Southwest Financials

Southwest Financials

Southwest Airlines is the only airliner in the industry that has been able to operate at marginal profit year after year.

Growth

Their business model has given them a 5-year growth rate of 10.34%. That is higher than the industry average of 8.19%.

Income

In 2006, Southwest had the highest net income in the industry at $499 million. Others in the industry last year, like American Airlines, had a net income of $231 million; Continental brought in $369 million and Southwest’s direct low-cost carrier competitor Jet Blue struggled to even make any profit last year with -$1 million of profit.

Cost per seat-mile

Southwest’s cost reducing strategy has made them the most efficient airliner in the industry. The cost per seat mile is the universal pricing measurement used by commercial airlines to determine efficiency and operating costs per available seat mile. Southwest has the lowest costs in the industry at 6.38 cents per seat-mile in 2006. Compared to others in 2006 like Jet Blue at 8.19 cents, Frontier at 8.68 cents, Delta at 11.3 cents, and United at 13.3 cents per seat-mile.

Fuel Hedging

Southwest’s fuel hedging strategy is a key reason why they have maintained profitability, compared to its competitors that have had record losses because of rising fuel costs. Southwest purchases fuel options for years in advance which lock onto rates that expire at varying dates. For example, last year about 68% of the fuel purchased by Southwest last year was bought at 2003 prices. As of 2005, they are paying 50% of the market price for their fuel. They have various rates locked in place through 2009. The only reason why Southwest was able to even begin this strategy is because they had the cash in the first place. Other airliners in the industry have been struggling to keep afloat with bankruptcies, huge debt, and just barely able to stay profitable, yet alone have the cash to invest in anything. Because of hedges, Southwest stayed profitable after 9/11 and the oil shocks from the Iraq war and Hurricane Katrina.

Ratio Analysis

Short Term Solvency- Southwest has a current ratio of .9; for every $1 of current liabilities (liabilities that are to become due within one years time) there are $.90 of current assets to cover those liabilities. They have a quick ratio of .7; for every $1 of Current liabilities (liabilities that are to become due within one years time) there is $.70 of liquid current assets (this ratio does not include inventory as a current asset). Both of these ratios measure the liquidity of the company. They measure if a company is able to pay off its short term liabilities that are financed through debt.