Southwest Airlines: the next fight begins.
Jackson, William T. ; Jackson, Mary Jo
CASE DESCRIPTION
This case was developed through the use of secondary research
material. The case has a difficulty level of five and is appropriate to
be analyzed and discussed by advanced undergraduate and graduate
students in a strategic management class.
The case allows the instructor the flexibility of concentrating on
one strategic issue, or as a means of examining the entire strategic
management process. The major focus within the strategic analysis as
well as excellent stand alone modules is in the area of legal/political
influence, economic, leadership succession, or the ability to survive in
an unattractive industry. The instructor should allow approximately one
class period for each element addressed. Using a cooperative learning
method, student groups should require about two hours of outside
research on each element researched. The case also provides an impetus
to explore a very successful company during the current extreme economic
downturn.
CASE SYNOPSIS
This case is a library, popular press and internet case which
examines Southwest Airlines--a frequently examined company, yet one
facing new challenges in the current economy. The review of annual
reports, trade journals, government documents and proposed and enacted
regulations must be accomplished carefully. While most students have a
general understanding of the airline industry, few have the current
knowledge to compare this industry against more traditional operations.
A review of these resources should lead students in determining the
future of the company and the current CEO, Gary Kelly.
INTRODUCTION
Gary Kelly sat staring blankly out of the board room's windows
overlooking Love Field pondering the inevitable questions regarding the
current year's annual report. Sure, the company had just achieved
the unprecedented feat of 36 consecutive years of profitability in the
never tranquil airline industry. He could not help but ask, to no one in
particular, when this industry would ever draw a break. Gary wasn't
feeling sorry for himself--he had been a part of this company long
enough to know that nothing came easy, and if he wanted the mundane he
had other choices.
I guess what worried him the most, was the potential that he would
be the one (it was his watch) when the unthinkable would occur--a year
when Southwest Airlines finally did not make a profit. Herb had
outsmarted and outmaneuvered every obstacle that was thrown his way from
taking that initial investment of $500,000 to start a new intra-state
airline in an era of high regulation and fierce established competitors
through recessions and fuel shortages. Then Coleen stepped right in to
9/11 and the fallout that accompanied that disaster in the years to
follow. So why should he be afraid to tackling the worse economic
downturn since the depression--maybe because so many members of the
Southwest family were counting on him not to let that happen.
COMPANY HISTORY
The early years provided numerous challenges to Southwest, and set
the stage for what has followed over the last thirty-six years of
operations. As management of the company insists today, this is when the
Southwest Spirit was born.
In 1996, Rollin King, a well-respected businessman of San Antonio,
came to Herb Kelleher with an idea too preposterous to ignore. As Herb
sat in his law office where he had been practicing for several years, he
listened to King's vision of starting a Texas airline that would
serve Dallas, San Antonio, and Houston using heavy jet equipment.
Although this idea was novel for Texas, it had already proven
itself in California (a state very similar in regard to geographic
separation of major cities within a state) through PSA and Air
California. Both of these carriers had been extremely successful with
intrastate coverage, even during a period of high government
involvement.
Because of his legal prowess (not to mention his entrepreneurial
spirit), Herb Kelleher was an ideal candidate to assist in getting the
carrier off the ground. It took over three years from the time that Herb
filed the initial application to fly these routes before the first
airplane took off at Love Field in downtown Dallas in June of 1971. This
period involved considerable legal positioning to counteract the
activity of other competitors that were flying these routes--Braniff,
Texas International and Continental. Numerous suits were filed against
Southwest, and the early years involved standing up against these giants
in the courts. These battles finally culminated with the U.S. Supreme
Court refusing to hear the complaints of the other carriers, and
Southwest was finally free to fly the skies of Texas.
