CLC Case Study Component One

Course Number: FIN-504

Professor 

Due: 05/11/2024

Component 1 – Part 1

Analysis of Fundamentals: Goals, Strategy, Market Conditions,

Competitive Marketing Approach, Regulatory and Operating Characteristics

Southwest Airlines Company opened its doors for business in 1971 and operates one of the world’s largest, and most awarded passenger airlines organizations. Their headquarters is in Dallas, Texas where they are one of the largest employers in Northern Texas. They currently employ approximately 75,000 employees, and are historically known for offering affordable and competitively priced airline tickets, hospitable service, and on-time arrivals.  Southwest Airlines currently flies from 121 airports and across 11 countries.  Their competitive approach to the consumer market is based on fundamental principles of honoring the relationships they have with their customers and their employees, while committing to fly passengers from one city to the next in a reliable, safe, and low-cost manner.  Today, Southwest Airlines transports more passengers on non-stop flights than any other airlines passenger company in the United States.  They pride themselves on maintaining an employee-first corporate culture and this is proven by an unparalleled record of never having implemented involuntary furloughs or layoffs.  Proof that Southwest Airlines both values and treats their customer base with respect is in the staggering 137 million loyal passengers the airline had retained in 2023. This success strategy, rooted in conscious capitalist ideals, has allowed Southwest Airlines to uphold its reputation of providing the best possible customer service to travelers while remaining profitable the past 47 years. 

Southwest Airlines services excess of 4,000 airline passenger flights during peak travel hours; however, even an airline as consistent as Southwest can be affected by economic swings. Troubles started in 2023 when Southwest Airlines was dealing with the aftermath of a holiday meltdown (that had cost the airline $140 million dollars in fees) stemming from inconsistencies with their aircraft supplier, Boeing.  The Dallas-based carrier operates an all Boeing 737 aircraft fleet; this lack of variety in their planes makes would be the source of major problems that season.  Unfortunately, those problems seem to have carried over into 2024. In April of 2024, thanks to the delays caused by major Boeing aircraft safety and quality issues, Southwest decided to replace its passenger cabin expectations for the remainder of 2024. Furthermore, In Q1 of 2024, the airline was hit with significant loss due to rising fuel costs. Then, in April of 24’, The Southwest American Pilots Association (SWAPA) entered a bipartisan agreement on a five-year Federal Aviation Administrative authorization bill that entails a host of SWAPA-supported provisions dedicated to maintaining the highest level of safety on the airline’s flight decks and its cabins, aeromedical reform, innovation, and workforce development (SWAPA, 2024). Though, this was a huge step forward for the Southwest employees and pilots who had reached an agreement on a “strong bill that enhances safety, improves the FAA’s aeromedical processes, and addresses mental health initiatives” (SWAMPA, 2024), who would now receive pay raises that amounted to 6.6% above industry average; it would cost Southwest approximately 12 billion dollars. The airline has publicly stated that they were happy to approve the bill: “Our pilots are exemplary aviators, and this agreement would give them industry-leading pay rates and numerous quality-of-life enhancements, while also providing opportunities for operational improvements” (Delouya, 2024).

Step 2: Analysis of Fundamentals: Revenue Outlook

To determine Southwest Airline’s financial outlook, we must critically analyze their financial statements, risk factors, and current market conditions, starting with the ways the company earns income and, likewise, its biggest expenses. Like other airlines, Southwest earns revenue through traditional ticket fares and in-flight services. Possibly the most lucrative source of income stems from their frequent flyer programs. Airlines create “points” to sell to banks for co-branded credit cards which incentivizes card holders to spend more money to earn “airline points”. Both the banks and the airlines earn money off this spending, and the airline incurs no cost unless the points are redeemed (Sitaraman, 2023). Loyalty programs continue to become more and more restrictive regarding how customers can obtain these points, adding to the increase in already staggering fare prices for consumers throughout the entire flight industry.  To stay profitable and be able to compete, companies must shift their strategies to mirror their competitors, therein lies the crux for Southwest Airlines. Is it possible to stay true to their customer first, conscious mentality while still effectively competing with the rest of their industry? Southwest certainly makes the attempt to, since their loyalty program is the most flexible and non-restrictive of all the airlines (Huffman, 2023).

Southwest’s largest operating expenses include wages, fuel, maintenance, airport fees, and aircraft depreciation. In the first quarter of 2024, Southwest Airlines reported a net loss of $231 million, or $0.39 loss per share, despite posting a record first quarter revenue of $6.3 billion (Southwest, 2024). Operating expenses had increased by 12.2 percent year-over-year mainly driven by a staggering 50 percent increase in maintenance costs (likely due to the Boeing mishaps mentioned above). Southwest Airlines continues to strive to reduce fuel costs through the delivery of new Boeing -8 aircraft, which has been built to maximize fuel efficiency: “During first quarter 2024, the Company received five -8 aircraft and retired three -700 aircraft, ending first quarter with 819 aircraft. Given the Company’s discussions with Boeing and expected aircraft delivery delays, the Company plans for approximately twenty -8 aircraft deliveries in 2024, a reduction from the Company’s previous expectation of forty-six -8 aircraft deliveries” (Southwest, 2024). Boeing’s production issues continue to be a risk for Southwest’s operating costs and can result in missed revenue opportunities as the airline cannot expand its capacity to introduce new routes. It remains to be seen whether Southwest can navigate through the increased operational costs and delays of new Boeing -8 deliveries. Logically, Southwest Airlines is one of only four big airlines to survive the government deregulation of the airlines in 1978 (Sitaraman, 2023); if Southwest can continue to drive loyalty program revenue, especially after the airline experienced record numbers of passengers early this year (2024), then they should be able to navigate their way through the hurdles they have been experiencing. 

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

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