Description
Details:
Throughout this course you have been preparing separate
components of a comprehensive 2,500-word financial analysis (excluding
tables, figures, and addenda) of a chosen company following the
nine-step assessment process detailed in Assessing a Company’s Future Financial Health.
There are three parts to the final component assignment of the case study.
Part One (Case Study Component 4)
Apply the final three steps of the nine-step assessment process to develop a 750-word analysis of your chosen company: Southwest Airlines
- Viability of the 3-5 Year Plan
- Stress Test Under Scenarios of Adversity
- Current Financing Plan
Part Two
Access the three prior component assignments, that you submitted in Topics 2, 4, and 6.
Integrate these three assignments into the final case study submission
along with the Component 4 assignment in this topic to provide a
comprehensive analysis inclusive of all nine steps that flows from start
to finish.
Part Three
Assume that you will be presenting your analysis to a group of senior
management at your place of employment that urgently needs to know this
information to make a major financial decision for your company. In 250
words, develop an introduction to your analysis that can serve as an
overview. Consider factors that might impede their ability to focus on
the information you are presenting. For example, some of your audience
may be pressed for time, another may have a crisis in their work team
that needs to be attended to quickly, and others may simply not be
paying attention. You have one chance to impress them; keep your
overview focused, succinct, and informative. Present only key and other
potentially relevant points this group needs to know.
Component 1
Brad VandeLune
Finance 504
Analysis of Fundamentals: Goals, Strategy, Market, Competitive Technology, Regulatory,
and Operating Characteristics
Southwest Airlines established in 1971, is a major U.S airline headquartered in Dallas,
Texas, traded under the symbol LUV. It is the largest airline in the U.S based on the number of
passengers carried per year and third most significant concerning fleet size. Its primary goal is to
continue its superiority as the best commercial airline concerning customer satisfaction, excellent
customer care, and safe travel. Another goal is to stay the most successful airline with low fare
prices and on-time operations. Above all, maintain its profitability in the industry. (Southwest,
n.d)
Southwest Airlines employs several strategies such as an appealing brand, outstanding
customer service and low costs of travel. The second approach, a robust route network; the
airline carries the most number of passengers in U.S and has the most daily departures. Lastly, a
superior financial position has an efficient capital distribution strategy and competitive cost
advantage.
Southwest Airlines market is the U.S serving over forty states and eight nearinternational markets, Jamaica, Mexico, Cuba, Aruba, The Bahamas, Dominican Republic, Costa
Rica and Belize. Southwest Airlines has an excellent technology whereby customers can
purchase and manage their travel online on its website. The website is personalized to identify
customer location to provide relevant deals, calendar view to advice on best times to travel at
low prices among other features. Customers can also transact on their mobile devices through an
application. Also, uses barcodes on boarding passes and reservation system for luggage checkins. (Southwest, n.d)
It operates a total of 723 Boeing and 737 aircrafts serving 101 destinations. The company
observes regulations by the federal government, government agencies, and legislative bodies.
The rules include consumer protection, aviation taxes and fees, health and safety regulations in
civil aviation activities, security regulations, environmental conservation and international
regulations. The company provides point-to-point route services. It offers variety fare options
such as “Wanna get away” and Business select and a rewards program.
Analysis of Fundamentals: Revenue Outlook
Revenue is the gross income of a company. (Gitman, Juchau & Flanagan, 2015)
Southwest Airlines in the year ended 2016 earned net income of $ 2,244 million. The revenue is
obtained from the sale of tickets which most are non-refundable instead re-usable. Net cash from
operating activities for that year was $4,293 million which was an increase from 2015’s $3,238
and 2014’s $2,902. The operating revenue for that year was $20,425 million. (Southwest, n.d)
The passengers brought in $18,594 revenue, a slight increase from 2015’s $18,299. On the other
hand, freight contributed $171. The operating expenses for that year were $16,665. As per the
analysis, the net profit margin ratio is 9.63 through twelve months and the average for five years
is 7.19.
