Southwest Airlines Term Paper

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Southwest Airlines

Before 1978, the federal government regulated the U.S. airline industry. Airlines were given profitable routes but were also obligated to serve unprofitable routes in the public's interest. Increases in airline costs were routinely passed along to customers due to the lack of price competition.

In 1978, the airline deregulation act enabled airlines to set their own fares and enter or exit routes without government approval (Lam, 2003). The major airlines responded by dropping the unprofitable routes, in favor of the more profitable ones that were the long haul flights between big cities. Short haul flights still operated, but only as feeder flights to the major airports where the long haul flights departed from. In many cases, passengers had to fly short haul to a hub airport, then connect to another hub airport and take another flight to reach their final destination.

Deregulation allowed smaller regional airlines to expand quickly, being more flexible and carrying a lower level of debt than the major carriers. Their lower cost structure allowed the small regional airlines to position themselves as value airlines, competing with the big carriers on price. In the U.S., air travel rapidly became more popular, due to the size of the country and the lack of competition from alternative forms of long distance travel.

Southwest Airlines began as a small regional airline operating between Dallas, Houston and San Antonio. Deregulation enabled it to expand rapidly and in 1990, it hit the U.S.$1 million mark. Today, it remains a major carrier.

Southwest Airlines has reinvented traditional air travel by implementing super-low airfares and a wacky, irreverent style of doing business. This paper will present a historical overview of the company, discuss the reasons for the company success, identify financial strengths and provide a final conclusion.

PART ONE

I. Company History

In 1971, Rollin King, a San Antonio entrepreneur who owned and operated a small commuter air service, and Herb Kelleher, a lawyer, collaborated their ideas for a new type of airline (Southwest, 2003). Their plan was simple -- they believed that if an airline could offer customers fast, friendly service with low fares, people would choose to fly that airline. Their idea was on target. Today, Southwest Airlines is the fifth largest major airline in America and has flown over 50 million passengers annually to 54 cities all over the southwest and to other cities.

According to the Southwest Airlines website: "We've also got more than 355 of the newest jets in the nation, with an average age of 8.75 years. Included in our fleet are three flying killer whales, Shamu One, Two and Three; Lone Star One, painted like the Texas flag, to celebrate Southwest Airlines' 20th Anniversary in a style and manner second to none; Arizona One, a symbol of the importance of the state of Arizona to Southwest Airlines; California One, a high-flying tribute to the state of California; Silver One, our 25th Anniversary plane; Triple Crown One, dedicated to the Employees of Southwest Airlines for their marvelous achievement of five consecutive annual Triple Crown awards; Nevada One, a high-flying tribute to the state of Nevada; and the newest member of the family - New Mexico One, also known as Zia, painted in the bright yellow of the New Mexico flag."

This brief annual synopsis about the airline explains how the company got off the ground and became one of America's largest and best-loved commercial airlines in history. In 1971, with President Lamar Muse (retired leader) at the helm, Southwest Airlines took off on its maiden voyage and began service between Dallas, Houston, and San Antonio. In 1972, all Houston service was transferred to Houston's Hobby Airport from Houston Intercontinental. Kelleher was quoted, "Why should our customers have to drive 45 minutes to take a 40-minute flight?"

In 1973, Southwest flew with the Texas Aeronautics Commission to extend service to the Rio Grande Valley. RUSH Cargo service, a same-day airport cargo delivery company, was introduced and Southwest had its first profitable year. In 1974, Southwest announced that it passed the one-millionth passenger mark. The company also spent $400,000 to renovate its terminal at Houston's Hobby Airport by adding two new boarding gates and departure lounges. 1975, Southwest was given permission to fly to the Rio Grande Valley via the Harlingen Airport with four roundtrips each business day.

In 1976 Southwest got clearance to begin service to Austin, Corpus Christi, El Paso, Lubbock, and Midland/Odessa. Within five years, Southwest placed its sixth Boeing 737 into service while flying over one and a half million satisfied customers to their destinations. In 1977 Southwest announced that it had passed its five millionth passenger mark. Southwest stock was listed for the first time on the New York Stock Exchange as "LUV."

