Financial Statement Analysis Southwest Airlines Term Paper

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Managing its fleet. This pertains to the optimization of an Airline's major assets, which is its airplanes, which is measure by its load factor, which is that percentage of an airplane's sets that are sold and actually filled at departure. The Company's load factor continues to increase from 69.5% in 2004, to 70.7% in 2005 to 73.1% in 2006. The Company is able to maximize its fleet by reducing its ground time (the amount of time planes spend on the ground at airports). Most airlines have an hour ground time compared to the Company's 15-20 minute ground time.

Managing People. Fortune magazine ranks the Company as one of the top 100 best companies to work for. The Company boasts of treating their employees like their customers, this has given the Company with the image and reputation of giving its customers the great value with their money. The dedication of its employees to provide customers with great satisfaction has been a powerful competitive weapon for the Company as its management claims.

Even with the rising labor cost, the Company has never laid off anyone in their 35 years of operations, which promotes a good management to employee relationship.

Managing its finances. The Company is the nations leading low fare brand and it also boast of its continuous financial success for the past 34 years, even amidst chaotic turmoil such as the 9/11 terrorist attack and raising fuel cost. The Company has well-known for its cost reduction strategies. For its ticketless travel options, which has eliminate the commission expense to be paid to travel agents, to standardizing the airplanes it uses, which reduces cost of maintenance, fleet managements and pilot training and to its best fuel hedging programs.

SUGGESTED FINANCIAL STRATEGIES for the NEXT FIVE YEARS

Many have criticized the Company for its soft domestic revenue trends. Rapid ratings have identified the Company's significant weaknesses in its leveraging rates and its sales performance.

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The Company's commitment to offer low fares in the expected rising ex-fuel CASM (cost per available seat mile) have cause some financial analyst to rate the Company as underperforming.

Revenue Initiatives: Win more Business Customers. The Company's travelers are 60% leisure while the remaining 40% is business. The Company should set out to attract more business travelers by enhancing the Company's Rapid Rewards frequent flyer program and strengthening its marketing and advertising on business travelers.

Manage Interest Expense. The Company's interest expense have continued to rise up overtime, although the Company is able to maintain only a 30% debt to equity ratio, interest expense is still a significant amount that the Company should manage.

Fuel Hedging. The Company is 90% hedged at $50 per barrel for CY07; 65% hedged at $49 per barrel in CY08; 50% hedged at $51 per barrel in CY09; 25% hedged at $63 per barrel in CY10; 15% hedged at $64 per barrel in CY11 and 15% hedged at $63 per barrel. The Company is known for its impressive fuel hedging programs; the Company should continue to assess political and economic factors that drive fuel availability and pricing so as to protect itself against rising fuel cost and significant disruption in fuel supply through entering fuel derivative contracts.

Expansion: Enter new markets. The Company has paved way to the Southwest Effect; the Company should recognize this strength and expand to new markets, to increase profit.

Continuing Productivity Development

Labor costs are expected to increase in the following years, but Management's effort to increase productivity can help maintain its labor per ASM flat. The headcount per aircraft trend for the past three years is declining; Management's continuous effort to keep its employees happy and the dedication of the employees themselves for high customer satisfaction will have this trend to continue for the years to.....

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