Compared to other companies in the industry, Southwest Airlines is doing significantly
well regarding revenue. The data is as of October 20, 2017, and the company has earned revenue
of $20.84 billion with a net profit of $2.01, Alaska Air group $6.94 billion and net profits of
$765 million. However, Delta Airlines and American Airlines Group are performing well with
revenue above $40 billion. Its asset turnover ratio is 0.9 the highest in the industry, inventory
turnover of 18.87 after Delta Airlines’ 19.67. Southwest Airlines’ receivables turnover ratio is
37.89. Its quick ratio is 0.68 which is a bad indicator showing the company is unable to meet its
short-term debts. (Financial Times, n.d)
The earnings per share which indicate profitability have been forecasted for the end year
2017, highest 3.75 lowest 3.5 and harmonized at 3.6. Projections for the year ended December
2018, the highest EPS 4.9 lowest 4 and harmonized at 4.52, year 2019, highest 5.29, lowest 3.5
and harmonized at 4.62. (Nasdaq, n.d)
Graph
Yearly Forecast Earnings
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Year 2017
Year 2018
Year 2019
References
Financial Times (n.d) Southwest Airlines Co LUV retrieved from
https://markets.ft.com/data/equities/tearsheet/forecasts?s=LUV:NYQ available on
October 23, 2017
Gitman, L. J., Juchau, R., & Flanagan, J. (2015) Principles of managerial finance Pearson
Higher Education AU
Nasdaq (n.d) Southwest Airlines Company Earnings Forecast retrieved from
http://www.nasdaq.com/symbol/luv/earnings-forecast available at October 23, 2017
Southwest (n.d) Investor Relations. Available at
http://www.southwestairlinesinvestorrelations.com/our-company/company-overview
accessed on October 23, 2017
Southwest (n.d) Investor Relations. SOUTHWEST AIRLINES CO. 2016 ANNUAL REPORT
TO SHAREHOLDER Available at
http://investors.southwest.com/~/media/Files/S/SouthwestIR/Annual%20Reports/2016_A
nnualReport_LUV.PDF accessed on October 23, 2017
Running head: SOUTHWEST AIRLINE
Southwest Airlines
Brad VandeLune
Finance 504
1
SOUTHWEST AIRLINE
2
Companies invest in business units to diversify their portfolios and hedge against
risks. The business environment is characterized by uncertainty and continual changes
making it hard to guarantee the success of the business. The level of competition is always on
the rise as more and more firms enter the market in a bid to get a portion of the market share
and penetrate it to increase its share by expanding into new frontiers and markets. Proper and
strategic management of the businesses units results in the overall success of the business.
South West Airline is an established brand that has gained international popularity due to its
service delivery. This paper looks at the investments to support business unit strategies,
future profitability and competitive advantage of Southwest Airlines.
The company has two business units namely passenger and freight. The passenger
unit is concerned with the carrying and transportation of people whereas cargo is involved in
ferrying passengers from one point to the other. The firm has been keen on investing in its
business units by making sure cash is spent on various investing activities. This is
demonstrated by the company putting money in capital expenditure shown by 1748 in 2014,
2041 in 2015 and 2038 in 2016. Besides, Southwest airlines have invested in short-term
investments demonstrated by 3080 in 2014, 1986 in 2015 and 2388 in 2016. The firm has
also been keen on selling some of its short-term and other investments shown by 3185 in
2014, 2223 in 2015 and 2263 in 2016. The company made investments of 1727 in 2014, 1913
in 2015 and 2272 in 2016.
The company has a positive future probability indicated by its financial statements.
The sales revenues are expected to increase into the future. This is substantiated by the
increase from 17,658 in 2014 to 18,299 in 2015 to 18,594 in 2016. The net income will also
increase steadily as demonstrated in the three-year period. The business had 1136 in 2014,
2181 in 2015 and 2244 in 2016. The earnings per share have also increased from 1.65 in
SOUTHWEST AIRLINE
3
2014, 3.30 in 2015 and 3.58 in 2016. The shareholders will also receive increased dividends
in the future despite the company maintaining the same pay-out ratio. This is shown by a
payment of 0.22 in 2014, 0.285 in 2015 and 0.375 in 2016. It is likely to witness increased
customer numbers, increase the number of flights and its fleet. Besides, there will be
increased competition as many international airlines are likely to enter new markets and
routes. The competition will cause an adverse effect on price dispersion which will be greater
in areas with relatively different demand elasticities (Gerardi & Shapiro, 2009).
