2. HIBS Consulting Group Southwest Airlines Co. (LUV) Financial Analysis
Figure 1. Southwest Profile (HIBS)
Figure 2. Historical Stock prices vs. S&P 500
(FactSet)
Figure 3. Global Market Growth (IATA)
Figure 4. Cargo Market Growth (IATA)
Now is the time to fly further and carry more!
Executive Summary
We recommend Southwest Airlines Co. (LUV) to gradually expand its airline business
towards international travel and the cargo market beyond limited domestic travel
business. This is primarily driven by a business and financial analysis below:
Business Strategy
Cost reduction and low oil price effect. Low unit cost, low maintenance cost driven by
the operation of only one type of aircraft Boeing 737, and low oil price have been
efficiently reflected to the business over the past year. OPEX/Available Seat Km (ASK) is
maintaining around $7 for the recent three fiscal years.
AirTran Integration effect completed. Approximately $500 million in net pre-tax
synergies excluding acquisition costs are being reflected to future cash flow.
Rapid rewards frequent flyer program and Fleet modernization. Contribution to the
revenue respectively $700 million to Revenue cumulatively and $500 million to EBITDA.
Competitive Positioning
Highest performance among competitors. Passenger approach and operations
restricted to the Americas, fuel management and efficiency program provided superior
results in fuel cost in the industry.
Strong competitor for travelers in the USA. generating EBITDA margins up to 19.20%
competitors. 99% of revenue is from their passenger transport service capturing more
market share, thereby generating high level of revenue the US market trends of growth.
Key Financials and Ratios
Capital and Operating Lease. Southwest Airlines Co. Reports $ 5,155 million as an
operating lease (93%) and $ 334 million as a capital lease in 2014. While delta reports $
12.741 million as an operating lease (97%) and $ 398 million as a capital lease. Delta has
more concentration of operating leases for using off-balance sheet.
Fuel and Oil Expense. Since 2012 Southwest Co. Fuel & Oil Expenses decreased with
nearly $ 827 M. Part of this change was caused by Jet Fuel Market Price decrease from
$ 2.94 to $ 1.80 per gallon. Due to the Fuel Hedging program Southwest Co. fuel price
was decreased only up to $ 2.92 in 2014.
Transaction Cost. For acquiring AirTran, Southwest Airlines Co. paid approximately US$
1 billion in cash and stock plus assumption of debt. The deal affected on the B/S creating
$ 970 million Goodwill, decreasing Cash by $ 432 million, and increasing flight
equipment by $ 2,078 million.
3. Figure 5. Transport cost reduction (IATA)
Figure 6. LUV. Revenue by region (Factset)
Figure 7. LUV Revue by global economy (Factset)
Figure 8. Fuel and Oil Cost Expense
Industry Metrics and Special Financials
Landing Fees. $ 1,111 million Landing Fees and $ 0.85 million per ASM in 2014, while
Delta reported $ 1,442 milion and $ per ASM, which means Southwest Airlines Co.
efficient airplane operation.
RPM (Revenue Per Mile) &. RPM / number of destinations served for Southwest Airlines
Co. appeared to be $ 1,162 million, while for Delta it is $ 620 million. This measure shows
that Southwest airlines Co. retain higher margins and is more profitable per destination,
than Delta. Southwest Co.
Revenue per ASM (Available Seats Miles). Revenue per ASM was $ 14.20, which is
4.57% higher than previous year. Delta increased 3% on a 3% higher capacity. In 2014
Delta reported $ 13.17 million operating revenue per ASM. The industry average is $
12.78 million. Based on the following statistics Southwest airlines Co. uses a very
effective strategy to increase revenues per passenger and per mile.
Credit Analysis
Fitch Upgrades Southwest Airlines to 'BBB+'; Outlook Stable - October 30, 2015: Fitch
Ratings has upgraded Southwest Airlines Co. (LUV) to 'BBB+' from 'BBB'. The Rating
Outlook is revised to Stable from Positive. The upgrade reflects steady improvements to
Southwest's credit profile over the past years as it worked through the integration of
AirTran, paid down debt, and returned credit metrics to pre-recession levels.
Moody’s assigned a Baa1 rating. According to Southwest Airlines Co.'s new $500 million
of senior unsecured notes due in November 2020. (2015). This positive classification is
due to Southwest creating a plan to have good liquidity for the next years, having a Debt-
to- EBITDA of 1.5 times and EBIT-to-interest of 12 times in 2015. According to these
values, Southwest is improving its performance in terms of operations, waiting that
demand for USA domestic travel continues increasing.
Estimates and Recommendation
Harder competition in the US domestic market. 12 major airlines and over 50 minor
airlines are in the competition in the US market. Low entry barrier and copying business
strategy would bring a low profit margin for the future. That’s why the growth rate of
revenue is annually diminishing from 7%(2014) to 5% (2017E).