In 1978, the 1978 Airline Regulation Act gave Southwest the opportunity to really expand with new service to St. Louis, Kansas City, and Detroit from Chicago's convenient Midway Airport. Lamar Muse resigned as President and Kelleher took his place as interim President, CEO, and Chairman of the Board. Later in the year, Howard Putnam was elected President and Chief Executive Officer. Kelleher resumed his position as permanent Chairman of the Board.

In 1979, Southwest offered service to New Orleans from Dallas, which was the first city outside of Texas to be served by Southwest. In 1980, Southwest added its 22nd Boeing 737 to the fleet and named it the "Rollin W. King" in honor of the co-founder of the airline. It was the first 737 to be owned outright by Southwest Airlines. In 1981, Southwest celebrated a decade of "Love Southwest Style." The company launched the new decade by offering fun promotions, games, and more savings for customers and employees alike.

In 1982 Kelleher became Southwest's permanent President, CEO, and Chairman of the Board. New service to San Francisco, Los Angeles, San Diego, Las Vegas, and Phoenix was offered. In 1983, major schedule increases were adopted, three additional Boeing 737- 200s were purchased, and Southwest flew nearly 10,000,000 passengers. In 1984, Southwest was ranked number one in customer satisfaction for the fourth consecutive year.

In 1985, Southwest attracting media coverage by naming the Ronald McDonald House as its primary charity. The company also launched the "Just Say When" campaign, which established Southwest as the most convenient point-to-point carrier in the United States. In 1986, Southwest introduced Fun Fares, offering reduced airfare and hotel packages for vacations. In1987, Southwest celebrated the sixth year in a row as a recipient of the Best Consumer Satisfaction -- a record for any continental U.S. carrier.

In 1988, Southwest and Sea World of Texas collaborated to promote Texas as a major tourist attraction. Through the "New Friends" campaign, Southwest became Sea World of Texas' official airline and created Shamu One, a Boeing 737 painted like Shamu the killer whale. Later in the year, Southwest became the official airline of Sea World of California, promoting its reputation as a "fun" airline. Southwest also won the first Triple Crown: Best On-Time Record, Best Baggage Handling, and Fewest Customer Complaints. In 1989, service started from Oakland's International Airport.

In 1990, Southwest celebrated its billion-dollar revenue mark and became a "major" airline. In 1991, the airline celebrated its 20-year anniversary. The company was awarded the first annual Triple Crown in 1992. In 1993, the airline expanded to the east coast and started service to Baltimore/Washington International Airport. By mid-1994, the company offered ticketless travel in four cities. Morris Air also merged with Southwest in 1994. In addition, Arizona One joined the fleet. Seven new cities opened, including Seattle, Spokane, Portland, and Boise in the Pacific Northwest.

In 1995, ticketless travel became available systemwide. California One debuted in Sacramento. The airline added service to Omaha and was awarded the fourth consecutive Triple Crown in 1995. In 1996, Florida service was added and Southwest celebrated 25 years of service. Online ticketless travel was launched on the Southwest Airlines Home Gate webpage. In addition, Southwest inaugurated service from Providence, Rhode Island.

In 1997, Southwest started out the year with service to their 50th city - Jacksonville, Florida. Jackson, Mississippi became the 51st city added in August. In December, Southwest accepted the delivery of its first Boeing 737-700. Southwest was the launch customer for Boeing of the next generation Boeing 737-700. In 1998, the airline added new service to Manchester, New Hampshire. In 1999, it began new service to Islip, New York.

In 2000, Southwest Airlines introduced "SWABIZ," a tool that assists company travel managers in booking and tracking trips made through southwest.com. New service to Albany International Airport and Buffalo-Niagara International Airport also began. In 2001, Southwest Airlines started new service to West Palm Beach, Florida and Norfolk, Virginia. Southwest also celebrated its 30th birthday, marking the milestone with the unveiling of Spirit One.

II. Financial Analysis

There are many different ratios that can be used by managers and investors to analyze and forecast the profitability and efficiency of Southwest Airlines. The following sections will use various ratios to analyze the company's…[continue]

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