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Investment Research Analysis Southwest Financial

Company Overview

Southwest Airlines Company is a one of the major US airlines and the world’s largest low-cost carrier. It is headquartered in Dallas, Texas, and has scheduled service to 121 destinations in the United States and 10 additional countries.

The airline was established on March 15, 1967, by Herb Kelleher and Rollin King as Air Southwest Co. and adopted its current name, Southwest Airlines Co., in 1971.

Southwest Airlines is the world’s largest low-cost carrier; it offers some extremely low fares with the addition of standard perks like free checked bags, inflight refreshments, and award winning customer service.

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. Southwest Airlines’ purpose is to connect people to what’s important in their lives through friendly, reliable, and low-cost air travel.

Founders

The airline was established on March 15, 1967, by Herb Kelleher and Rollin King as Air Southwest Co.

Kelleher earned a bachelor’s degree  from Wesleyan University where he was an Olin Scholar and where his major was English and his minor Philosophy.

King graduated from Case Western Reserve University in 1955. King moved to Texas in 1962. He had received an M.B.A from Harvard University and was working as an investment consultant. 

Board of Directors

Directors at Lions Financials

Lions Financials Directors

Ron Vice Chairman - Lions Financial

Directors - Lions Financial Directors - Lions Financials

Executive Team

Lions Financial Senior Executives

Chief Operationg Officer - Lions Financials

Product Positioning

Branding

  • Make flying easier — Less stress flying experience (Policies and No Third Party Procedure)
  • Price less and reward more — Affordability and rapid reward plans
  • Target population expansion — Families, Young Travelers, Business, Frequent Flyers, Holiday Makers
  • Brand with personality  — Employees be themselves, feel like playing, humor marketing, LOGO and stock code LUV 
  • Brand with Authenticity — Most intimate brand, more human and approachable, crisis management

Cost

  • Flys only Boeing 737 — Maintenance cost (Inventory and Employees)
  • Short distance point to point operation network — Time, Distance, and Operating deduction
  • No frills policy — Cut extra service cost
  • Smaller markets and airports — Chicago Midway instead of O’Hare, low fees and time
  • More than one role — Negotiated with union to perform more than one job function

Profitable

  • Never reported an unprofitable year until 2019 — 47 years of consecutive profit
  • Returning value to its Shareholders — More than $12.9 billion through 2010 to 202

Competitive Analysis Globally

Southwest is a US domestic focused airline company, despite its expansion to Central America, the majority of its services still lie within the US. Given the fact that the tourism resorts in Central America are still heavily covered by US airlines, and international services still weigh relatively small, Southwest’s major competitors are US air carriers.

Southwest has a large number of competitors, including legacy carriers such as Delta Air Lines, American Airlines, and United Airlines; low-cost carriers like JetBlue, Alaska, and Virgin America; and ultra-low-cost carriers such as Spirit, Frontier, and Allegiant.

By revenue, the larger, hub-spoke players occupy first and second position, but Southwest is the largest low-cost carrier by market share.

Competitive Analysis Globally

Southwest is among the market leaders in the top 50 US metro areas around cities that include multiple major airports. In some cases, the airports within a metro area may serve separate markets. The company has 22% of total domestic market share and is the market leader in 23 of the top 50 U.S. metro areas as shown.

Southwest’s domestic operating expenses per available seat-mile, excluding fuel, are lower than legacy and low-cost carriers, only the ultra-low-cost carriers have even lower costs per seat-mile.Southwest’s business model and point-to-point network provide unit cost advantages compared with the majority of the domestic airline industry. This competitive advantage is reflected in Southwest having the best recent gross profit margin of the entire group.

Gross Profit Margin Comparison

Gross Profit Margin Comparison

Competitive advantage of Southwest Airline

AirlineFleet sizeMarket Cap(2021)Revenue(2021)Net IncomeComment
Southwest728$25.35 B$14.25 B$1.75 B 
United Airlines857$14.17 B$22.54 B-$0.98 

northern based

different strategy

American Airlines881$11.63 B$27.37 B-$0.75 B

largest airline

poor financial

Delta843 $25.01 B$23.55 B$1.67 Bmost significant competitor
Jetblue282$4.52 B$5.61 B-$69 M

important competitor

focus on eastern part

Spirit173$2.36 B $3.23 B-$0.4 Bbiggest ultra low

Quantitative Analysis

Southwest Airlines Co. (LUV) 10K report| sec.com

Risk Management Modeling from FY 2012 – FY 2021 10-K Filing

  1.     General factors

      (1)   Financial Risks 

  •  Sensitive to changes in economic conditions

The airline industry is particularly sensitive to changes in economic conditions; in the event of continued or future unfavorable economic conditions or economic uncertainty, the Company’s results of operations could be further negatively affected, which could require the Company to further adjust its business strategies. 