The Global Air travel market is drastically growing. Air travel growth (Revenue
Passenger Km: RPK) this year varies to Asian market in strength, approximately India
20%, China 12%, Within Europe 9%, Within Asia 8%, in contrast with the US growth RPK
which is good for 4%. Southwest Airlines Co. serving only domestic market could find
potential revenue by entering international travel market before global economy
recovery.
Renewed growth in international Cargo market. Since 2013 Cargo growth rate has been
positive, and it began to break through a 20-year average growth rate of 5% from 2014.
Southwest Airlines Co. has only 0.9% portion of revenue in the Cargo business even
decreasing over years.
From Profitability to Growth. Southwest Airlines Co., as of 2014, has $3 billion of Cash
and Short-term investment. Now is the best time to enter to global travel and cargo
market not to focus on just domestic market, in a situation that most airlines are coming
back to the US domestic travel market. To enter at the bottom of the global economy
cycle would guarantee safe margin and big success along the recovery of the global
market.
4. Figure 9. (LUV Southwest Airlines Co. Airlines Co. 10-K,
2015
Figure 10. Nasdaq LUV
Figure 11. Nasdaq LUV
Figura 12. Southwest Airlines Co. Annual report 2014
Business Description and Strategy
Southwest Airlines Company
Southwest Airlines Company operates Southwest Airlines, a major passenger airline that
provides scheduled air transportation in the United States and near-international
markets, was founded in 1967 and is currently headquartered in Dallas, Texas.
Southwest Airlines is the largest domestic flights operator in the United States.
Southwest Airlines reported a record net income of $1.1 billion and, excluding special
items, record net income of $1.4 billion in 2014. The company had 46,278 employees in
2014. (LUV Southwest Airlines Co. Airlines Co. 10-K, 2015).
Southwest Airlines Co. commenced service on June 18, 1971, with three Boeing 737
aircraft serving three Texas cities: Dallas, Houston, and San Antonio. The Company
ended 2014 serving 93 destinations in 40 states and 5 international countries. The
Company’s common stock is listed on the New York Stock Exchange (“NYSE”) and is
traded under the symbol “LUV.”
Properties (Assets)
Aircraft
Southwest operated a total of 665 Boeing 737 aircraft as of December 31, 2014, of which
98 and 14 were under operating and capital leases, respectively.
Ground facilities and Services
Southwest Airlines Co. either leases or pays a usage fee for terminal passenger service
facilities at each of the airports it serves, to which various leasehold improvements have
been made. The Company leases the land and structures on a long-term basis for its
aircraft maintenance centers, its flight training center at Dallas Love Field and its main
corporate headquarters building, also located at Dallas Love Field. The Company also
leases a warehouse and engine repair facility in Atlanta. As of December 31, 2014, the
Company operated seven Customer Support and Services call centers. The company also
invested in the oversight, design in modern, convenient air travel facilities and air
terminals at several airports.
Strategy
The company’s main strategy is being competitive and gaining market share on the
international market, since the ‘Wright Amendment’ is repealed (Appendix B).
Southwest Airlines Co. operations are designed to generate growth and increase value
through:
Commuter benefits - Point-to-point flights and neglecting major hubs.
Low unit costs - No meals are offered, customers have to pay for luggage,
therefore the planes are clean and stocked very quickly. The aircraft
turnaround time is reduced because of this.
Low maintenance cost - Southwest Airlines is only flying with Boing 737’s.
High employee satisfaction – Southwest Airlines never had a union strike,
which saves them millions compared to other airlines.
Rapid Rewards frequent flyer program - Contributing almost $400 million in
incremental year-over-year revenue in 2014, and approximately $700 million
cumulative since the inception of the new program in 2011.
Fleet modernization - Contributed approximately $500 million to earnings
before interest and taxes
5. Figure 13. Southwest Airlines Co. Annual report 2014
Figure 14. Unique city-pairs and real transport costs
Figure 15. Tax revenues and global supply chain jobs supported
AirTran Airlines integration completed - Produced approximately $500
million in net pre-tax synergies (excluding acquisition and integration costs)
Management & Governance
Management
Gary Kelly serves as the Chairman of the Board, President, and Chief Executive Officer at
Southwest Airlines. Under Gary's leadership, Southwest Airlines Co. has grown to
become the nation's largest airline in terms of originating domestic passengers carried.
A full overview of the executive management and leadership organization chart can be
found in Appendix C.
Corporate Governance
The Board of Directors of Southwest Airlines Co. has created Corporate Governance
Guidelines and has adopted these guidelines to further it’s goal of providing effective
governance of the Company’s business for the long-term benefit of the Company’s
Shareholders, Employees, and Customers. The Guidelines will be reviewed annually. The
main focus of Southwest Airlines Company corporate governance strategy can be seen
in the following areas:
Committees – Established Audit, Compensation, Executive, Nominating and
Corporate Governance Committee and Safety and Compliance Oversight
Committee. (Appendix ….)
