Financial Analysis and Strategic Alternatives

Analysis: Strategic Alternatives Assessment and the Financial Analysis

From the evaluation of the potential growth opportunities as well as strategies for Southwest Airlines, it was established that the optimal strategic alternative would be better service quality. At present, the airline offers a wide range of product offerings. These, according to the airline, are meant to make customers’ travel extraordinary and are inclusive of, but they are not limited to; business select, WiFi, mobile access, EarlyBird Check-In, PAWS, Express Bag Drop, Business Travel and Groups, etc. Other strategic alternatives that were identified in this case were route expansion and floating of flight discounts. The strategic alternatives were determined via the application of the scenario development approach – in which case assumptions were made about Southwest Airline’s future in the face of developments in the Airline industry, and a determination made regarding the various courses of action Southwest Airlines ought to embrace. The best alternative was in this case selected via the deployment of a decision matrix. It is important to note that the said decision matrix in this case proved to be a really important decision-making tool as it made it possible to not only evaluate, but also prioritize the three alternatives identified. A rating of each alternative was obtained using a pre-determined scale of 1 to 5, and weights assigned on the basis of the relevance of each alternative. The evaluation criteria utilized in this case was; alignment to airline mission, long-term viability, and cost implications. The cost implication of each alternative happens to be a crucial aspect to take into consideration. This is more so the case given that the industry is not out of the woods yet following the negative impacts of the COVID-19 pandemic. Decreased customer spending is also a concern owing to the risk of a downturn in economic activity going forward. It is on this basis that ‘cost implications’ were assigned the weight of ‘4’, indicating that this was the most important consideration.

It would be prudent to note that there is other information that would have come in handy in efforts to formulate recommendations. This is more so the case when it comes to not only the development, but also the suggestion of value-enhancing strategic alternatives. For instance, we lacked access to internal reports and records such as budgeting reports, white papers on urgent issues, personnel and human resource reports, etc. This info would have been instrumental in the further assessment of the airline’s capabilities and shortcomings. Other information that would have come in handy in this case relates to the airline’s dividend policy. This would have had the effect of establishing the earnings the airline has at its disposal to reinvest, i.e. in the betterment of its service quality – specifically when it comes to the integration of new technology, which could be a rather resource intensive undertaking. My team would also have been able to engage in the better assessment as well as management of the proposed alternatives’ possible risks if we had access to key info in relation to future government policy and/or monetary policy, i.e. in relation changes in law and adjustment of interest rates. For instance, a move by the Fed to further hike interest rates could have a negative impact on the cost of doing business – effectively affecting the airline’s bottom line and ability to settle its long-term obligations.

Financial considerations cannot be ignored in the formulation of strategic recommendations to management – especially with regard to how feasible and viable the options available are. The financial performance of Southwest Airlines have gotten better over the last two years – especially after the negative effects of the COVID-19 pandemic. The airline’s return on equity ratio and return on assets ratios under the time period under consideration both indicate that the airline is better-off in as far as the generation of profits is concerned. It is also important to note that the airline does not, at present, face any challenge in as far as the settlement of its obligations (in both the long-term and short-term) is concerned. This is more so the case given that its liquidity as well as leverage ratios are within acceptable limits – as indicated by current ratio and the debt-to-assets ratio. The airline can, therefore, be able to commit, direct, and effectively assign resources in efforts to establish a strategic alliance. However, there may be need to engage in deeper assessment of how the strategic alliance would affect the airline’s ability to advance the interests of its shareholders, i.e. in as far as return on equity is concerned. This is particularly the case given that a strategic alliance could result in a clash of both companies’ cultures and/or have a negative impact on the airline’s ability to effectively deploy and benefit from its low-cost strategic advantage. The commitment of resources to mutually beneficial undertakings, i.e. following the establishment of a strategic alliance, could also disrupt cash flow.

Since we submitted our Financial Analysis Assignment, the FOMC has further hiked the federal funds by a total of 50 basis points. At the time, the rate had been set at 4.00%. This was again revised to 4.50%. This could be seen as a move by the Fed to further contain inflation. Indeed, as Hitt, Ireland and Hoskisson (2016) indicate, “when there is too much growth, the Fed can then raise interest rates in order to slow inflation and return growth to more sustainable levels” (211). However, the impact of this is that it results in higher financing costs. Thus, Southwest Airlines would likely find the prevailing circumstances unsuitable for borrowing (and investing) – which is likely to have a negative impact on its future performance. For this reason, I am of the opinion that going forward, the airline’s profitability ratios will likely indicate decreased ability in as far as its ability to generate profits is concerned. It would, thus, be prudent to indicate that this might not be an ideal time for Southwest Airlines to pursue an aggressive value-enhancement strategy. Thus, an ideal approach could in this case be geared towards ‘stability’ – in which case the airline attempts to maintain profits by embracing a steady course.

The decision matrix happens to be one of the quantitative tools that could be deployed in efforts to establish not only the suggested strategic alternative’s risks, but also how Southwest Airlines could be impacted (from a financial point of view) if it seeks to pursue the alternative. Thanks to the decision matrix, it is possible to come up with a mathematical comparison of alternatives for prioritization purposes. Thanks to the weighted criteria embraced in this case, it becomes possible to assess available options in an effective and informed manner. It is also important to note that the decision matrix would in this case permit the consideration of the suggested strategic alternative from a logical point of view – effectively limiting or minimizing the possibility of making decisions rooted in emotions or mere intuition. I am of the opinion that the decision matrix is an instrumental quantitative tool in as far as the prediction of risk is concerned. This is more so the case given that it helps break down problems that appear rather complex. Thus, it could be deemed an effective data-driven decision-making tool that could greatly help with risk prediction. The selection of the most advantageous strategy was based on the application of the decision matrix. With that I mind, the selection made earlier on – i.e. better service quality - will not be adapted.

Yet another strategic planning tool that could come in handy on this front is the risk matrix. The strategic alternative embraced in this case was better service quality. Here, the airline would be focused on the further enhancement of its present offerings. The overall objective on this front would be the expansion of market share and attainment of growth in sales. Some of the unique risks that were deemed as being closely associated with this particular strategic alternative were inclusive of, but they were not limited to; old feature redundancy, increased operational costs, negative customer sentiment (i.e. as a consequence of failure to sufficiently address user/customer needs), laws and regulations (i.e. changes in law that impact the mode of delivering certain services), competitor retaliation, resources (budget and people), contract risk (i.e. in relation to the ability of the airline to hold vendors or contractors accountable), economic downturn, resistance to change (i.e. where employees of the airline refuse to fully embrace changes meant to enhance service quality), unforeseen circumstances etc. These risks have been highlighted in the risk matrix (table 1). Two of the most crucial risks were