  •  Fuel prices

The Company’s business can be significantly impacted by high and/or volatile fuel prices; therefore, the Company’s strategic plans and future profitability are likely to be impacted by the Company’s ability to effectively address fuel price increases.

  • Control of costs

The Company’s low-cost structure has historically been one of its primary competitive advantages, and many factors have affected and could continue to affect the Company’s ability to control its costs.

  • Ability to effectively execute its strategic plans

The Company’s results of operations could be adversely impacted if it is unable to effectively execute its strategic plans.

  • Competitive airline industry

The airline industry is intensely competitive. 

      (2)   Information Technology Risks 

  • Implementation of the Company’s information systems

The Company is increasingly dependent on technology to operate its business and continues to implement substantial changes to its information systems; any failure, disruption, breach, or delay in implementation of the Company’s information systems could materially adversely affect its operations. 

  • Security of information

Any failure of the Company to maintain the security of certain Customer, Employee, and business-related information could result in damage to the Company’s reputation and could be costly to remediate.

      (3)   Operational Risks 

  • Labor intensive

The Company’s business is labor intensive; therefore, the Company could be materially adversely affected in the event of conflict with its Employees or its Employees’ representatives. 

  • Dependence on a single engine supplier

The Company is currently dependent on a single engine supplier, as well as single suppliers of certain other aircraft parts and equipment; therefore, the Company could be materially adversely affected (i) if it were unable to obtain timely or sufficient delivery of aircraft parts or equipment from Boeing or other suppliers or adequate maintenance or other support from any of these suppliers, or (ii) in the event of a mechanical or regulatory issue associated with the Company’s aircraft parts or equipment.

  • Security concerns from hostilities

The airline industry has faced on-going security concerns and related cost burdens; further threatened or actual terrorist attacks, or other hostilities, even if not made directly on the airline industry, could significantly harm the airline industry and the Company’s operations.

  • Conditions beyond control

The airline industry is affected by many conditions that are beyond its control, which can impact the Company’s business strategies and results of operations. 

     (4)   Legal, Regulatory, Compliance, and Reputational Risks 

  • Changes in or additional governmental regulation

Airport capacity constraints and air traffic control inefficiencies have limited and could continue to limit the Company’s growth; changes in or additional governmental regulation could increase the Company’s operating costs or otherwise limit the Company’s ability to conduct business. 

  • International operations

The Company’s future results will suffer if it is unable to effectively manage its international operations.

  • Pending antitrust litigation due to acquisition of AirTran

The Company is currently subject to pending litigation, and if judgment were to be rendered against the Company in the litigation, such judgment could adversely affect the Company’s operating results.

  1.     New factors occurred per fiscal year

New factors occurred per fiscal year

2012:

(1)  Operational Risks 

The Company’s business is labor intensive; therefore, the Company would continue to be adversely affected if it were to continue to be unable to employ sufficient numbers of qualified Employees to maintain its operations.  

(2)   Risk Factors Related to the Company’s Acquisition and Integration of AirTran 

  • The Company may be unable to successfully complete the integration of AirTran’s business and realize the anticipated benefits of its acquisition of AirTran. In addition, delays in integration could cause anticipated synergies to take longer than anticipated to realize. 
  • The need to integrate AirTran’s workforce presents the potential for delay in achieving expected synergies and other benefits, or labor disputes that could adversely affect the Company’s operations and costs. 
  • The Company has incurred, and expects to continue to incur, substantial expenses related to the acquisition and integration of AirTran’s business. 
  • The Company will need to continue certain branding or rebranding initiatives in connection with the acquisition that may take a significant amount of time and involve substantial additional costs and that may not be favorably received by Customers. 
  • The Company’s operations may be adversely affected by its expansion into non-U.S. jurisdictions and the related increase in laws to which it is subject.
  • The Company’s ability to use AirTran’s net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes may be limited as a result of the acquisition, or if taxable income does not reach sufficient levels. 
  • Instability of credit, capital, and energy markets can result in pressure on the Company’s credit ratings and can also negatively affect the Company’s ability to obtain financing on acceptable terms and the Company’s liquidity generally.
  • The application of the acquisition method of accounting resulted in the Company recording a significant amount of goodwill in connection with the acquisition of AirTran, which could result in significant future impairment charges and negatively affect the Company’s financial results. 