Company Code of Ethics – Created a code of ethics for entire company.
Insider Trading Policy – Prohibits employees, board members and consultants
from purchasing or selling Southwest securities while in possession of
material nonpublic information about the company.
Direct Stock Ownership - The Board believes that, in order to align the
interests of Directors and Shareholders, Directors should have a financial
stake in the Company.
Industry Economic Overview and Competitive Positioning
Consumers (Travelers & Cargo)
An overall of 1% ($763 billion) of the world’s GDP is expected to be spent on air
transportation in 2015. The change of the economic cycle has driven accelerated growth
for air travel, achieving the best results in the last 20 years with a 6.1% growth YoY in
the last 3 years in RPK. (Appendix E) Overall passenger departures are expected to be
3,542 Million, a tendency growing from 5.8% in 2014 to 6.5% in 2015. The ton’s of cargo
freight are expected to grow from 49.3 million in 2013 to 54.2 million in 2015 increasing
gradually in average 4.03% YoY.
Economic Development & Government
As more cities are now connected, the capacity of air connections almost doubled since
20 years ago. Overall economic distance trading activities with reduced economic costs
have been improving in the last 5 years and employment as a determinant indicator of
economic development has increased in the sector to an estimate of 64.7 million ‘supply
chain’ jobs in year 2014. For the government the increase of performance of the airline
industry means more taxes are collected with a YoY growth in tax collection of 3.7%
expecting an end collection of taxes for 2015 at $116 billion. This is almost $5 billion
more than the collections in 2014, this represents on a 3 year average of 48% of the total
GVA of the Airline Industry. (Appendix F)
Direct employment and new hires are expected to accelerate in the 2015, with an
expectancy of reaching 2.5 million jobs for airlines. The productivity has also risen with
an average employee generating around 485,000 ATK
6. Figure 16. Fuel eddiciency and the price of jet fuel
Figure 17. Return on capital invested in airlines
Figure 18. Regions and Performance
Figure 19. Porter 5 Forces
Profits, Investments & Assets
Airlines rely on investment, the ROIC has been growing from 4.9% on 2013 to an
expected 7.5% by the end of 2015 providing a positive factor in the ROIC-WACC index
generating a value for the investors of $4.9 billion, EBIT will grow from 3.5% in 2013
to 6.9% in 2015 (Appendix F). The net post tax profits are expected to hit $29.3 billion
in 2015 a growth of 276% from 2013, the profit % of revenues is expected to reach
4% and profit per passenger has improved to almost $8.27 per passenger.
Corporate Governance
Assets (Fleet & Aircraft)
The investment for commercial airlines is expected to be around $180 billion which
accounts for 1,700 new aircraft deliveries in 2015. There are about 27,000
commercial aircraft in total which translates into 3,7 million seats available, more
aircraft available, new routes and more productivity is rising the load factor in the
industry estimating to achieve 80% by 2015. (Appendix G) The direct cost of
infrastructure has increasingly been transferred to the passenger; this cost has risen
in the last decade due to low competition and new entries on infrastructure
providers. The routing and airspace inefficiencies in Europe are adding costs up to $
2.9 billion to the industry and about $ 4.7 billion worth consumer cost.
Fuel and Oil cost Impact
Fuel is the major operating cost for airlines, however it has dropped from 33% in
2013 to 28.1% in 2015, the tendency is tied to cheap oil prices and is expected to
keep dropping. For 2015 the total amount spent on fuel is expected to be $191 billion
(Appendix H), price has dropped from $124.5 to $ 78 per barrel where fuel
consumption driven by new technologies and new fuel efficient aircraft are using 35
liters per each 100 RTK.
Regions & Performance
Overall the industry is performing with a tendency to grow their profits YoY as a
whole but there are interesting contrasts between regions, average revenue per
passenger is $205.37, with costs up to $ 197.10 and average profit of $8.27. Africa is
the weakest region with profit of $ 1.59 per passenger in contrast to North America
that is the best performing region with profit of $18.12 per passenger, margins of
7.5% and net profits expected to be $15.7 billion USD by the end of the year.
Competitive Positioning
Southwest Airlines has a very good performance among their industry competitors,
driven by their passenger approach and operations restricted to the Americas, fuel
management and efficiency program provide superior results in fuel cost in the
industry their business model has allowed them to remain as a strong competitor for
travelers in USA generating EBITDAR margins up to 19.20% one of the highest among
competitors. Almost 95% of this revenue is from their passenger transport service
and their cargo division can improve performance to capture more marketshare and
eventually revenue from this operations following market trends of growth.
Southwest Porter’s five forces show the high intensity of the competition in the
industry, rating 4 of 5 forces ‘High’ with the fifth ‘medium and rising’.