Business units are an integral part of any company. These are usually organized into
departments as they deal in specialized commodities and products. Besides, they are
separately indicated and shown in the financial statements. The units are run by managers
who set strategies and long-term goals they expect the business to achieve. The strategic plan
gives the company a sense of direction through which efforts are directed. Besides, the firm
has to allocate resources to counter competition and ensure the success of the business. This
involves setting aside investments for to facilitate the performance of the units.
SOUTHWEST AIRLINE
4
References
Gerardi, K. S., & Shapiro, A. H. (2009). Does competition reduce price dispersion? New
evidence from the airline industry. Journal of Political Economy, 117(1), 1-37.
Component III
Brad VandeLune
Finance 504
Southwest Airlines Component III
2
Future External Financing Needs
Southwest Airlines expects to increase its profitability in future. There is high demand from
consumers for Southwest Airlines services in other regions it has not established. The company
looks forward to expanding its operations and increasing sales revenue. Southwest Airlines needs
to maintain its cost advantages and maximize new growth opportunities. The company requires
funds to increase its direct flights to other regions in future. Increasing costs of fuel and labor are
significant concerns for the company. 22% of the operating expenses in 2016 covered energy, jet
fuel, and oil (Southwest, n.d). An increase in operations such as buying or leasing more jets which
require more fuel expenses. Thus Southwest Airlines involves capital to support its predicted sales
and other activities such as covering employee wages. A company has an option of internal from
net profits, sales or external outsourcing. In this case, Southwest Airlines needs external financing
in future, the net profit alone cannot support its expansion.
From the financial analysis of previous years, we get an increasing trend in revenues and
number of tickets sold. Currently, the company sources its revenues from shareholders who own
some percentage of the business and profit from sales. Research indicates that more foreign
Airlines Company are getting into the market. The company will have to increase its investors or
borrow funds. Therefore, an opportunity for the company to expand its international market. The
company will require finances to engage in such operations (Southwest, n.d). The company looks
forward to forming partnerships with other foreign airline companies and expanding its large
customer base. The company is yet to utilize some of these opportunities. Investors, shareholders,
bank loans and partnerships are great ways of sourcing external finances (Gitman, Juchau &
Flanagan, 2015).
Southwest Airlines Component III
3
Access to Target Sources of External Finance
The external target sources for Southwest Airlines include bank loans, investors,
partnerships, mergers, and acquisitions. An easy access to financial aid is bank loans and investors.
The company’s debt to equity ratio is 40.13, debt to capital is 28.64 and long-term debt to assets
0.11, which means the company is financially healthy and can pay its debts. The profitability of
the business indicated by its 2016 net income which was $ 2,244 million (Southwest, n.d). Ability
to pay outstanding debts increases the company’s access to receiving aid from banks and other
lenders. The company’s operating cash flow was above the debt which means it utilizes its debt
well hence able to pay off future debts.
The profitability, and ability to utilize its funds well attract more shareholders. Southwest
Airlines has market capitalization $32.47 billion which is a safe indicator for stakeholders. It has
a strong balance sheet and high liquidity thus more stock available for shareholders. Even if
liquidity drops, increase in interest rates will cover the stock. In the year 2016, the company
returned a total of $222 million dividends to stakeholders and had $1.75 million share repurchases.
Most shareholders will want to buy shares in the company as it expands hence cater for its future
financial needs.
A partnership is another way the company can find resources for future expansion needs
(Gitman, Juchau & Flanagan, 2015). Boeing Company is a significant supplier of aircrafts used by
Southwest Airlines. The firm acquires planes from Boeing through direct purchases, Southwest
looks forward to increasing its jets, instead of buying and using internal finances, it can partner
with Boeing to give them a certain quantity of aircrafts for a given period could be on lease terms.