2014:

(1)  Financial Risks 

The Company’s operations are subject to disruption in the event of any delayed supply of fuel; therefore, the Company’s strategic plans and future profitability are likely to be impacted by the Company’s ability to effectively address fuel price volatility and availability. 

 2017:

(1)  Operational Risks 

The Company is currently dependent on a single engine supplier, as well as single suppliers of certain other aircraft parts and equipment; therefore, the Company could be materially adversely affected (iii) in the event the pricing and operational attributes of the Company’s aircraft or equipment become less competitive. 

(2)   Legal, Regulatory, Compliance, and Reputational Risks 

The Company’s future results will suffer if it is unable to effectively manage its Extended Operations (“ETOPS”). 

2018:

(1)  Information Technology Risks 

Developing and expanding data security and privacy requirements could increase the Company’s operating costs.

(2)  Legal, Regulatory, Compliance, and Reputational Risks 

The Company’s reputation and brand could be harmed if it were to experience significant negative publicity through social media.

2019:

(1)   Boeing 737-MAX Risks 

The Company is currently dependent on Boeing as the sole manufacturer of the Company’s aircraft. Prolonged delays completing the FAA’s requirements to return the Boeing 737 MAX aircraft to Customer service, or further regulatory actions by the FAA with respect to the MAX aircraft, could materially and adversely affect the Company’s business plans, strategies, and results of operations. 

(2)   Legal, Regulatory, Compliance, and Reputational Risks 

The Company is subject to extensive FAA regulation that may necessitate modifications to the Company’s operations, business plans, and strategies.

 2020:

(1)   COVID-19 Risks 

  • The COVID-19 pandemic has materially and adversely affected, and will likely continue to materially and adversely affect, the Company’s results of operations, financial position, and liquidity. 
  • In response to the COVID-19 pandemic, federal, state, and local agencies have issued laws, regulations, and orders relating to health and occupational safety.
  • Company has entered into agreements with the U.S. Treasury with respect to funding support pursuant to the Payroll Support Program under the CARES Act and the Payroll Support Program Extension; pursuant to these agreements the Company has agreed to certain restrictions on how it operates its business and uses its cash, which could limit the ability of the Company to take actions that it otherwise might have determined were in the best interests of the Company and its Shareholders.

(2)   Legal, Regulatory, Compliance, and Reputational Risks 

  • The Company is subject to various environmental requirements, including laws and regulations related to climate change and emissions. Compliance with new or existing environmental requirements could materially and adversely affect the Company’s business plans, strategies, and results of operations.
  • The Company’s Bylaws provide, to the fullest extent permitted by applicable law, that the United States District Court for the Northern District of Texas or, if such court lacks jurisdiction, the state district court of Dallas County, Texas, will be the exclusive forum for certain legal actions between the Company and its Shareholders, which could increase costs to bring a claim, discourage claims, or  limit the ability of the Company’s Shareholders to bring a claim in a judicial forum viewed by the Shareholders as more favorable for disputes with the Company or the Company’s directors, officers, or other Employees.

2021:

(1)   COVID-19 Risks 

Laws, regulations, orders, or other government actions requiring that employees be vaccinated could materially adversely affect the Company’s operations.

(2)   Operational Risks 

  • The Company is currently dependent on Boeing as the sole manufacturer of the Company’s aircraft. Prolonged delays in the FAA issuing required certifications or approvals for the -7, or further regulatory actions by the FAA with respect to the MAX aircraft, could materially and adversely affect the Company’s business plans, strategies, and results of operations. 
  • The Company’s business is labor intensive; therefore, the Company would continue to be adversely affected if it were to continue to be unable to employ sufficient numbers of qualified Employees to maintain its operations.

(3)   Legal, Regulatory, Compliance, and Reputational Risks 

  • The Company is subject to various environmental requirements and risks associated with changing consumer preferences, and the potential increased impacts of severe weather events on the Company’s operations and infrastructure.
  • The Company’s reputation and brand could be harmed if it were to experience significant negative publicity with respect to the Company’s voluntary sustainability and ESG-related disclosures. 

Financials Since IPO

Income Statement

Income Statement

Southwest’s profitability was relatively stable from 2017 to 2019 with a slight decrease per year. In 2020, the profit margin had a sharp decrease, which may also result from the COVID-19 pandemic.

As mentioned in the risk factor part, the COVID-19 pandemic has materially and adversely affected the Company’s result of financial position. Besides, the issuance of new FAA regulations could result in flight schedule adjustments and groundings or delays in aircraft deliveries, as well as lower operating revenues, operating income, and net income.