The battle was not over yet though. The next two years of striving
to become profitable was the next hurdle to clear. Then, just when the
black ink was hardly dry, Southwest was again taken back to court by the
cities of Dallas and Fort Worth for refusing to move their operations to
DFW International Airport. Once again the fight went all the way to the
U. S. Supreme Court. As before, Southwest emerged victorious.
Through these hardships, as well as those encountered after the
implementation of the Airline Deregulation Act of 1978, Southwest
developed its personality of doing things unconventionally. This
maverick attitude continues to permeate throughout the company to this
day as the company faces new obstacles in dealing with the national and
world economy.
As the most recent annual report states, the company has just
completed their thirty-six year of profitable performance. Southwest has
grown each year from a regional carrier with four airplanes to one with
over 500 airplanes today, and serving a substantial part of the country
through a route structure that includes 64 cities in 32 states.
THE AIRLINE INDUSTRY
The U.S. commercial airline industry has been dominated by a few
major players in the market (even prior to the Airline Deregulation Act
of 1978). In 2008 the industry was dominated by seven major companies
(firms with revenues in excess of $1 billion). These seven companies
account for over 80 percent of the industry's total market share.
While there are numerous national airlines (32 firms with revenues
between $100 million and $999 million) as well as regional and commuter
airlines (89 firms with revenues less than $100 million) the landscape
of air travel is controlled by these seven firms.
As has been the case over the last thirty years since the passage
of the Airline Deregulation Act of1978, the last seven years has been
especially difficult for the airline industry. The landscape his been
scattered with the remains of numerous smaller airlines after their
failed attempts to compete against the imperfect oligopoly found in the
airline industry. In addition, many of the larger more respected firms
in the industry found themselves in bankruptcy as well.
The year 2001 gave some forbearance to the impact the environment
was having on even the larger firms in the industry. In July of 2001 the
Department of Justice blocked the proposed merger between US Airways and
United Airlines. After the deal did not materialize, both firms ended up
in bankruptcy court. Finally in 2005 after filing for bankruptcy again
in 2004, US Airways completed a merger with American West Airlines.
Further consolidation within the industry is currently underway with the
approved merger in late 2008 of two of the industry giants--Northwest
Airlines and Delta. Both firms had filed in 2005 for bankruptcy.
The merger of Delta and Northwest (scheduled to be implemented over
a 12-24 month period) created the world's largest airline. The
combined company, after taking into consideration capacity reductions,
would have a near 23 percent market share in the industry. The total
city pairs to be served by the merger would be over 1,000 with only 12
pairs served by both companies prior to the merger. Many authorities in
the industry see the plans of increased revenue with potential cost
savings as being a realistic goal for the new company.
The end on 2008 was not as many expected. Instead of a rebound of
the struggling economy, the overall health of the economy on almost all
fronts continued to plummet. This continued downturn was in spite of
numerous attempts by the government to bolster economic growth through
various bailouts and stimulus packages. The results within the airline
industry for the last quarter of 2008 reflected the same general trends
seen in most sectors.
There are numerous other concerns facing firms within the industry
within the environment; none more precarious than the price of fuel. On
October 25, 2007, oil prices hit an all time high of $92.22 per barrel.
According to Air Transport Association (ATA), an industry trade group,
it is estimated that fuel costs will equal around 29% of total airline
revenue in 2007.
Just as critical as the base price of oil is the "crack
spread"--the cost difference between a barrel of oil and a barrel
of jet fuel. The differential has historically hovered between $5 and
$10 per barrel. Immediately after Hurricanes Katrina and Rita this
spread reached as high as $60 and during 2006 the spread averaged $16.64
a barrel.
According to the U.S. Energy Information Administration, the
average price of West Texas crude oil rose sharply from 2001 to 2006. As
seen in Table ax below, this increase amounted to over a 100% increase.
Preliminary results in 2008 through September further exasperate the
problem--jet fuel averaged $3.35 a gallon, up 55% over the average price
paid of $2.16 a gallon for all of 2007.
COST STRUCTURE
When evaluating an airline, a greater consideration regarding
performance needs to be applied to the cost structure within that firm.
The secret to success generally hinges on the ability of the airline to
manage growth and costs simultaneously. In the airline industry, the
three primary areas of cost involve fuel, labor, and airframes. Each of
these must be examined in context of the firm to understand the
competitive position of that firm.