Also, the company can buy shares in Boeing Company. A merger would be best but difficult to
acquire.
Southwest Airlines Component III
4
References
Gitman, L. J., Juchau, R., & Flanagan, J. (2015) Principles of managerial finance Pearson
Higher Education AU
Southwest (n.d) Investor Relations. SOUTHWEST AIRLINES CO. 2016 ANNUAL REPORT
TO SHAREHOLDER Available at
http://investors.southwest.com/~/media/Files/S/SouthwestIR/Annual%20Reports/2016_A
nnualReport_LUV.PDF accessed on November 22, 2017.
Purchase answer to see full
attachment
Brad VandeLune
Finance 504
Analysis of Fundamentals: Goals, Strategy, Market, Competitive Technology, Regulatory,
and Operating Characteristics
Southwest Airlines established in 1971, is a major U.S airline headquartered in Dallas,
Texas, traded under the symbol LUV. It is the largest airline in the U.S based on the number of
passengers carried per year and third most significant concerning fleet size. Its primary goal is to
continue its superiority as the best commercial airline concerning customer satisfaction, excellent
customer care, and safe travel. Another goal is to stay the most successful airline with low fare
prices and on-time operations. Above all, maintain its profitability in the industry. (Southwest,
n.d)
Southwest Airlines employs several strategies such as an appealing brand, outstanding
customer service and low costs of travel. The second approach, a robust route network; the
airline carries the most number of passengers in U.S and has the most daily departures. Lastly, a
superior financial position has an efficient capital distribution strategy and competitive cost
advantage.
Southwest Airlines market is the U.S serving over forty states and eight nearinternational markets, Jamaica, Mexico, Cuba, Aruba, The Bahamas, Dominican Republic, Costa
Rica and Belize. Southwest Airlines has an excellent technology whereby customers can
purchase and manage their travel online on its website. The website is personalized to identify
customer location to provide relevant deals, calendar view to advice on best times to travel at
low prices among other features. Customers can also transact on their mobile devices through an
application. Also, uses barcodes on boarding passes and reservation system for luggage checkins. (Southwest, n.d)
It operates a total of 723 Boeing and 737 aircrafts serving 101 destinations. The company
observes regulations by the federal government, government agencies, and legislative bodies.
The rules include consumer protection, aviation taxes and fees, health and safety regulations in
civil aviation activities, security regulations, environmental conservation and international
regulations. The company provides point-to-point route services. It offers variety fare options
such as “Wanna get away” and Business select and a rewards program.
Analysis of Fundamentals: Revenue Outlook
Revenue is the gross income of a company. (Gitman, Juchau & Flanagan, 2015)
Southwest Airlines in the year ended 2016 earned net income of $ 2,244 million. The revenue is
obtained from the sale of tickets which most are non-refundable instead re-usable. Net cash from
operating activities for that year was $4,293 million which was an increase from 2015’s $3,238
and 2014’s $2,902. The operating revenue for that year was $20,425 million. (Southwest, n.d)
The passengers brought in $18,594 revenue, a slight increase from 2015’s $18,299. On the other
hand, freight contributed $171. The operating expenses for that year were $16,665. As per the
analysis, the net profit margin ratio is 9.63 through twelve months and the average for five years
is 7.19.