In late February 2020, the Company began to see a negative impact from the COVID-19 pandemic, which quickly accelerated during the first quarter and continued throughout the remainder of the year. The pandemic greatly depressed the demand for air travel. According to the Southwest 2020 Annual Report, the Company experienced its first annual net loss in 48 years.

Income Statement of 2020

Income Statement of 2020

The Company took action to reduce capacity and swiftly cut costs. However, due to the fixed nature of a large portion of the Company’s cost structure, the reduction in operating expenses was not enough to overcome the dramatic decline in revenues. 

Income Statement of 2021

Income Statement of 2021

In 2021, as impacts from the COVID-19 pandemic eased, the net income improved significantly due to the rebound in domestic leisure demand and bookings for air travel and expanding its revenue sources.

Cash-flow Statement

5-year Cash Flow Statement

5-year cash flow statement

cash flow statement

Cash from operations:

According to the Southwest 2020 Annual Report, the operating cash flows for 2020 were affected primarily by the COVID-19 pandemic, which resulted in a significant drop in travel demand, sales, and revenues, leading to the Company’s net loss, the Company’s funding of its $667 million 2019 profit-sharing distribution to employees in 2020, a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the decline in passenger ticket sales, and the suspension of collection of certain ticket taxes as dictated by the CARES Act. 

Cash from investing:

Net cash used in investing activities for 2020 and 2019 was $16 million and $303 million, respectively. The Company also raised $815 million from the sale-leaseback of 20 aircraft and received $428 million of Supplier proceeds during 2020, which the Company considers an offset to its aircraft capital expenditures. 

Cash from financing:

The Company bolstered its liquidity through the financing activity in 2020. Net cash provided by financing activities for 2020 was $9.7 billion. During 2020, the Company borrowed $13.6 billion through various transactions. An additional $2.3 billion was raised from a public offering of 80,500,000 shares of common stock. 

Balance Sheet

5 years key metrics of the balance sheet

balance sheet

Both cash and equivalents and total debt had a sharp increase in 2020, during which the pandemic began and influenced the financial market. Details will be discussed in the Capitalization Requirements part.

Net debt shows how much cash would remain if all debts were paid off and if a company has enough liquidity to meet its debt obligations. It also had decreased sharply from 2020, which may be because of the increase in cash and cash equivalents. A negative net debt also implies that the company possesses more cash and cash equivalents than its financial obligations and is hence more financially stable.

Cash and Net Debt Comparison

Cash and Net Debt Comparison

Southwest’s working capital has been negative in the recent five years. According to the Southwest 2020 Annual Report, this is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable. 

Southwest’s fixed asset is relatively stable and doesn’t change significantly. The leverage ratio became higher in 2020, which showed earnings were more volatile. The higher financial leverage ratio indicates that Southwest is using debt to finance its assets and operations, which would be risky for potential investors.

Capitalization requirements

Cash Holdings

Cash Holdings

In the past 10 years, the cash holding situation is shown in the graph above.

From 2011 to 2019, the cash holding is stable. Since the beginning of the pandemic in 2020, Southwest’s cash holding increased 334.2% from $2548 million to $11063 million.

Southwest indicated in a regulatory filing that “continues to experience significant negative impacts to passenger demand and bookings” due to the pandemic, which has caused Southwest to scramble to cut costs and raise cash. The company began to focus on its liquidity, including quickly and substantially enhancing its cash holdings. Southwest said it has cash and short-term investments totaling $13.9 billion, including government assistance, which is about 24 months of liquidity at current burn rates. Even if conditions worsen, Southwest still has levers to pull: The airline estimates it has about $12 billion in unencumbered assets, including about $10 billion in aircraft, that it could borrow against.

 Capital Structures

 

Capital Structures

In the past 10 years, the capital structure is shown in the graph above.

From 2011 to 2019, the change in debt and equity was stable. In 2020 when the pandemic began, there was a sharp increase in debt and a decrease in equity. 

According to the Southwest 2020 Annual Report, the effects of the COVID-19 pandemic on the financial markets may materially and adversely affect the company’s access to capital and cost of capital, including its ability to raise funds through equity or debt financings. The extent to which the pandemic affects Southwest’s earnings and liquidity will depend partly on the company’s ability to successfully access capital. Southwest used more debt financing may due to the more long-term financial benefits than equity financing. A loan does not provide an ownership stake, so it does not cause dilution to the owners’ equity position in the business. 

D/E Ratio Analysis 

 

DE Ratio Analysis

In the charts, it shows the D/E ratio trend and Debt and equity trend in five years. As we can see from the graph, the D/E ratio of Southwest Airlines significantly increased and from annual reports, the reason is Southwest Airlines borrowed more debt in the pandemic in 2020. 