0
1
2
3
4
Threat of
Substitutes
Bargaining Power of
Buyers
Rivalry Among
Existing Competitors
Threat of New
Entrants
Bargaining Power of
Suppliers
Southwest Airlines
Porter 5 Forces Analysis
Source: Team Calculations
7. *as of December 31th 2014.
Southwest
Airlines Co.
United
Continental
Holdings, Inc.
Delta Air
Lines, Inc.
American
Airlines Group,
Inc.
JetBlue
Airways
Corporation
Alaska Air
Group, Inc.
Planes Total 665 691 809 983 203 196
Owned Aircraft 553 451 618 510 137 147
Leased Aircraft 112 240 191 473 66 49
Average Aircraft Age 13.8 13.4 17.1 12.0 7.8 9.3
Employees 46,278 84,000 80,000 113,300 13,280 12,739
Load Factor (%) 82.50 83.60 84.70 82.00 84.00 85.10
Fuel Cost (Avg. liters/gallons) 2.94 2.99 3.00 2.91 2.99 3.02
Fuel Consumed (gallons) 1,801 3,905 3,893 4,332 639 469
Airline Revenue (In Millions) 18,605 38,901 40,362 42,650 5,817 5,368
Passengers 17658 33762 34954 37124 5343 4579
Cargo 175 938 934 875 0 114
Other 772 4201 4474 4651 474 675
Total Expenses (In Millions) 16,266 36,137 35,440 37,593 5,279 4,394
EBITDAR (In Millions) 3,572 5,326 6,768 7,819 982 1,378
EBITDAR Margin % 19.20 13.69 16.77 18.33 16.88 25.67
Revenue Analysis % LUV UAL DAL AAL JBLU ALK
Total LTM Revenue in Billion 19.5 38.1 40.6 41.5 6.3 5.5
Africa and Middle East 0.0 4.4 0.3 1.8 0.0 0.0
Americas 100.0 66.4 74.7 84.2 100.0 100.0
Asia/Pacific 0.0 14.5 9.5 3.4 0.0 0.0
Europe 0.0 14.8 15.4 10.6 0.0 0.0
Region Unespecified 0.0 0.0 0.0 0.0 0.0 0.0
Passenger 94.91% 86.79% 86.60% 87.04% 91.85% 85.30%
Cargo 0.94% 2.41% 2.31% 2.05% 0.00% 2.12%
Other 4.15% 10.80% 11.08% 10.91% 8.15% 12.57%
Key Financials and Ratios
Profitability % Southwest (SOUTHWEST AIRLINES CO.) Delta (DAL)
Years 2014 2013 2012 2014 2013 2012
Gross Margin 24.42 19.37 16.65 20.55 18.07 16.68
SG&A to Sales 11.85 12.01 11.93 4.23 4.26 4.34
Operating Margin 12.57 7.36 4.72 11.85 8.43 6.98
Asset Turnover 0.94 0.93 0.93 0.71 0.72 0.83
Net Margin 6.13 4.28 2.46 1.64 28.00 2.75
Return on Assets 5.77 3.99 2.30 1.16 20.28 2.29
Return on Equity 16.16 10.57 6.07 6.44 221.61 --
Table 1.
Southwest Airlines Co (LUV) has outperformed Delta Airlines (DAL) in sheer numbers in
terms of profitability ratios. Southwest Airlines Co. has increased their gross margin by
approx. 8 points in the last two financial years whereas Delta has increased by 3.5 points.
Southwest Airlines Co. has a very high SG&A to Sales ratio compared to Delta revealing that
their administration an employee salary are much higher than the delta Airlines. Southwest
has a higher employee satisfaction which is also due high employee salary. Even though
both the companies have similar operating margin and asset turnover Southwest Airlines
Co. has a very high net return on assets than Delta, this is mainly due to the high net margin,
which was in turn driven by its lower operating expenses, which even offset the higher
SG&A to sales ratio. Notably Delta has posted a huge ROA and ROE of 20.28 and 221.61 for
the year 2013 we will see this abnormal variation in the later section ROE decomposition.
0.00
5.00
10.00
15.00
20.00
25.00
2014 2013 2012
Southwest Delta
Figure 20. Return on Assets
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2014 2013 2012
Southwest Delta airlines
Figure 21. Gross Margin
8. Figure 22. Liquidity Ratios - South West
Figure 23. Liquidity – Delta
Figure 24. ROE
Figure 25. Delta - Income tax provision/benefit
Liquidity
Liquidity Southwest Delta
Years 2014 2013 2012 2014 2013 2012
Current Ratio 0.74 0.79 0.91 0.74 0.68 0.62
Quick Ratio 0.69 0.70 0.81 0.69 0.61 0.55
Cash Ratio 0.50 0.56 0.64 0.26 0.28 0.28
Table 2.
