORE 1.34 1.35

 Matrix Analysis and SWOT
summary
 Alternative Strategies IE SPACE GRAND COUNT
 Forward Integration X X 2
 Backward Integration X X 2
 Horizontal Integration X X 2
 Market Penetration X X 2
 Market Development X X 2
 Product Development X X 2
 Concentric Diversification X X 2
 Conglomerate Diversification X X 2
 Horizontal Diversification X X 2
 Joint Venture X 1
 Retrenchment
 Divestiture
 Liquidation
 Strategic plans for the future
Southwest Airlines should expand into
Mexico.
Expand into Canada
Expand domestically
 EPS/EBIT Analysis
Amount Needed $1,000M
Interest 5%
Tax Rate 38%
Share Price $7.20
Shares Outstanding 770M
 EPS/EBIT Analysis
Common Stock Financing Debt Financing
Recession Normal Boom Recession Normal Boom
EBIT 300,000,000 500,000,000 800,000,000 300,000,000 500,000,000 800,000,000
Interest 0 0 0 50,000,000 50,000,000 50,000,000
EBT 300,000,000 500,000,000 800,000,000 250,000,000 450,000,000 750,000,000
Taxes 114,000,000 190,000,000 304,000,000 95,000,000 171,000,000 285,000,000
EAT 186,000,000 310,000,000 496,000,000 155,000,000 279,000,000 465,000,000
# Shares 838,965,517 838,965,517 838,965,517 770,000,000 770,000,000 770,000,000
EPS 0.22 0.37 0.59 0.20 0.36 0.60
70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock
Recession Normal Boom Recession Normal Boom
EBIT 300,000,000 500,000,000 800,000,000 300,000,000 500,000,000 800,000,000
Interest 15,000,000 15,000,000 15,000,000 35,000,000 35,000,000 35,000,000
EBT 285,000,000 485,000,000 785,000,000 265,000,000 465,000,000 765,000,000
Taxes 108,300,000 184,300,000 298,300,000 100,700,000 176,700,000 290,700,000
EAT 176,700,000 300,700,000 486,700,000 164,300,000 288,300,000 474,300,000
# Shares 818,275,862 818,275,862 818,275,862 790,689,655 790,689,655 790,689,655
EPS 0.22 0.37 0.59 0.21 0.36 0.60
 Implementation
Objectives
5 Year Plan
Increase domestic routes to include
80% of the continental United States
Increase operating revenue by
addition of more aircrafts
10 Year Plan
1st in industry for short-haul flights
 2004 Financial Condition

Operating Revenue $6.53 billion

Net Income $313 million
EPS $.40
Total Debt $1.7 billion
 Southwest in the News
03/09/05 Hungry? Southwest Airlines Takes Care of Its Customers With
Free Inflight Snack and Beverage Service

05/10/04 Southwest Airlines Flies Into Philly With a 'Ding

06/19/03 Southwest Airlines Pilot Honored as an American Hero