Because the pandemic hit the transportation industry, in 2020, the earnings before interest and tax of Southwest Airlines are negative so the company has to borrow money to maintain its daily operations. At the same time, the shareholder’s equity from year to year is similar without huge changes. 

Break Even Analysis

 

Break Even Analysis

These charts show the trend of operating income & expense and contribution margin in five years. From the above charts, before the pandemic, Southwest Airlines developed well when its operating revenue but its contribution margin slightly decreased. During the pandemic, because of travel restrictions, the demand for flights significantly decreased so the operating revenue sharply declined and it cannot support the operating expense. Furthermore, the Fuel and oil expenses for 2021 increased significantly compared with 2020, primarily due to higher market jet fuel prices. In 2021, when canceling the travel restriction, Southwest Airlines recovered and its contribution margin is positive again but the operating revenue does not recover to its original level yet.

Cash Flow Projection

 

Cash flow projectioN

There is the chart about the Discount cash flow projection for five years.

From projecting revenue with average revenue growth rate in previous years, projecting the EBIT. The tax rate is the effective tax rate.

tAX RATE

Depreciation expense is the depreciation rate of PPE. Capital expenditure is based on a percentage of net income. Working capital change is based on account receivable turnover and account payable turnover. 

Finally, when the terminal value growth rate is predicted as 2% and the discount rate is 8.2% from the Nasdaq prediction, the enterprise value is $28,581.10 Billion

We can see the operations in 2021 were getting on track normally step by step after the 2020 pandemic. There are more passengers using airplanes for traveling.

Industry Average Valuation Multiples

 

Alaska Airlines, Delta Air Lines, United Airlines Holdings, and American Airlines Group are four major competitive airline companies of Southwest Airlines in the US. They have a similar level of Market capitalization and Revenues in the market.

Market Cap and Revenue of peer companies

Market Cap and Revenue of peer companies

There are EV/Revenue, EV/EBIT, EV/EBITDA, P/E, and P/B ratios of peer companies and their average multiple.

Multiples of peer companies and Avg

Multiples of peer companies and avg

Explore Fundamental Data for Southwest Airlines Co. (LUV) | finbox.com

After that, the charts shown below compute the estimated enterprise value and equity value of Southwest Airlines.

Est. Enterprise value and Equity value of Southwest Airlines

Equity value of Southwest Airlines

eQUITY VALUE

Stock Price Analysis

Stock Price Since IPO 

Stock Price Since IPO

Southwest Airlines’ initial public offering was on June 8, 1978 for 650,000 shares at approximately $11. $6.5 million raised at IPO in total. On June 8, 1978, Southwest Airlines stock price closed at $0.14, And there were no big fluctuations until 1990.

Stock Price Trend over 10 years

Stock Price Trend over 10 years

*Adjusted close price adjusted for splits and dividend and/or capital gain distributions.

  • In 2013, Southwest Airlines launched a three-year, $125 million construction project. The stock price rose from August 2013 to 2015. The highest point of the stock price in 2015 was $47.31, a total increase of 544.52% compared to the lowest point in 2012.
  • In 2016, the stock price boosted again and rose to $64.45 in early 2018, the highest price since IPO.
  • In 2020, COVID-19 hit the U.S. airline industry severely. Airline stocks fell an average of 35% in February and were at risk of continued declines. Southwest Airlines fell to $23.87, which was the lowest point since 2014. But soon, Southwest Airlines quickly resumed its core business and maintained normal operations. Southwest Airlines has also expanded its revenue sources by launching new routes and innovative businesses. Shares formed a V-shaped rebound and reached a high of $64.10 in April 2021, second only to 2018’s $64.45.

Moving Average Analysis

Moving Average Analysis

Source from YCharts

  • From 2013 to 2015, the sma50 was significantly higher than the sma200, and the stock had a large short-term increase.
  • From 2015 to 2017, the upward trend ended and the stock entered a period of shock. The sma200 indicated that the stock had undergone intraday adjustments during this period.
  • From 2020 to 2021, the stock price quickly fell below sma50 and 200. The moving average had fallen sharply, and the stock had been below the moving average and been suppressed by the moving average. The short-term share price was well below the 50-day and 200-day average, implying a sharper-than-expected short-term decline.
  • Since hitting the new high in 2021, the stock price had entered a downward period. A fall below sma50 in 2021 means the end of the short-term uptrend. Due to the severely short-term decline in stock prices, the long-term trend was disrupted. The two lines are gradually deviating, and sma50 has no tendency to cross 200 for the time being. Therefore, the stock is difficult to reverse the downward trend in the short term.

