CLC – Case Study Component 2

FIN-504-O500

Professor 

May 29^th, 2024

Step 3: Investments to Support the Business Unit Strategy or Strategies

As stated above, Southwest invests heavily into fleet modernization of the new Boeing 737 MAX 8 aircraft in an effort to improve fuel efficiency and reduce maintenance costs. Furthermore, because Southwest only operates Boeing 737 variants as a single aircraft type, this strategy streamlines Southwest’s maintenance processes and reduces the complexity of maintaining a diverse fleet. Pilots only need to be trained on a single aircraft type which lowers both training costs and increases schedule flexibility (The Strategy Story, 2023). 

Another key component of Southwest’s strategy is market penetration as the company strives to increase its share in existing markets by leveraging its low-cost structure. In a recent study, Vadlamani, Shafiq, and Baysal (2022) employed machine learning techniques to analyze and forecast the factors influencing Southwest Airlines’ decisions when entering new markets. The study identified key data points such as population size, infrastructure quality, and per capita income of the local population as predictors of market entry strategies. The conclusions drawn from the study point to existing infrastructure as Southwest’s largest determinant factor when choosing a new market to break into. 

Surprisingly, population size and growth only have a slight impact on Southwest’s choice to operate at a given location, and average individual income had little effect. Despite Southwest’s strategic focus on fleet modernization compounded with single aircraft type strategy places them at the top of low-cost structure airlines, Southwest was forced to withdraw operations from four different airports and reduce capacity in two others in 2024 in a tempt to consolidate and improve operating margins (Southwest, 2024). Due to the challenges faced, It remains to be seen if Boeing’s delivery delays and quality issues could push Southwest to pivot their strategy to include Airbus A220-300 in their fleet. 

Step 4: Future Profitability and Competitive Performance

     What is the three to five-year strategic profitability outlook, anticipated sales revenue forecast, and future financial performance projections for Southwest Airlines according to past failures and successes, organizational goals and objective established by Southwest’s top executives, customer expectations, news media reports, and recently conducted academic research efforts?  This question can be fully explored by locating, organizing, analyzing, and incorporating shared research findings (relevant facts) that gives sufficient information to answer the question stated above. The best approach to answering this question is to provide fairly recent statistical research data (sales revenue, debt ratios, and total operating expenses figures) that gives us a substantial and clear picture of the current standing of Southwest Airlines within a variety of company performance areas which are assessed on a quarterly, semi-annual, or annual frequency basis. 

The end goal for Step 4 in the process of assessing Southwest Airlines’ long-term financial health is to assess economic performance, profitability, cash flow stability and also determine if there are financial success factors that need to be addressed, performance areas that have opportunities for improvement, and what must occur in terms of operating performance to ensure excellence in quality, customer service, profitability, and competitive performance. Southwest CEO Bob Jordan is not satisfied with Q1 2024 financial results. To help ensure that employees are held accountable for their actions, decisions, etc. and to ensure continued profitability success, Southwest has heightened their commitment to intentionally reach higher profit margins each quarter. Target operating performance initiatives that are linked directly to their remainder-of-year financial targets are:

❖Continuing to focus on providing outstanding customer service to its airline passengers

❖Driving revenue through commercial initiatives

❖Efficiently managing costs 

❖Producing free cash flow to further strengthen the company’s balance sheet

As stated previously, Southwest Airlines reported a $231 million loss of total sales revenue of $6.3 billion. In comparison to first-quarter 2024 earnings, Southwest endured a net loss of $159 million in the first quarter of 2023 — a 68% decline in operating expenses when compared to Q1 2024 company reported losses according to their financial earnings report. The attitude and mentality the Dallas-based airline carrier has adopted suggests a bright and optimistic future profitability outlook for Southwest. 

Bob Jordan (CEO) expressed contentment towards end of first-quarter 2024 financial results specifically related to the month of March and that comment during a press release was, Southwest ended the quarter with “healthy profits and margins in the month of March” (Osborne & Sadeghi, 2024). In an ongoing effort to address first-quarter losses, a coping strategy that Southwest CEO Bob Jordan has endorsed and shared with news media analysts earlier in the year is that Southwest Airlines is (1) focused on decisions within their realm of authority (2) has responded quickly to conquer current and potentially-detrimental issues surrounding financial underperformance; and (3) has adjusted their operating business practices to satisfy revised aircraft delivery expectations of customers.

