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SWOT Analysis

SWOT ANALYSIS Southwest Airlines Co (Southwest Airlines) is a provider of passenger airline services. Strong financial leverage, operational performance and fleet network are the key strengths off the company, even as weak liquidity position remains a cause for concern. Growth prospects for aviation industry, positive outlook for US T&T industry, business expansion and growth initiatives could provide new opportunities to the company. However, fluctuations in fuel prices, stringent government regulations, increasing manpower costs in US and COVID-19 impact on airline industry could affect company’s performance.


Fleet Network Financial Leverage Operational Performance


Liquidity Position Opportunity

Positive Outlook for the US T&T Industry Growth Prospects: Aviation Industry Business Expansion Growth Initiatives


COVID-19 Impact on Airline Industry Fluctuations in Fuel Prices Increasing Manpower Costs in US Stringent Government Regulations


Fleet Network

Southwest Airlines has a strong fleet network. Based on the US Department of Transportation’s most recent data, the company is the US’s largest carrier in terms of originating domestic passengers boarded. As of December 2019, the company had 747 Boeing 737 aircraft of which 70 were finance leased and 52 were under operations. Out of 737 aircraft 505 are Boeing 737-700; 207 are Boeing 737-800; and 34 are Boeing 737 MAX 8. The company also has plans to 380 aircrafts by 2026 comprising 219 MAX 8 Firm aircrafts, 115 Max 8 aircrafts and 30 Max 7 Firm aircrafts. It served 101 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos.

Financial Leverage

The company’s financial leverage, indicated by debt-to-equity ratio, remained low in FY2019, which enhances its earnings with less interest payments, and reduces the risk of defaulting. During FY2019, its debt-to-equity ratio was 0.2, as compared to 0.3 in FY2018. In FY2019, the company recorded a 22.2% decrease in debt to US$2,665 million, as compared to US$3,425 million in FY2018.

Southwest Airlines Co Page 4 © MarketLine

Southwest Airlines Co

SWOT Analysis

Operational Performance

Strong operating performance helps in enhancing investor confidence and the company’s ability to pursue growth plans. In FY2019, the company recorded Revenue passengers of 134 million; Enplaned passengers of 162.6 million; Revenue passenger miles (RPMs) of 131,345 million; and Available seat miles (ASMs) of 157,254 million with load factor of 83.5%. It reported Average length of passenger haul of 980 miles; Average aircraft stage length of 748 miles; 1.3 million trips flown; and 206.3 million seats



Liquidity Position

Limited cash and liquidity put the company at a disadvantage when funding any potential opportunities in the market. Southwest Airlines’ current ratio was 0.6 at the end of FY2019. This suggests that the company’s inability to meet its short-term obligations than some of its peers. Its total current liabilities stood at US$8,952 million, an increase of 13.2% over the previous year. Its current portfolio of long-term debt or capital leases also increased from US$606 million in FY2019 to US$819 million in FY2018.


Positive Outlook for the US T&T Industry

The company is likely to benefit from the positive outlook for the US T&T industry. According to the World Travel & Tourism Council (WT&TC), direct contribution of US T&T industry to the country’s GDP is expected to reach US$673.9 billion in 2028. The industry’s contribution to the US economy is expected to increase 2.3% per annum to reach US$1,954.1 billion in 2028. Visitor exports are expected to increase 3.4% per annum, from 2018-2028, to reach US$291.7 billion in 2028. The increase in investments to US$246.2 billion in 2028 is likely to spur the US T&T industry.

Growth Prospects: Aviation Industry

Southwest Airlines could benefit from the positive outlook for the global aviation industry, which could drive the demand for its services in the aviation market space. According to the Airports Council International (ACI) report, the global passenger volume is projected to reach 20.9 billion by 2040, with an annual growth of 4.1%. China is forecasted to be the largest air passenger market with 4.0 billion passengers, a 19% share of the global air passenger traffic. The US and India are expected to be second and third largest air passenger traffic markets with 3.1 billion and 1.3 billion passengers, respectively. Emerging economies including Indonesia, Turkey and Vietnam are expected to play significant roles in the global passenger traffic market. The global air cargo volume is also expected to reach 203.4 million tonnes by 2040. It is also expected that over 20% of all air cargo could be handled in the US alone by 2040, while China and the UAE could be considered as the second and third largest air cargo markets. The US, China and India are estimated to be the primary markets for global aircraft movements by 2040, representing 21%, 16% and 4% of aircraft movements, respectively.