P/E Ratio Over 10 Years

PE Ratio over 10 YEARS

  • P/E Ratio boosted to 110.29x in the third quarter of 2020 because of the near to zero diluted EPS.
  • Negative Trailing P/E Ratio from the fourth quarter of 2020 to the fourth quarter of 2021.

Index Performance

Competitors Index

By October 2022, Southwest Airlines has been the third biggest company of the U.S Airline market share, which is 17%. American Airlines (AAL) is 18%, Delta Airlines (DAL) is 17.10%, and United Airlines is 14.90%. Comparing LUV with other U.S. domestic carriers, the top four airline companies’ historical stock prices in the past ten years are listed below. Southwest Airlines’ shares have remained centered and became the top of the Big Four in mid-2021.

dOMESTIC MARKET SHARE

Stock price comparison with peer groups over 10 years 

Source Yahoo Finance. 

United Airlines stock prices are most sensitive to economic factors.

  • American Airlines deviated from the average trend at the time period 2018~2020.
  • Southwest and Delta had a similar trend.

Industry Index- North America

Industry Index- North America

Source from Yahoo Finance

Using the ARCA Airline Index (XAL) compares with the S&P/TSX Industrials index (GSPTTIN), which is the Canadian industrial index containing Air Canada. From 2014 to 2018, XSL was flat in the long term and fluctuated in a short time period, and GSPTTIN has been on an upward trend and gradually passed through XAL. In 2020, due to the COVID-19, both industry indices dropped; however, XAL fell more dramatically than the Canadian industrial index. Currently, the U.S. Airlines Index still suffers a downward trend but the Canadian industrial index has quickly recovered and moved up. It is important to mention that S&P/TSX Industrials index contains not only the Airline industry but also other non-cyclical industries, and XAL only includes the airline companies.

US Top 100 NYSE Index

US Top 100 NYSE Index

Source from Yahoo Finance

The company’s stock price has shown a high-speed and fluctuated upward trend in the past decade, and is very sensitive to external factors. In contrast, the trend of the NYSE US Top 100 is rising steadily. Due to the combination of stocks in different industries, the cycle sensitivity of each industry is different, and the overall trend is not volatile.

Total Stock Market Index

Total stock market index

Source from Yahoo Finance

The difference between a total stock market index fund and an S&P 500 index fund is that the S&P 500 Index includes only large-cap stocks. The total stock index includes small-, mid-, and large-cap stocks. iShares Russell 3000 Index Fund (IWV): With IWV, you gain access to the Russell 3000, which covers about 3,000 U.S. stocks. It is one of the best total stock index funds on the market.

Comparative Index Analysis S&P 500

 

Comparative Index Analysis

Source from Yahoo Finance

The NYSE Arca Airline Index (XAL) is a modified equal-dollar weighted index designed to measure the performance of highly capitalized and liquid international airline companies. The index tracks the price performance of selected local market stocks or ADRs of major U.S. and oversea airlines.

  • Southwest Airlines has outperformed the S&P 500 and XAL since 2014, stock price has fluctuated more than the industry index, following the industry trend.
  • Because of the COVID-19, Southwest decreased much more than the change of S&P 500 and Industry index in early 2020. Southwest is sensitive to economic factors.

Target Market Research

10K Research Reference

Southwest Airlines Co. (LUV) 10K report| sec.com

1. Who are the Target Customers for the Company?

  • Route:

Southwest has historically had point-to-point service, rather than the “hub-and-spoke” service provided by most major U.S. airlines. Southwest’s point-to-point service has also enabled it to provide its markets with frequent, conveniently timed flights and low fares. Southwest complements its high-frequency short-haul routes with long-haul nonstop service including flights between Hawaii and California, Las Vegas, and Phoenix, and between markets such as Los Angeles and Nashville, Los Angeles and Baltimore, Oakland and Houston, Las Vegas and Orlando, and San Diego and Baltimore

  • Passengers who prefer Low fares and free baggage delivery service:

Southwest offers a relatively simple fare structure that features competitive fares and product benefits, including unrestricted fares, as well as lower fares available on a restricted basis. Southwest fare products include three major categories: “Wanna Get Away®,” “Anytime,” and “Business Select®,” to provide Customers options when choosing a fare.

Southwest continues to be the only major U.S. airline that offers to all ticketed Customers up to two checked bags that fly free. Southwest also does not impose additional fees for items such as seat selection, soft drinks and snacks where available, curb-side check-in where available, and telephone reservations.