Compared to other companies in the industry, Southwest Airlines is doing significantly
well regarding revenue. The data is as of October 20, 2017, and the company has earned revenue
of $20.84 billion with a net profit of $2.01, Alaska Air group $6.94 billion and net profits of
$765 million. However, Delta Airlines and American Airlines Group are performing well with
revenue above $40 billion. Its asset turnover ratio is 0.9 the highest in the industry, inventory
turnover of 18.87 after Delta Airlines’ 19.67. Southwest Airlines’ receivables turnover ratio is
37.89. Its quick ratio is 0.68 which is a bad indicator showing the company is unable to meet its
short-term debts. (Financial Times, n.d)
The earnings per share which indicate profitability have been forecasted for the end year
2017, highest 3.75 lowest 3.5 and harmonized at 3.6. Projections for the year ended December
2018, the highest EPS 4.9 lowest 4 and harmonized at 4.52, year 2019, highest 5.29, lowest 3.5
and harmonized at 4.62. (Nasdaq, n.d)
Graph
Yearly Forecast Earnings
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Year 2017
Year 2018
Year 2019
References
Financial Times (n.d) Southwest Airlines Co LUV retrieved from
https://markets.ft.com/data/equities/tearsheet/forecasts?s=LUV:NYQ available on
October 23, 2017
Gitman, L. J., Juchau, R., & Flanagan, J. (2015) Principles of managerial finance Pearson
Higher Education AU
Nasdaq (n.d) Southwest Airlines Company Earnings Forecast retrieved from
http://www.nasdaq.com/symbol/luv/earnings-forecast available at October 23, 2017
Southwest (n.d) Investor Relations. Available at
http://www.southwestairlinesinvestorrelations.com/our-company/company-overview
accessed on October 23, 2017
Southwest (n.d) Investor Relations. SOUTHWEST AIRLINES CO. 2016 ANNUAL REPORT
TO SHAREHOLDER Available at
http://investors.southwest.com/~/media/Files/S/SouthwestIR/Annual%20Reports/2016_A
nnualReport_LUV.PDF accessed on October 23, 2017
Running head: SOUTHWEST AIRLINE
Southwest Airlines
Brad VandeLune
Finance 504
1
SOUTHWEST AIRLINE
2
Companies invest in business units to diversify their portfolios and hedge against
risks. The business environment is characterized by uncertainty and continual changes
making it hard to guarantee the success of the business. The level of competition is always on
the rise as more and more firms enter the market in a bid to get a portion of the market share
and penetrate it to increase its share by expanding into new frontiers and markets. Proper and
strategic management of the businesses units results in the overall success of the business.
South West Airline is an established brand that has gained international popularity due to its
service delivery. This paper looks at the investments to support business unit strategies,
future profitability and competitive advantage of Southwest Airlines.
The company has two business units namely passenger and freight. The passenger
unit is concerned with the carrying and transportation of people whereas cargo is involved in
ferrying passengers from one point to the other. The firm has been keen on investing in its
business units by making sure cash is spent on various investing activities. This is
demonstrated by the company putting money in capital expenditure shown by 1748 in 2014,
2041 in 2015 and 2038 in 2016. Besides, Southwest airlines have invested in short-term
investments demonstrated by 3080 in 2014, 1986 in 2015 and 2388 in 2016. The firm has
also been keen on selling some of its short-term and other investments shown by 3185 in
2014, 2223 in 2015 and 2263 in 2016. The company made investments of 1727 in 2014, 1913
in 2015 and 2272 in 2016.
The company has a positive future probability indicated by its financial statements.
The sales revenues are expected to increase into the future. This is substantiated by the
increase from 17,658 in 2014 to 18,299 in 2015 to 18,594 in 2016. The net income will also
increase steadily as demonstrated in the three-year period. The business had 1136 in 2014,
2181 in 2015 and 2244 in 2016. The earnings per share have also increased from 1.65 in
SOUTHWEST AIRLINE
3
2014, 3.30 in 2015 and 3.58 in 2016. The shareholders will also receive increased dividends
in the future despite the company maintaining the same pay-out ratio. This is shown by a
payment of 0.22 in 2014, 0.285 in 2015 and 0.375 in 2016. It is likely to witness increased
customer numbers, increase the number of flights and its fleet. Besides, there will be
increased competition as many international airlines are likely to enter new markets and
routes. The competition will cause an adverse effect on price dispersion which will be greater
in areas with relatively different demand elasticities (Gerardi & Shapiro, 2009).
Business units are an integral part of any company. These are usually organized into
departments as they deal in specialized commodities and products. Besides, they are
separately indicated and shown in the financial statements. The units are run by managers
who set strategies and long-term goals they expect the business to achieve. The strategic plan
gives the company a sense of direction through which efforts are directed. Besides, the firm
has to allocate resources to counter competition and ensure the success of the business. This
involves setting aside investments for to facilitate the performance of the units.
