Southwest Airlines Ratio Analysis and Strategic Alliance Risks
This paper presents a financial ratio analysis of Southwest Airlines for the fiscal years 2020 and 2021, covering profitability (ROA and ROE), liquidity (current ratio), leverage (debt-to-assets), activity (total assets turnover), and shareholders' return (dividend payout) ratios. The analysis shows that Southwest Airlines recovered meaningfully in 2021 after pandemic-driven losses in 2020. The paper then examines the risks and benefits of forming a strategic alliance, argues that return on equity is the key metric for evaluating alliance effectiveness, and evaluates the challenges of raising capital under elevated interest rates. A realistic borrowing rate of approximately 8% is discussed alongside its likely impact on the firm's debt-to-assets ratio.
- Financial Ratio Overview: Ratio table for 2020 and 2021 performance
- Profitability and COVID-19 Recovery: Year-over-year improvement after pandemic losses
- Strategic Alliance Risks and Benefits: Alliance risks tied to ROA and ROE
- Return on Equity as Alliance Performance Indicator: ROE as key metric for alliance success
- Capital Acquisition Challenges in a High-Interest Environment: Fed rate hikes limit capital-raising options
- Impact of Borrowing on Leverage Ratios: Borrowing raises debt-to-assets ratio
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What makes this paper effective
- Grounds every analytical claim in specific ratio values drawn directly from the financial statements, giving the argument quantitative credibility.
- Connects macroeconomic context (Federal Reserve rate hikes, post-pandemic recovery) to firm-level financial decisions, showing awareness of the external environment.
- Uses a clear logical chain: compute ratios → interpret performance → project strategic risks → evaluate financing options.
Key academic technique demonstrated
The paper demonstrates applied financial ratio interpretation within a strategic management framework. Rather than simply reporting numbers, it uses ratios as diagnostic tools to evaluate both past performance and forward-looking strategic decisions, specifically the viability of a strategic alliance and the feasibility of aggressive value enhancement under adverse credit conditions.
Structure breakdown
The paper opens with a ratio table covering five ratio categories for 2020 and 2021. The discussion section that follows moves through four analytical threads in sequence: (1) year-over-year performance comparison and COVID-19 recovery, (2) strategic alliance risks tied to specific ratios, (3) ROE as the primary alliance effectiveness metric, and (4) capital-raising challenges under current interest rate conditions, concluding with a brief projection of borrowing's impact on the debt-to-assets ratio.
Financial Ratio Overview
The ratios captured in Table 1 below are useful for assessing Southwest Airlines' current performance level.
Table 1. Note: Figures in thousands, except financial ratio computations, EPS, and DPS.
Profitability and COVID-19 Recovery
As per Southwest Airlines' most recent financial statements, an assessment of the various ratios indicates that the airline performed better in 2021 than it did in 2020. This is especially true with regard to the return on assets (ROA) ratio and the return on equity (ROE) ratio. In addition to improving its efficiency in utilizing assets to generate profit — as indicated by growth in return on total assets — the airline also managed to increase the profits earned for every dollar that stockholders invested, as indicated by growth in return on equity. This is essentially a sign of an airline recovering from the negative impact of the COVID-19 pandemic. The liquidity and leverage ratios remain within acceptable limits, indicating that there is no significant risk of the airline defaulting on either its short-term or long-term obligations.
Strategic Alliance Risks and Benefits
The formation of strategic alliances carries both risks and benefits, and Southwest Airlines would need to be cognizant of both if it seeks to pursue such a partnership. With respect to risks, Southwest Airlines might report a lower return on assets ratio going forward if there is a lack of coordination between management teams following the formation of a strategic alliance. This concern is heightened by the likelihood that the firm would find it difficult to engage in the effective management of available assets for profit generation. The risk of losing financial resource control also means that the airline's bottom line could be negatively affected, resulting in a lower ROE ratio. The airline is not yet out of the woods, having reported a negative ROA and ROE in 2020 and relatively low figures for both metrics in 2021.
References
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2016). Strategic Management: Competitiveness and Globalization. Cengage Learning.
Monica, P. R. (2022, December 11). The Fed will raise rates again. But it's playing with fire. CNN Business. https://edition.cnn.com/2022/12/11/investing/stocks-week-ahead/index.html
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