     It is evident based on enormous probabilities for a very strong future financial performance, predictions from news reporting analysts, strategic leadership initiatives, effective leadership at times of major hurdles and extenuating circumstances, and finally a record-breaking first-quarter 2024 performance that entailed sales revenue earnings at $6.3 billion (a 10.9% increase annually) compared to $5.7 billion the first quarter of 2023. Current booking trends indicate that Southwest will have another record-breaking quarterly financial performance in sales revenue earnings second-quarter 2024. “Network optimization adjustments, implemented with the March 

schedule, were accretive and supported the profitability inflection point and strong margins for the month of March 2024” (Osborne & Sadeghi, 2024). Southwest’s current level of profitability may continue to be impacted by operating expenses (i.e., fuel costs, aircraft upgrade costs, and cancelled flights) for the remaining duration of the current year. It is through strategic initiatives that Southwest Airlines in anticipation and optimistic spirit will drive incrementally additional sales growth to achieve a pre-tax sales revenue lofty yet attainable goal of $1.5 billion. Listed below is current, credible, factual, and reliable quantitative research data which validates content and provides supporting evidence to attest to the facts and figures presented in Step 4 of assessing Southwest Airlines’ financial performance health, determining future profitability potential, potentially threatening economic climate factors, and competitive performance results within the airline transportation industry sector of the U.S. economy.

Southwest Airlines Profitability Success Factors, Profitability Ratios, and other Financial

Performance Metrics Summary

The latest closing stock price for Southwest Airlines as of May 24, 2024, is 26.84.

Southwest Airlines revenue for the quarter ending March 31, 2024, was $6.329B, a 10.92% increase year-over-year. Southwest Airlines’ total assets for the quarter ending March 31, 2024, were $36.018B, a 1.33% increase year-over-year. Southwest Airlines PE ratio as of May 24, 2024, is 18.14. Southwest Airlines’ net profit margin as of March 31, 2024, is 1.59%.

Southwest Airlines PE ratio as of May 24, 2024, is 18.14. Southwest Airlines’ current ratio for the three months ending March 31, 2024, was 1.09. The current dividend yield for Southwest Airlines as of May 24, 2024, is 2.68%. Southwest Airlines’ total number of employees in 2023 was 74,806, a 12.23% increase from 2022.  Southwest Airlines reported a net loss from earnings of $219 million in the 4th quarter of 2023.

Conclusion

In conclusion Southwest Airlines most valuable investment is in the new Boeing 737 MAX 8 aircraft. The reason behind this major investment is to decrease fuel costs and reduce the cost of maintenance. This will in turn reduce the amount of aircrafts that pilots will have to be trained on reducing the overall cost for company expenditures such as training, maintenance and will also provide lower cost to customers. According to the performance metrics Southwest continues to increase profitability each year. Southwest has always considered how each of the changes they make will affect their customers. Southwest tries to remain profitable while considering customer satisfaction as well. Southwest still remains one of the most competitive airlines when it comes to both customer service and profitability as well as affordability. 

References:

Delouya, S. (2024). Southwest, pilots reach tentative agreement for contract worth $12 billion. CNN Business. https://www.cnn.com/2023/12/19/business/southwest-pilots-contract/index.html

Huffman, A. (2023). The pros and cons of the Southwest loyalty program. Nerd Wallet. https://www.nerdwallet.com/article/travel/southwest-loyalty-program-pros-cons

Sitaraman, G. (2023, October 3). Airlines are just banks now. The Atlantic. https://www.theatlantic.com/ideas/archive/2023/09/airlines-banks-mileage-programs/675374/ 

Southwest Airlines. (2024, April 25). Southwest Airlines reports first quarter 2024 results. Southwest Airlines. https://www.southwestairlinesinvestorrelations.com/news-and-events/news-releases/2024/04-25-2024-114535295#:~:text=(NYSE%3A%20LUV)%20(the,operating%20revenues%20of%20%246.3%20billion

The Strategy Story. (2023, March 27). Southwest Airlines SWOT analysis – the strategy story. The Strategy Story – Simplifying Business Strategies. https://thestrategystory.com/blog/southwest-airlines-swot-analysis/#google_vignette

Vadlamani, S., Shafiq, M. O., & Baysal, O. (2022, September 14). Using machine learning to analyze and predict entry patterns of low-cost airlines: A Study of Southwest Airlines. Machine Learning with Applications https://www.sciencedirect.com/science/article/pii/S2666827022000858#sec8