  • Loyalty passengers:

Southwest’s Rapid Rewards loyalty program features tier status and Companion Pass programs for the most active Members, including “A-List” and “A-List Preferred” status. Both A-List and A-List Preferred Members enjoy benefits such as “Fly By®” priority check-in and security lane access, where available, as well as dedicated phone lines, standby priority, and an earnings bonus on eligible revenue flights..

2. How do they acquire targeted companies?

  • Pricing and Cost Structure:

Pricing is a significant competitive factor in the airline industry, and the availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts. During 2020 and 2021, as a result of the COVID-19 pandemic, the company experienced an increasingly competitive fare environment, as airlines offered significantly discounted fares to attempt to address unprecedented decreases in consumer demand. Pricing can be driven by a variety of factors. In addition to the need to stimulate traffic, as has occurred during the COVID-19 pandemic, under normal circumstances, airlines may discount fares to drive traffic in new markets and/or grow market share in existing markets. The company believes its low-cost operating structure has historically provided it with an advantage over many of its airline competitors by enabling it to continue to charge low fares. In addition, the company believes its low-cost operating structure provided it with a significant financial competitive advantage relative to many of its competitors in responding to the financial impact of the COVID-19 pandemic.  

  • Routes, Loyalty Programs, and Schedules:

Southwest also competes with other airlines based on markets served, loyalty opportunities, and flight schedules. While the Company has a robust, point-to-point route network in the United States, some major airlines have more extensive global route structures than Southwest, including more extensive international networks. In addition, many competitors have entered into significant commercial relationships with other airlines, such as strategic alliances, code-sharing, and capacity purchase agreements, which increase the airlines’ opportunities to expand their route offerings. An alliance or code-sharing agreement enables an airline to offer flights that are operated by another airline and also allows the airline’s customers to book travel that includes segments on different airlines through a single reservation or ticket. More extensive route structures, as well as alliance and code-sharing arrangements, not only provide additional route flexibility for participating airlines, they can also allow these airlines to offer their customers more opportunities to earn and redeem loyalty miles or points.  

3. What type of marketing does the company do to increase their brand recognition?

  • Reward program co-brand with Chase credit card:

Southwest has a very generous frequent flier program that handsomely rewards travel on Southwest, as well as spending using the Southwest-branded Chase® Visa credit card. 

  • Advertising:

Advertising costs are charged to expenses as incurred. Advertising and promotions expense for the years ended December 31, 2021, 2020, and 2019 was $185 million, $156 million, and $212 million, respectively, and is included as a component of Other operating expense in the Consolidated Statement of Income. 

  • Environment protection disclosure:

The Company operates in a public-facing industry with significant exposure to social media. Negative publicity, whether or not justified, can spread rapidly through social media. The Company also makes certain disclosures regarding sustainability and certain ESG matters, including the Company’s goals to achieve carbon neutrality and minimize carbon emissions

Brand position

Market share

Southwest Airlines had 17.4% of the domestic market share for 2021. This falls just behind the market share leader, American Airlines (AAL) with 19.5%. Other larger competitors, Delta Air Lines (DAL) and United Continental (UAL) came in with market shares of 16.3% and 12.9%, respectively.

US AIRLINER

20 Southwest Airlines Statistics [2022]: Passengers, Revenue, And Facts – Zippia

Rank

Safety:

The Top 20 Safest Airlines 2021|Airline rating

Qantas, Qatar Airways, Air New Zealand, Singapore Airlines, Emirates, EVA Air, Etihad Airways, Alaska Airlines, Cathay Pacific Airways, British Airways, Virgin Australia/Virgin Atlantic, Hawaiian Airlines, Southwest Airlines, Delta Air Lines, American Airlines, SAS, Finnair, Lufthansa, KLM, and United Airlines. 

Southwest at 13th in the world and second in the US.

On-time Performance:

Southwest’s performance is worst at on-time departure time, which is only 81.2% on-time rate.

Southwest’s performance

20 Southwest Airlines Statistics [2022]: Passengers, Revenue, And Facts – Zippia

Customer satisfied:

The Best And Worst Airlines in America in 2021

  1.     Delta Air Lines
  2.   Southwest Airlines
  3.   United Airlines
  4.   Alaska Airlines
  5.   American Airlines
  6.   JetBlue Airways
  7.   Hawaiian Airlines
  8.   Spirit Airlines
  9.   Frontier Airlines
  10. Allegiant Air

Ranked: The Best And Worst Airlines In America In 2021 (forbes.com)

Southwest Airlines is ranked second Best airline in America in 2021.