Labor:
Labor costs dropped to the second highest expense category due to
recent increases in fuel costs. When examining this area of costs, three
broad areas must be taken into consideration--pilots and engineers,
flight attendants, and ground services. In most of the industry, much of
the costs in each category is impacted by the high level of
unionization.
Fortunately, there have been few rehabilitating strikes in the
industry over the past several years. This is primarily due to the
prescribed procedures that must be followed prior to a strike. The
procedures mandated include submission of disputes to a mediation board,
declaring an impasse, and then sitting through a "cooling-off"
period. In addition, many of the failures throughout the industry have
prompted a much more conservative approach by the unions in making
unreasonable demands on management.
Fuel:
As previously mentioned, fuel costs have historically been the
second largest cost for air carriers, but recently moved into the number
1 position. These costs represented 25.7% of total revenues within the
industry for both 2006 and 2007 for the 10 largest carriers. Fuel
efficiency has naturally become a major concern for these firms. In
considering efficiency levels firms have to take a concerted look at
both the age and type of aircraft as well the number of landings.
Another tool being deployed by most carriers are long-term contracts
with suppliers as well moving into the futures market. Some firms have
been much more successful in this approach than others.
Airframes:
Many options exist today to lower the costs associated with
airframes. As an example, carriers can adjust the percentage of leased
equipment rather than outright purchases. Typically this can result in
considerable savings in interest expense through the bulk purchasing
capabilities of the leasing company.
Other costs savings associated with airframes can be achieved
through a younger fleet with lower maintenance costs. Standardization
within a company's fleet can also result in substantial savings.
Reservation Systems:
Most carriers today have most of their bookings in one of three
ways. Flights can be booked through computer reservation systems (CRSs)
requiring payments to the operator of between $2.50 and $3.00, through
the firm's won website, or through intermediaries specializing in
multiple access schedules. Clearly, bookings through the firm's own
resource results in considerable savings with greater control for
adjusting fares when necessary.
Security:
The Aviation and Transportation Security Act of 2001 created in
response to the events of 9/11 federalized the airport security industry
and resulted in the creation of the Transportation Security Agency
(TSA). While the federal government assumed the responsibility of paying
the more than 40,000 screeners used in all commercial airports, the cost
has been passed on to the carriers at a rate of $5.00 per passenger per
segment. In addition, costs for the equipment used in screening are the
responsibility of the carriers. More sophisticated equipment has been
mandated for enhanced screening of possible incendiary devices and will
add further costs in this area in the near future.
In addition to the added costs, with increased security measures,
getting in and out of some airports can require significant time. On
sort-haul trips this may result in a significant reduction in any value
added by the speed of air travel. As an example, a trip from New York to
Boston by car is approximately 220 miles and takes about four hours to
drive. When you factor in travel to and from the airport along with
addition time for security, flying may actually take longer.
THE ECONOMY
Firms in the airline industry have not dealt well with the impact
of the economy at the end of 2008 and into 2009 as was the case in other
sectors. However, since leisure travel is directly impacted by
disposable income, and to a lesser extend business travel, the airlines
were especially impacted.
Another major concern in the economic environment is the Federal
Funds Rate issued by the Federal Reserve. This rate has increased
steadily since 2004 reaching 5.25% in 2006. Recently, the Federal
Reserve has taken actions to lower the rate based on fears of an
impending recession. Unfortunately, the deteriorating economy has
eliminated most of the benefits of these reductions.
A further concern is eroding consumer confidence as measured by the
Consumer Confidence Index (CCI). The index peaked in 2000 at 144.7 but
fell to a disturbing 99.8 in September 2007. This measure is closely
tied to disposable personal (DPI) income as well which often drives
leisure travel. DPI as adjusted for inflation rises and falls with the
economic cycle--rising each year after the recession of 1991. The recent
economic downturn has only eroded confidence further.
