Description
Throughout this course you will prepare 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. This analysis is composed of four separate component assignments in Topics 2, 4, 6, and 8.
In this topic, apply the next two steps of the nine-step assessment process to develop a 500-word analysis of your chosen company:
- Future External Financing Needs
- Access to Target Sources of External Finance
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 near-international
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 check-ins. (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.
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 near-international
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 check-ins. (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.
Purchase answer to see full
attachment
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