SWOT Analysis

Strength

  1. Southwest is one of the largest airline brands in the world and recognized for offering low-cost travel to travelers and only two free baggage delivery airlines.
  2. The company has more than 100 destination in the USA and has its flights flying to 10 countries
  3.   The company has more than 50,000 employees
  4. Due to very streamlined process, the airline operator receives very few complaints as compared to other air carrier
  5. As a part of its experience, the aircrafts offer Wi-Fi, entertainment, movies, games, music etc.
  6. The company has a very effective marketing via several channels like TV, print ads, online ads and ecommerce portals

Weakness

  1. Strong competition from other low cost carriers means limited market share growth
  2. Dependence on primary American market means limited customer share of travelers

Opportunity

  1. Expansion to other cities with the USA can help boost its business
  2. International flights and global expansion can help increase the revenue for Southwest airlines
  3. Tie-up with international airline companies to offer global air travel at affordable prices

Threat

  1. Increase in fuel prices can lead to loss of margins for Southwest
  2. Changing economic policies, recessions & pandemics can affect the tourism sector, thereby impacting their revenue

Mergers and acquisitions

Southwest Airlines’ M&A since the IPO

Southwest Airlines’ M&A

Muse Air

Muse air was a regional commuter carrier based in Dallas operated from 1981 to 1987. Its founder left the Southwest presidency and aimed to compete directly with Southwest.

Their strategy of high debt-service costs and competing against the much larger Southwest doomed Muse’s failure. After unsuccessful expansion the firm was seeking sale or merger in 1984 due to continuing losses. 

Southwest bought Muse on June 25, 1985, structured as each Muse shareholder receive $6 in cash and, for each share of Muse stock, one-eighth share of Southwest common stock and one-eighth of a warrant to purchase a share of Southwest common in five years for $35. The total cost for Southwest was $40,480,108 in cash and 830,323 shares of stock, excluding stock ultimately required to cover warrant purchases.

After the acquisition, Southwest renamed Muse Air as TransStar Airlines in February, 1986, and restructured its routes to focus on long-haul services, such as flights from California to Florida. Southwest also restricted mail, freight, and interline passengers. But by 1987 TransStar still was still taking losses (10 million losses on 80 million revenue), and it was shut down.

Morris Air

Morris Air was a Salt Lake City based air company founded in 1984 that modeled their business after Southwest Airlines: using Boeing 737-300 jets, frill-free service and a low-fare strategy.

In 1993, Morris Air was offering more than 1,000 flights each week. 28 Destinations were scattered all over destinations mostly in the western US. Delta has held onto nearly half of the local market in Salt Lake City, but Morris Air’s share has risen steadily over the past year and now stands at more than 23 percent

The deal was valued at approximately $122.4 million, under the agreement, Southwest Airline will acquire all of the outstanding stock of Morris Air in exchange for 3.6 million shares of Southwest’s common stock.

This indicated the rise of point to point air and moving away from the hub and spoke. Helped Southwest to compete with Delta. Morris was the first real contender for southwest as they mimicked, competed in many ways as they expand. 

Morris Air continued to operate as a wholly-owned subsidiary for much of 1994.  The integration was completed on October 4, 1994 when Boise, Tucson, and Salt Lake City were converted to Southwest cities.  The merger was viewed by many as one of the most successful in the history of the industry.

AirTran

AirTran was the the former ValuJet, Atlanta is its main hub and it has headquartered in Orlando, Florida.Between 1999 and 2007, AirTran Airways grew to serving more than 56 cities, having over 700 daily flights, 9,000 crew members, and a traffic of nearly 20 million passengers per year. AirTran Holdings announced the acquisition by Southwest in September 2010.

AirTran’s common stock valued approximately $7.57 per share, $1.0 billion in the aggregate. Each share of AirTran common stock will be exchanged for $3.75 in cash and 0.321 shares of Southwest Airlines’ common stock. Additionally cash of $518 million and existing AirTran net debt and leases summed up total transaction value of $3.2 billion.

AirTran added 21 cities and 30 destinations to Southwest’s network and 7 of these cities lie in the international market, including Eastern and smaller cities and Central America leisure destinations. Southwest received additional 138 planes, including 717s. They were also able to integrate AirTran’s Atlanta hub into its point to point network and hire most of AirTran’s employees.

The acquisition was generally a success, Southwest entered important US and international markets, but its goal of utilizing 717s to serve smaller cities was not realized. Southwest’s interest waned as the operation cost was proven to be high. They also did not pose a big competitive threat to Delta as after the de-hubbing finished the departures from Atlanta decreased.

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