Although airlines within the industry target the business traveler
as their ideal passenger, the Domestic Travel Market Report (2006
Edition) recognizes that approximately 59% of the 164.6 million domestic
person-trips by airplane in 2005 were taken primarily for leisure
purposes. As leisure travelers are more cost conscious than their
business traveler counterparts, they are more likely to consider
substitutes to air travel.
SOUTHWEST TODAY
SWA has always pursued the business traveler. From its very
beginning, the ability to have breakfast in Dallas, a business lunch in
Houston, an afternoon meeting in San Antonio and back home by that
evening was an important element of their business model. Recently, in
an attempt to capture an even greater percentage of business travelers,
the company has offered a new "Business Select" fare product
that guarantees for $10-30 more per seat; preferred seating, extra
credit in SWA's frequent flier program, preferential seating, and a
free drink. The company has also taken a new approach to boarding (their
old method had often been seen as a "cattle call"). In lieu of
standing in three separate lines awaiting boarding, customers are now
called by actual check-in order.
Even with these new changes, the pleasure-class customer still has
the ability of taking advantage of the traditional "Gotta Get
Away" no-frills options provided by the airline. While there are
still no movies or meals served on the airline, the company continues to
offer numerous options on flights that historically have maintained
consistency in on-time departure and arrival. This has translated to
SWA has, from its inception, used the power of promotion to
"gain attention" and "teach" its potential customers
about the company's low fares and high customer service. This has
been done with the use of unique advertisements infused with humor and a
light-hearted approach to marketing. SWA kicked off its first marketing
campaign in 1972 with a television commercial featuring a young,
attractive female flight attendant, asking viewers to remember what it
was like before hostesses in hot pants who "loved you." More
recent campaigns have centered on the company's humorous
"Wanna Get Away" campaign, featuring comical embarrassing
situations in which people find themselves wanting to "get
away."
The company entered the airlines industry with a penetration
pricing strategy with the goal of capturing the largest possible volume
at the lowest possible cost. In order to be successful over the
long-haul, SWA needed to always pay very close attention to its costs.
The approach continues to be on this focus. Southwest typically enters a
market with fares that are two-thirds lower than competitors and they
increase traffic three or four fold in these markets.
Southwest has constantly sought out new markets, but not just for
growth sake. The company has remained cautious in examining the cost
structure of any new city it has entered. Long-term growth potential
along with sustainable low costs has driven their decision to serve
limited markets. However, the company now serves 64 cities nation wide
and only serving international locations with the use of international
codeshare agreements. Its latest venture into this market is through a
joint venture with West Jet to serve markets in Canada and Volaris to
capture travel to Mexico.
The company's careful pricing strategy has placed Southwest in
the enviable position of setting the prices for a large section of the
industry. In strongly competitive markets, this pricing approach has led
many competitors to be forced to match fares while usually not being
able to match the cost efficiency of SWA.
Operations:
Known as the most efficient airline in the industry, Southwest
Airlines continues to grow in spite of troubling times. From its humble
beginnings of four airplanes serving three cities, SWA has made
significant strides. Table 4 below details cities currently being served
by the company while Table 5 highlights the largest markets for the
carrier.. Even though the number of airports soliciting the airline to
expand to their location has drastically increased, SWA has elected to
make expansion decisions based upon finding underserved, overpriced
markets, and has stayed steady in its course of selecting only
profitable destinations.
One unique feature regarding the company's fleet serving these
cities is that the planes do not change. That is not to suggest that the
company is using the same old planes. In fact, SWA continues to be one
of the leaders in the industry in regard to the age of its fleet--9
years old on average. What it does suggest is that it uses only one
model of airframe--the Boeing 737 aircraft. Table 6 below shows the
makeup of the fleet.
All carriers are being forced to consider cost savings measures and
SWA is no different. Improvements in the fleet have remained at the
forefront for the company. All of its new 737-700 aircraft arrive form
Boeing with Blended Winglets installed significantly increasing the
efficiency of the aircraft. In addition, over 48 percent of its 737-300
aircrafts (the oldest in its fleet) have added this technology.