Quick ratio is one of the main parameters to consider for the airline industry since they
are capital intensive and have significant amount of debt hence higher quick ratio is
favorable. Delta relatively had a stable and increasing quick ratio. It is alarming that
Southwest Airlines Co.’s quick ratio drops at a very high rate. The Figure 22 shows that
Southwest Airlines Co. started having lower quick ratio from 2011. This is mainly due to
the fact of Air Tran acquisition which resulted in higher current liability than the current
assets to Southwest Airlines Co.. The company’s plan for expansion in the years can drive
down their quick ratio still further but they have bought back considerable amount of
Shares on year 2014 (LUV Southwest Airlines Co. Airlines Co. 10-K, 2015) to refloat in to
the market and maintain a stable liquidity.
ROE decomposition/DuPont analysis
ROE Southwest Delta
Years 2014 2013 2012 2014 2013 2012
Net Profit Margin (%) 6.13 4.28 2.46 1.64 28.00 2.75
Asset turnover (%) 0.94 0.93 0.93 0.71 0.72 0.83
Financial Leverage 2.80 2.65 2.64 5.55 10.93 --
ROE (%) 16.16 10.57 6.07 6.44 221.61 --
Table 3.
Southwest Airlines Co. has a better ROE than Delta has. Even though Delta’s financial
leverage is better than Southwest Airlines Co. they were not able to achieve very high
ROE because of the fact that Southwest Airlines Co. has a higher net profit margin and
asset turn over which offset the financial leverage. The financial leverage of 10.93 and
5.55 for years 2013 and 2014 are high for Delta when compared with the Southwest
Airlines Co. but taken in to the fact the size of company and capital required, Delta needs
to fund its operations with debt than equity.
For the year 2013 Delta has posted a very huge number of 221.61 as its ROE this is way
above any industry standard. The main reason for this difference is highlighted in the
Figure 24. Delta got around $ 8013 million revenues approx. $ 8 billion as deferred tax
benefit for the year 2013. As the deferred tax benefit was directly equable to
shareholders income this resulted in a very huge ROE and ROA for Delta on year 2013.
This clearly shows that Delta has been underestimating their financial statements /
followed a big bath strategy by keeping a higher margin on the cost of goods sold for
warranty repair and other costs. One of the other reasons of higher income tax benefit
is because of the previous losses posted by the Delta in the previous financial years (LUV
Southwest Airlines Co. Airlines Co. 10-K, 2015).
0.00
2.00
4.00
2014 2013 2012 2011 2010
Current Ratio Quick Ratio Cash Ratio
0.00
0.50
1.00
2014 2013 2012 2011 2010
Current Ratio Quick Ratio Cash Ratio
0.00
50.00
100.00
150.00
200.00
250.00
2014 2013 2012
Southwest Delta
2014 2013 2012 2011 2010 2009 2008
In Millions (413) 8,013 (16) 85 (15) 344 119
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
9. Figure 26. Dividend Payout ratio
Common Size Southwest Delta
Years 2014 2013 2012 2014 2013 2012
Assets
Total Current Assets 21.8% 23.0% 22.7% 31.2% 23.8% 29.8%
Cash & Short-Term Investments 14.8% 16.3% 16.0% 8.1% 6.6% 8.4%
Cash Only 6.3% 7.0% 5.5% 3.9% 5.0% 6.3%
Accumulated Depreciation 40.7% 38.4% 36.2% 17.3% 13.1% 14.9%
Net Property, Plant & Equipment 70.8% 69.2% 68.6% 40.5% 36.8% 46.5%
Liability and Equity
Provision for Risks & Charges 0.8% 0.7% 1.6% 28.0% 20.9% 35.9%
Retained Earnings 36.7% 33.2% 31.0% 6.4% 5.1% -16.6%
Additional Paid-In Capital 6.5% 6.4% 6.5% 24.0% 23.5% 31.6%
Equity and dividend analysis
Per Share Southwest Delta
Years 2014 2013 2012 2014 2013 2012
EBIT (Operating Income)
per Share
3.36 1.81 1.06 5.64 3.70 3.01
EPS (recurring) 2.28 1.20 0.48 3.36 12.21 1.60
EPS (diluted) 1.64 1.05 0.56 0.78 12.28 1.19
Dividends per Share 0.22 0.13 0.03 0.30 0.12 0.00
Table 4.
EBIT and EPS analysis share a key new trend for the competitive analysis. Even though Delta
was not performing better on other profitability and other financial ratio’s like ROE they have
outperformed Southwest Airlines Co. in EBIT per share and EPS for the past three years.
Therefore Delta is performing better on their equity part compared to southwest. The lower
rate of EBIT, EPS for Southwest Airlines Co. is also due to the fact that much of the Southwest’s
debt is financed by equity.
Figure 26 shows the dividend payout ratio for the Southwest Airlines Co. and Delta. Southwest
Airlines Co. have been relatively steady in satisfying their shareholders with constant and
increasing dividend payout in the recent years. But Delta has outperformed Southwest Airlines
Co. during FY - 2014 with a higher dividend payout ratio this relates to their overall net income
on FY13 with EPS of 12.21 (higher EPS because of 8 billion USD as deferred tax benefit). Delta
is expected to yield a better EPS and dividend in the future because of their current high
liquidity and the benefit of not paying the future income taxes.