Southwest Airlines Co Page 5 © MarketLine

Southwest Airlines Co

SWOT Analysis

Business Expansion

Southwest Airlines taking various initiatives to drive growth. The initiatives are expected to strengthen the company’s operations and increase its returns. In January 2020, the company announced its plans to launch Memphis, Tennessee, the US. In January 2020, the company opened its new maintenance facility at William P. Hobby International Airport in Houston, Texas. In September 2019, the company launched Baltimore-Providenciales, Houston-Cozumel services from March 2020. In November 2019, the company expanded its service from Rick Husband to Houston. In March 2019, the company started flight services to Hawaii, on the routes of Oakland International Airport (OAK) to Daniel K. Inouye International Airport (HNL) and Kahului Airport (OGG).

Growth Initiatives

Southwest Airlines is taking various strategic initiatives to drive growth. The initiatives are expected to strengthen the company’s operations and increase its returns. In August 2019, the company entered into an agreement with Airlines Reporting Corp to expand corporate travel distribution strategy. In May 2019, the company signed a purchase-and-leaseback agreement with BOC Aviation Limited for ten Boeing 737 MAX 8 aircraft equipped with CFM LEAP-1B engines.


COVID-19 Impact on Airline Industry

The COVID-19 outbreak has almost grounded the global airline industry. In early March 2020, the World Health Organization (WHO) announced the outbreak of COVID-19 as a global pandemic. As the outbreak has become rampant, several governments have imposed travel restrictions and stopped passenger flight operations from many cities across the world. A slew of travel restriction includes EU’s 30-day ban on non-essential travel to at least 26 European countries from the rest of the world; and US government’s temporary ban on the travelers from Europe, as many countries have been affected by the virus in the region. Many countries have since restricted passenger operations. As a result of these travel restrictions, global air traffic is expected to decline further in the short-term. According to the International Air Transport Association’s (IATA) projection on March 5, 2020, the global airline industry is expected to experience a possible loss of US$113 billion in passenger revenues in 2020. Major markets such as China, Australia, Japan, Malaysia, Singapore, South Korea, Thailand and Vietnam could face a combined loss of US$49.7 billion passenger revenues in 2020. This could be also followed by the major European markets such as Italy, Germany, Netherlands, Norway, Spain, Austria, France, Switzerland, Sweden and the UK.

Fluctuations in Fuel Prices

The company’s business is highly dependent on the price and availability of jet fuel, and its performance could be adversely affected by high volatility in fuel costs, increased fuel prices and disruptions in the supply of jet fuel. The fuel market is volatile and changes according to market, political and economic movements. Therefore, a modest decline or increase in prices could have a significant impact on the

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Southwest Airlines Co

SWOT Analysis

company’s business operations. Several factors are responsible for such changes including domestic and foreign supply of oil, global economic conditions, price and availability of alternative fuels, governmental regulations, weather conditions and technological advances, among others. According to the International Air Transport Association, jet fuel price was US$80.3 per barrel as of March 8, 2019, which increased 3.5% over that same period in the previous year. Such increase in jet fuel price could affect the company’s overall profitability.

Increasing Manpower Costs in US

Increasing manpower costs could increase the company’s operating costs and hamper its profits. The tight labor markets, government-mandated increases in minimum wages and a higher proportion of full- time employees are resulting in an increase in labor costs. Effective January 2020, 21 states in the US increased their minimum wages. Arizona, Alaska, Arkansas and Washington increased their hourly minimum wage to US$12, US$10.19, US$10 and US$13.5, respectively. California, Colorado, Connecticut, Delaware and Florida increased their hourly minimum wages to US$12, US$12, US$11, US$11, and US$8.56, respectively. Whereas, states such as New Jersey, Ohio and South Dakota increased their hourly minimum wages to US$11, US$8.7 and US$9.3, respectively.

Stringent Government Regulations

Airlines are subject to extensive regulatory and legal compliance requirements that result in significant expenditures. For instance, the Federal Aviation Authority (FAA) is an authority body, which regulates all safety issues in civil aviation operations. FAA’s safety jurisdiction includes aircraft maintenance and operations such as equipment, ground facilities, dispatch, communications, flight training personnel, and other matters affecting air safety. These will increase the aircraft operations cost significantly. The company expects to continue incur expenses to fulfill the FAA’s regulations. These authorization laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase operating expenses or reduce profit margins. As a result, complying with such laws, regulations and actions increases the operating costs of Southwest Airlines which could have a significant effect on its profitability and margins.

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