SOUTHWEST AIRLINE
4
References
Gerardi, K. S., & Shapiro, A. H. (2009). Does competition reduce price dispersion? New
evidence from the airline industry. Journal of Political Economy, 117(1), 1-37.
Component III
Brad VandeLune
Finance 504
Southwest Airlines Component III
2
Future External Financing Needs
Southwest Airlines expects to increase its profitability in future. There is high demand from
consumers for Southwest Airlines services in other regions it has not established. The company
looks forward to expanding its operations and increasing sales revenue. Southwest Airlines needs
to maintain its cost advantages and maximize new growth opportunities. The company requires
funds to increase its direct flights to other regions in future. Increasing costs of fuel and labor are
significant concerns for the company. 22% of the operating expenses in 2016 covered energy, jet
fuel, and oil (Southwest, n.d). An increase in operations such as buying or leasing more jets which
require more fuel expenses. Thus Southwest Airlines involves capital to support its predicted sales
and other activities such as covering employee wages. A company has an option of internal from
net profits, sales or external outsourcing. In this case, Southwest Airlines needs external financing
in future, the net profit alone cannot support its expansion.
From the financial analysis of previous years, we get an increasing trend in revenues and
number of tickets sold. Currently, the company sources its revenues from shareholders who own
some percentage of the business and profit from sales. Research indicates that more foreign
Airlines Company are getting into the market. The company will have to increase its investors or
borrow funds. Therefore, an opportunity for the company to expand its international market. The
company will require finances to engage in such operations (Southwest, n.d). The company looks
forward to forming partnerships with other foreign airline companies and expanding its large
customer base. The company is yet to utilize some of these opportunities. Investors, shareholders,
bank loans and partnerships are great ways of sourcing external finances (Gitman, Juchau &
Flanagan, 2015).
Southwest Airlines Component III
3
Access to Target Sources of External Finance
The external target sources for Southwest Airlines include bank loans, investors,
partnerships, mergers, and acquisitions. An easy access to financial aid is bank loans and investors.
The company’s debt to equity ratio is 40.13, debt to capital is 28.64 and long-term debt to assets
0.11, which means the company is financially healthy and can pay its debts. The profitability of
the business indicated by its 2016 net income which was $ 2,244 million (Southwest, n.d). Ability
to pay outstanding debts increases the company’s access to receiving aid from banks and other
lenders. The company’s operating cash flow was above the debt which means it utilizes its debt
well hence able to pay off future debts.
The profitability, and ability to utilize its funds well attract more shareholders. Southwest
Airlines has market capitalization $32.47 billion which is a safe indicator for stakeholders. It has
a strong balance sheet and high liquidity thus more stock available for shareholders. Even if
liquidity drops, increase in interest rates will cover the stock. In the year 2016, the company
returned a total of $222 million dividends to stakeholders and had $1.75 million share repurchases.
Most shareholders will want to buy shares in the company as it expands hence cater for its future
financial needs.
A partnership is another way the company can find resources for future expansion needs
(Gitman, Juchau & Flanagan, 2015). Boeing Company is a significant supplier of aircrafts used by
Southwest Airlines. The firm acquires planes from Boeing through direct purchases, Southwest
looks forward to increasing its jets, instead of buying and using internal finances, it can partner
with Boeing to give them a certain quantity of aircrafts for a given period could be on lease terms.
Also, the company can buy shares in Boeing Company. A merger would be best but difficult to
acquire.
Southwest Airlines Component III
4
References
Gitman, L. J., Juchau, R., & Flanagan, J. (2015) Principles of managerial finance Pearson
Higher Education AU
Southwest (n.d) Investor Relations. SOUTHWEST AIRLINES CO. 2016 ANNUAL REPORT
TO SHAREHOLDER Available at
http://investors.southwest.com/~/media/Files/S/SouthwestIR/Annual%20Reports/2016_A
nnualReport_LUV.PDF accessed on November 22, 2017.
Purchase answer to see full
attachment
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