Common Size Analysis
Table 5.
The common size analysis of the balance sheet two company reveals the percentage
distribution of assets and liabilities between the two companies. Southwest Airlines Co. and
Delta have a similar structure of percentage of the total current assets. Southwest Airlines Co.
has a higher percentage of the of non-operating asset (cash and short term investments)
revealing that they are running high on cash and short term investments which are good to
pay out the short term debt. Southwest Airlines Co. has a very high percentage of accumulated
depreciation of 40.7 % for FY14 compared to 17.3% for Delta which is due to very high
percentage of Net Property, Plant & Equipment of their total assets (approx. 70.8% for FY14).
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
2014 2013 2012 2011 2010
Delta Southwest
10. Figure 27. Fuel and Oil Expenses of Southwest
Figure 28. Fuel and Oil Expenses of Delta
This basic difference occurs because of the capital structure of the company. Southwest
Airlines Co. has invested a lot of capital in purchasing the flights therefore higher
depreciation whereas DAL major fleet is leased (LUV Southwest Airlines Co. Airlines Co.
10-K, 2015).
The common size analysis of provision for risk and charges reveal different trends for
both the company. Southwest Airlines Co. has a much lower provision for risk and
charges than the industry standard, since Southwest Airlines Co. is entering the new
international market it is better to have a higher provision to mitigate risk and charges.
Delta on the other case has a very high provision for Risks and Charges implying they
have parked funds there by following big bath strategy.
Operating Efficiency
Operating Efficiency Southwest Delta
Years 2014 2013 2012 2014 2013 2012
Receivables Turnover (x) 47.46 47.13 54.16 16.64 22.80 22.52
Inventory Turnover (x) 34.76 30.50 32.74 33.36 29.56 43.96
Payables Turnover (x) 20.34 12.12 13.23 12.89 13.44 16.03
Table 6.
Southwest Airlines Co. payable turnover ratio has been considerably increased in the
last year showing that they have paid their suppliers at a faster rate than Delta for FY14.
Southwest Airlines Co. has a very higher turnover ratio than Delta this is mainly due two
to couple of factors. First reason is Southwest Airlines Co. is operating more on cash and
second it has a lower amount of account receivable. Delta on the other hand has a very
low Receivables turnover ratio which clearly outlines Southwest Airlines Co. is
performing better in recovering the account receivable and keep them under limits than
Delta does.
Industry Metrics and Special Financials
Fuel and Oil expenses
Fuel and Oil expenses are a significant part of the airline companies’ income statement.
According to Factset data, Southwest Airlines Co. airlines reported $ 6,120 million for
fuel and oil expenses in 2012. However, it started to decrease in the 2 years following
2012 and reached $ 5,293 million. Since 2012 Southwest Airlines Companies’ Fuel & Oil
Expenses were decreasing with nearly $ 827 million. Part of this change was caused by
the jet fuel market price decrease from $ 2.94 to $ 1.80 per gallon. Due to the ‘Fuel
Hedging program’ Southwest Airlines Co. fuel’s price was decreased only up to $ 2.92 in
2014.
Another driver of change was increased capacity of airplanes, which is measured by
ASM’s. According to Wikipedia “ASM (Available Seat Miles) is a measure of an airline
flight's passenger carrying capacity. It is equal to the number of seats available multiplied
by the number of miles flown” (Wikipedia, 2015). Furthermore, according to Southwest
Airlines Co. 10-k “Fuel efficiency improved slightly due to the Company’s fleet
modernization efforts, as fuel gallon consumed decreased by 0.9 percent, compared
with 2013. (LUV Southwest Airlines Co. Airlines Co. 10-K, 2015). Southwest Airlines
airlines has the lowest F&O expenses per ASM in the U.S. airline market.
In contrast, Delta airlines reported in its 10-k, a significant increase in Fuel & Oil
Expenses. The following expenses have increased from $ 10,150 million in 2012 to $
11,668 million in 2014.
11. Figure 29. What AirTran did for Southwest
Figure 30. Southwest Balansheet
Such a big difference between two airlines’ absolute numbers are caused by a difference
in number of flights and destinations. Southwest Airlines Co. operates on an average of
3,600 flights a day, serving 94 destinations. However, Delta performs international
flights, serving 326 destinations across 59 countries and has an average of 5,400
flights per day, which is almost twice as big as Southwest Airlines Co.
A better measure for fuel efficiency is ‘fuel and oil expenses per ASM’. According Factset’
statistics of the last three years, the average expense of Delta per ASM in 2014 was $
4.87 million while the same number for Southwest Airlines Co. was equal to $ 4.04
million.