SWA has dealt with this crippling increase by implementing one of
the best fuel hedging programs in the industry. The company negotiated
fuel derivative contracts for over 70% of its 2006 expected jet fuel
needs at $36 per barrel. This decision saved the company over $675
million compared to spot markets. SWA also has adequate hedging
positions over the next three years at approximately $50 per barrel.
While this is a substantial increase over 2006 rates it remains
significantly below market rates as well as rates negotiated by most
competitors in the industry.
Going Green:
In response to the Federal Aviation Administration (FAA's)
Next Generation Air Traffic Control System spearheaded by Required
Navigation Performance (RNP) requirements, Southwest has committed $175
million over the next years for implementation. The RNP system unites
the accuracy of GPS (Global Positioning Systems), advanced avionics and
new flight procedures. This new way of looking at aviation will allow
aircraft to fly more precise, direct, and accurate paths. It is
estimated that by 2015, 156,000 metric tons of emissions will be
eliminated as well as $25 million in fuel savings per year.
Human Resources:
The recently retired COO and President, Coleen Barrett, was quoted
as saying, "After the employee ... the company's second focus
is the passenger, with shareholders coming in a distant third". To
back up this claim, SWA's emphasis on employee happiness can be
witnessed through the company's compensation practices. SWA's
annual employee compensation is one of the highest in the industry.
According to the Bureau of Transportation Statistics, "Southwest
Airlines' average annual compensation of $90,669 was higher than
all of the network airlines except Northwest."
The high compensation and benefits packages can be credited to
SWA's low employee turnover rate. This rate is the lowest in the
industry, approximately 4.5% a year. While pay and benefits may be
higher, training costs are significantly reduced due to the low turnover
rate.
Information Technology:
Southwest Airlines has consistently remained on the leading edge of
information technology (IT), recognizing the cost savings that could be
generated from the efficiencies of system processes. The company made a
strategic decision to centralize its IT procurement on a selected number
of vendors, where possible and practical. This decision allowed the firm
to streamline its operations, improve resource utilization, avoid paying
for redundant functionality, and more tightly integrate the systems that
support is business and initiatives. In 2004, SWA announced that the
company would be standardizing its mainframe management software to
reduce IT costs even further.
Another technology solution implemented by the company was the GE
Aviation Flight Management System for Boeing 737s. The flight management
system gives Southwest the ability to consistently fly shorter routes
and idle-thrust descents, thus offering significant cost savings through
reduced fuel consumption.
Leadership:
The name Herb Kelleher and Southwest Airlines are synonymous to
many. His reputation as a heavy smoking, hard drinking maverick are well
known, not only in the company, but outside of the company as well.
One of the greatest concerns the company ever faced was upon his
decision to step down as President and CEO. Many viewed that decision as
the beginning of the end for the company. What other CEO would go to the
maintenance hanger at 2:00 a.m. in a purple dress and a flower boa.
While the question did not take long to be answered--Coleen Barrett and
Gary Kelly might.
Coleen Barrett assumed the role of President and Gary Kelly CEO in
2001. Colleen joined the company in 1978 as a legal secretary. She
quickly moved her way up through the management team, serving as vice
president of both administration and customer relations. She was
described as both den mother and a management guru and has been credited
as an integral part of the famous SWA culture. As the company grew in
size and geographic dimension, Barrett recognized the challenge of
maintaining this strong culture. In response she created a culture
committee whose purpose it was to enhance and preserve the culture
established by Herb.
Gary Kelly started with the company as their internal auditor. In
1986 he took the position of controller and later became the Chief
Financial Officer. He gained high praise and recognition with the
successful fuel hedging strategies and upgrades in cost saving
technology. He also defied pontiffs that speculated that SWA should
inhibit its growth plans during the period after 9/11 and maintained the
course in their controlled growth strategy. In 2008, Gary Kelly assumed
all of the responsibilities of Chairman of the Board, CEO and President
as both Coleen and Herb stepped away. And, although Gary might not dress
in a purple dress, as many found out at a company party, he looked
magnificent as Gene Simmors of KISS.
Finance:
A major difference between Southwest Airlines and its competitors
revolves around the means of financing operations. In an industry well
known for tremendously high levels of debt, SWA stands out in its
conservative approach to maintaining its controlled growth. In 2006, SWA
had the lowest debt-to-equity ratio in the industry, 25.2% compared to
the industry average of 96.7%. This element of operations clearly gives
the company a unique advantage during more troubling times.
Awards:
Based upon the many characteristics described above, it is not
surprising that Southwest Airlines continues to garner headlines in the
business and professional community. As usual 2008 was no different.
Table 7 below highlights some of the awards the company achieved during
the most recent year of operations.
Other SWA Facts:
Some other interesting facts about Southwest Airlines includes:
1. Average 2008 airfare was $124.38
2. Average passenger trip length 846 miles
3. Company is 86 percent unionized
4. Most supported charity was Ronald McDonald House
5. On line bookings reached 74% via Southwest.com
6. More than 6.6 million people subscribe to SWA's weekly
Click 'N Save emails
7. 70 percent of customers check in online or at a kiosk
8. SWABIZ, SWA's free online booking tool allowing business
travelers to plan and track business travel, increased 19% in 2007
9. SWA was the first airline to establish a home page on the
internet
10. In 2007, Southwest.com was the number 1 airline web site for
online revenue
11. Fortune Magazine selected SWA as # 7 in the world's most
admired companies
Financial and Operational Performance:
As mentioned, SWA just completed its 36 consecutive year of
profitability. The financial statements provided below (unaudited at
this time) represent the most recent results of operations for 2008--as
can be seen, some areas have changed significantly for the company.
William T. Jackson, University of South Florida St. Petersburg
Mary Jo Jackson, University of South Florida St. Petersburg
Table 1: Airline Market Share Leaders
2008 Rank Company 2008 % 1998 %
1 American 16.8 17.4
2 United 14.2 19.8
3 Delta 13.4 16.6
4 Continental 10.7 8.6
5 Southwest 9.3 5.0
6 Northwest 9.2 10.6
7 U.S. Airways 7.8 6.6
Others 18.6 15.4
Source: Aviation Daily
TABLE 2: Airline Bankruptcies 2004-2008
Airline Date Chapter
Primaris 10/08 11
Gemini Air 8/08 7
Gemini Air 6/08 11
Air Midwest 4/08 7
Frontier 4/08 11
ATA 4/08 11
Big Sky 1/08 7
Kitty Hawk 10/07 11
Independence 1/06 7
Independence 11/07 11
TransMeridian 9/05 7
Northwest 9/05 11
Southeast 10/04 7
US Airways 9/04 11
Great Plains 1/04 11
Sun Country 10/08 11
Vintage 7/08 11
Champion Air 5/08 7
Eos 4/08 11
Skybus 4/08 11
Aloha 3/08 11
MAXjet 12/07 11
Florida Coastal 2/06 11
ERA 12/05 11
Mesaba 10/05 11
Delta 9/05 11
Aloha 12/04 11
ATA 10/04 11
Atlas Air 1/04 11
Table 3: Crude Oil prices
Year Crude Oil Price ($ per Barrel)
2000 30.30
2001 25.92
2002 26.10
2003 31.14
2004 41.44
2005 56.48
2006 66.02
2007 61.52
Source: U.S. Energy Information Administration
TABLE 4: Cities Served by SWA: 2008
Albany
Albuquerque
Amarillo
Austin
Baltimore/Washington
Birmingham
Boise
Buffalo
Burbank
Chicago