Aircraft maintenance costs
The second significant part of operational expenses are the Aircraft maintenance costs.
According to the Factset statistics, Southwest Airlines Co. managed to decrease its
maintenance fees by roughly 14% for the last 2 years. The aircraft maintenance expense
for 2014 was $ 978 million ($ 0.85 million per ASM).
According to Southwest Airlines Companies’ 10-k report, the following significant
decrease in maintenance costs are caused by completion of the “Evolve” program, which
is an aircraft interior retrofit program. On top of that, “the remaining decrease was
attributable to lower engine and avionics repair expense as a result of the 717-200
aircraft transitioning out of the Company's fleet” (LUV Southwest Airlines Co. Airlines
Co. 10-K, 2015).
In contrast, Delta aircraft maintenance expenses were $ 1,828 million and 1,852 million
in 2013 and 2014 respectively. Delta’s expenses are twice as big because it holds 100
more airplanes in service. (Current Air fleet: Southwest Airlines Co. – 679; Delta – 809)
Transactions costs
In 2011, Southwest Airlines Co. decided to acquire AirTran Airways – an American low-
cost airline headquartered in Dallas, Texas. AirTran executed 700 flights per day, mostly
in eastern and Midwestern United States. The acquisition purpose was strategic. It
allowed Southwest Airlines Co. to enter in key markets of the US and offer their
customers more low-fare destinations.
According to the New York Times: “Southwest Airlines Co. had clamored to get access
to markets that it had once shunned, especially as it sought out business travelers who
were asking for flights to the main airports in New York (La Guardia) and Washington”
(Mouawad, A., NYT, 2010). The deal appeared to be very successful as Southwest Airlines
Co.’s network expanded by 25% up to 70 airports and started its first international flights
in the Caribbean and Mexico.
According to Factset the Southwest Airlines Co. paid “$ 1 billion in cash and stock plus
assumption of debt. Under the agreement Southwest Airlines Co. acquired each share
of AirTran for US$ 3.75 and issued 0.321 for a share. After signing the ‘Federal Aviation
Administration accepted agreement’, AirTran announced Southwest Airlines Co. as an
owner of 78% outstanding shares.
The deal was closed in May 02’ 2011. The current transaction is reflected on the
Southwest Airlines Co. balance sheet of 2011. More specifically, $ 970 million of goodwill
was recorded. Cash was decreased by $ 432 million and flight equipment was increased
by $ 2,078 million.
12. Figure 31. Southwest Aircraft Landing Fees
Figure 32. Delta Aircraft Landing Fees
Figure 33. RPM
Figure 34. PRASM
Aircraft Landing Fees
Landing fees are special charges paid by airlines to an Airport holding company. Some
airports charge on-time fees for landing and exclude check-in facilities and use of the
gates. Landing fees are gathered as a revenue source to improve Airport
infrastructure. Some airports offer landing free of charge to attract more airlines,
some of them are subsidized by local governments.
According to the Factset Southwest Airlines Co. reported $ 1,111 million landing fees
and $ 0.85 million per ASM in 2014, while Delta reported $ 1,442 million and $327
million per ASM. In order to compare how these two companies operate with landing
fees, we should include the number of destinations served in calculations.
So landing fees per ‘destination served ratio’ for Southwest Airlines Co. equals to $
11.9 million while for Delta the ratio equals to $ 4.40 million. Therefore, Delta
negotiates better with airports’ management and chooses cheaper options to land
their airplanes.
RPM & PRASM
RPM or ‘Revenue Passenger Mile’ is an industry specific measure for an airline which
shows “One paying passenger flown one mile. Often referred to as the airline
industry’s measure of “traffic”.” (Source: Southwest Airlines Co. Airline Glossary).
Southwest Airlines Co. reported 108,035 annual RPM in 2014. RPM growth was
relatively steady for the last 4 years. The biggest annual growth was reported after
the AirTran Acquisition in 2011, when RPM was increased by 25%, from 78,047 to
97,583.
The same RPM measure for Delta was defined as 202,925 in 2014, while industry
average was 126,700. According to number Southwest Co. has a lower RPM (Traffic),
but due to operating cost savings it retains higher operating margins.
The second relevant industry specific measure is ‘PRASM’ (Available Seat Kilometers/
Miles). As Southwest Airlines Co. defines: it shows “Passenger Revenue per available
“one seat (empty or full) flown one mile” (Source: Southwest Co. Airline Glossary).
For the last 5 years (2010-2014) the Southwest Co. airlines managed to increase
PRASM cumulatively by 1.81 cents which is equivalent to cumulative percentage
increase by 15.51%.
Delta’s 10-k reports that PRASM increased 3% on 3% higher capacity. In 2014 Delta
reported 14.58 cents revenue per ASM, while the industry’s average is 12.78 cents.