Cleveland
Columbus
Corpus Christi
Dallas
Denver
Detroit
El Paso
Ft. Lauderdale
Ft. Myers
Hartford
Houston
Indianapolis
Long Island
Jackson, MS
Jacksonville, FL
Kansas City
Las Vegas
Little Rock
Los Angeles
Louisville
Lubbock
Manchester, NH
Midland/Odessa
Nashville
New Orleans
Norfolk
Oakland
Oklahoma City
Omaha
Ontario, CA
Orange County
Orlando
Philadelphia
Phoenix
Pittsburg
Portland, OR
Providence, RI
Raleigh-Durham
Reno
Rio Grande Valley
Sacramento
St. Louis
Salt Lake City
San Antonio
San Diego
San Francisco
San Jose
Seattle
Spokane
Tampa
Tucson
Tulsa
Washington Dulles
West Palm Beach
TABLE 5 SWA's Top Ten Airports-2008
Nonstop
Cities Daily Departures # of Gates Cities Served
Las Vegas 238 21 55
Chicago Midway 214 29 47
Phoenix 194 24 42
Baltimore/Washington 162 26 38
Houston Hobby 144 17 29
Dallas 140 15 15
Oakland 134 13 21
Los Angeles 126 11 18
Orlando 106 14 33
San Diego 108 10 18
TABLE 6: SWA's Fleet
Type Number Seats
737-300 186 137
737-500 25 122
737-700 327 137
TABLE 7: Awards in 2008
Award Presenter
Most Reliable Airline Forbes
Friendliest Airline TIME
Most Admired Airline Fortune Magazine
Best Leisure Airline Recommend Magazine
Best Blog PR News
Quest for Quality Award Logistics Magazine
Airline Customer Service Champs BusinessWeek
Top Shareholder Friendly Companies Institutional Investor
Magazine
Best Domestic Airline Customer Service Executive Travel
Top 500 Most Innovative Users of Technology Information Week
EXHIBIT 1: Southwest Airlines Co. Income Statement
Southwest Airlines Co. Year ended 12/31
Condensed Consolidated Statement of Operations
(in millions, except per share amounts) (unaudited) 2008 2007
Operating Revenues:
Passenger $10549 $9457
Freight 145 130
Other 329 274
Total Operating Revenue 11023 9861
Operating Expenses:
Salaries, wages and benefits 3340 3213
Fuel and oil 3713 2690
Maintenance, materials and repairs 721 616
Aircraft rentals 154 156
Landing fees and other rentals 662 560
Depreciation and amortization 599 555
Other operating expenses 1385 1280
Total Operating Expenses 10574 9070
Operating Income 449 791
Other Expenses (Income)
Interest Expense 130 119
Capitalized Interest (25) (50)
Interest Income (26) (44)
Other (gains) losses, net 92 (292)
Total other expenses (income) 171 (267)
Income (Loss) Before Income Taxes 278 1058
Provision (Benefit) for Income Taxes 100 413
Net Income (Loss) $178 $645
Net Income (Loss) per share :
Basic $.24 $.85
Diluted $.24 $.84
Weighted Average Shares Outstanding:
Basic 735 757
Diluted 739 768
Southwest Airlines Co.
Condensed Consolidated Statement of Operations
(in millions, except per share amounts) (unaudited) % Change
Operating Revenues:
Passenger 11.5
Freight 11.5
Other 20.1
Total Operating Revenue 11.8
Operating Expenses:
Salaries, wages and benefits 4.0
Fuel and oil 38.0
Maintenance, materials and repairs 17.0
Aircraft rentals (1.3)
Landing fees and other rentals 18.2
Depreciation and amortization 7.9
Other operating expenses 8.2
Total Operating Expenses 16.6
Operating Income (43.2)
Other Expenses (Income)
Interest Expense 9.2
Capitalized Interest (50.0)
Interest Income (40.9)
Other (gains) losses, net n.a.
Total other expenses (income) n.a.
Income (Loss) Before Income Taxes (73.7)
Provision (Benefit) for Income Taxes (75.8)
Net Income (Loss) (72.4)
Net Income (Loss) per share :
Basic
Diluted
Weighted Average Shares Outstanding:
Basic
Diluted
EXHIBIT 2: Southwest Airlines Co. Balance Sheet
Southwest Airlines Col December 31
Condensed Consolidated Balance Sheet
(in millions) (unaudited) 2008 2007
ASSETS
Current Assets:
Cash and cash equivalents $1368 $2213
Short-term investments 435 566
Accounts and other receivables 209 279
Inventories or parts and supplies, at cost 203 259
Fuel derivative contracts -- 1069
Deferred Income Taxes 365 --
Prepaid expenses and other current assets 313 57
Total current assets 2893 4443
Property and equipment, at cost:
Flight Equipment 13722 13019
Ground property and equipment 1769 1515
Deposits on flight equipment purchase contracts 380 626
Less allowance for depreciation and amortization (4831) (4286)
Net Property and Equipment 11040 10874
Other Assets 375 1455
Total Assets LIABILITIES & STOCKHOLDERS' EQUITY $14308 $16772
Current Liabilities:
Accounts Payable $668 $759
Accrued liabilities 1012 3107
Air traffic liability 963 931
Current maturities of long-term debt 163 41
Total current liabilities 2806 4838
Long-term debt less current maturities 3498 2050
Deferred income taxes 1904 2535
Deferred gains from sale and leaseback of aircraft 105 106
Other deferred liabilities 1042 302
Total Long-term Liabilities 6549 4993
Stockholders' equity:
Common stock 808 808
Capital in excess of par value 1215 1207
Retained earnings 4919 4788
Accumulated other comprehensive income (984) 1241
Treasury stock, at cost (1005) (1103)
Total stockholders' equity 4953 6941
Total Liabilities and Stockholders' Equity $14308 $16772
EXHIBIT 3: Southwest Airlines Co. Comparative Operating Statistics
Year Ended December 31
2008 2007
Revenue passengers carried 88529234 88713472
Enplaned passengers 101920598 101910809
Revenue passenger miles (RPMs) (000s) 73491687 72318812
Available seat miles (ASMs) (000s) 103271343 99635967
Load factor 71.2% 72.6%
Average length of passenger haul (miles) 830 815
Average aircraft stage length (miles) 636 629
Trips flown 1191151 1160699
Average passenger fare $119.16 $106.60
Passenger revenue yield per RPM (cents) 14.35 13.08
Operating revenue yield per ASM (cents) 10.67 9.90
CASM, GAAP (cents) 10.24 9.10
CASM, GAAP excluding fuel & related 6.64 6.40
taxes (cents)
CASM, excluding special items (cents) 10.06 9.04
CASM, excluding fuel & related taxes and 6.64 6.38
special items (cents)
Fuel costs per gallon, including fuel $3.18 $2,26
tax (unhedged)
Fuel cost per gallon, including fuel $2.44 $1.80
tax (GAAP)
Fuel cost per gallon, including fuel $2.32 $1.77
tax (economic)
Fuel consumed, in gallons (millions) 1511 1489
Fulltime equivalent employees at period-end 35449 34378
Size of fleet at period-end 537 520
Year Ended
December 31
Change
Revenue passengers carried (0.2)%
Enplaned passengers 0.0%
Revenue passenger miles (RPMs) (000s) 1.6%
Available seat miles (ASMs) (000s) 3.6%
Load factor (1.4)pts
Average length of passenger haul (miles) 1.8%
Average aircraft stage length (miles) 1.1%
Trips flown 2.6%
Average passenger fare 11.8%
Passenger revenue yield per RPM (cents) 9.7%
Operating revenue yield per ASM (cents) 7.8%
CASM, GAAP (cents) 12.5%
CASM, GAAP excluding fuel & related 3.7%
taxes (cents)
CASM, excluding special items (cents) 11.3%
CASM, excluding fuel & related taxes and 4.1%
special items (cents)
Fuel costs per gallon, including fuel 40.7%
tax (unhedged)
Fuel cost per gallon, including fuel 35.6%
tax (GAAP)
Fuel cost per gallon, including fuel 31.1%
tax (economic)
Fuel consumed, in gallons (millions) 1.5%
Fulltime equivalent employees at period-end 3.3%
Size of fleet at period-end 3.3%