Based on the following statistics, Southwest Airlines Co. airlines has 1.11 cents lower
revenues per passenger and per mile than Delta, but still manages to have 0.7 cents
higher revenues than the total industry’s average. Furthermore its revenue growth in
2014 was 5.07%, which is the higher rate than industry average and Delta also.
(Source: MIT Global Industry airline program – Airline data project).
13. Figure 35. Capital Leases
Figure 36. Operating Leases
Figure 37. S&P Rating
Figure 38. Moody’s Rating
Lease structure - Capital vs Operating
According to the Southwest Airlines Co. 10-K report: “The Company has
contractual obligations and commitments primarily with regards to future
purchases of aircraft, payment of debt, and lease arrangements. For aircraft
commitments with Boeing, the Company is required to make cash deposits
toward the purchase of aircraft in advance. These deposits are classified as
Deposits on flight equipment purchase contracts in the Consolidated Balance
Sheet until the aircraft is delivered, at which time deposits previously made are
deducted from the final purchase price of the aircraft and are reclassified as Flight
equipment“(Southwest Airlines Co. 10-K, 2014).
Generally, leases can be divided by capital and operational leases. Capital leases
are the agreements with the supplier, while asset owners are the users of product
and product, this is reflected on their balance sheet with its purchasing value.
Operational leases retain under supplier ownership until the lease agreement will
be completed.
Southwest Airlines Co. Reports $ 5,155 million as an operating lease and $ 334
million as a capital lease in 2014. While delta reports $ 12.741 million as an
operating lease and $ 398 million as a capital lease. Simple math helps us to
define that Delta has more concentration of operating leases and prefer to not
reflect aircraft on its balance sheet. (97% of leases are operational) The same
ratio is lower for Southwest Airlines Co., however the general attitude can be
defined as the same. (93% of leases are operational).
Risks Analysis
Credit Analysis
For the Credit Analyst of Southwest airlines Co., we found that this is the only one
US airline that has been graded for all the three credit rating agencies.
Standard & Poor’s (or S&P)
The last report of S&P is the one of 2014, where Southwest airlines Co. improved
their rating from BBB- to BBB. In the report of the S&P they state that the
explanation of this increase is due to the following “Crucial factors: improving
financial conditions, expected increase in earnings, cash flow, credit measures
supported by favorable conditions in the US airline industry, and revenue and
cost synergies from the AirTran Holdings acquisition”. (10K, LUV, 2014)
Moody’s
According to the report of Moody's Investors Service, they “Assigned a Baa1
rating to Southwest Airlines Co.'s new $500 million of senior unsecured notes due
in November 2020.” (2015). This positive classification is due to Southwest
airlines Co. creating a plan to have good liquidity for the next years, having a Debt-
to- EBITDA of 1.5 times and EBIT-to-interest of 12 times in 2015. According to
these values, Southwest airlines Co. is improving its performance in terms of
operations, knowing that demand for USA domestic travel continues to increase.
In the case of a decrease in the number of travels during 2016, according to the
previous values, Southwest airlines Co. is going to be able to fight this decrease.
Another important point to mention is that according to Moody’s, Southwest
Airlines Co. “anticipates that the average spot price of jet fuel Will Remain well
below $ 2.00 per gallon in 2016, removing jet fuel as a pressure point on earnings
in 2016”. (2015)
14. Figure 39. Fitch Rating
Figure 40. Passenger Revenues
Figure 41. Cargo / Sales (%)
Figure 42. Airline profitability improves when economy strong
Fitch
As we can see in the rating of Fitch, Southwest Airlines Co. has increased their
classification from BBB to BBB+, mainly because of their credit profile, followed
by their strong and competitive position in the US domestic market, and their
strong brand. This is strongly supported because of the payment of their debts,
the integration of AirTran, and having good credit metrics. As it states in the Fitch
report, they “Expect Southwest Airlines Co. to continue to generate solid free
cash flow (FCF), exhibit stable or modestly declining leverage, and maintain its
substantial financial flexibility.” (2015) Southwest's investment-grade credit
ratings are also supported by its competitive position in the U.S. domestic market,
its strong brand, and its sizeable base of high-quality unencumbered assets.
Projections and Estimates. LUV vs. Delta
Projections and Estimates
These projections are generated by the guidance provided by the company and
the consensus of analysts starting from the average growth rate of past revenues.
The estimates could be used to forecast the company’s future business and
financial trends, and investors would take advantage of predicting future stock
prices. The key segments below are comprised with the two companies that are
a regional airline Southwest Airlines Co. and an international airline Delta to find
out performances along with a different business strategy.
Product Segment (Passenger and Cargo)
Due to the worldwide economic development and low oil prices, the airline
economic cycle has driven accelerated growth for air travel. In particular, the US
air travel market with the strong economic recovery of the US has achieved the
best results in the last two decades, recording over 7% net profit margin. Thus,
the increasing trend in passenger revenues is estimated to continue. Southwest
Airlines Co. would take more benefit from the US central economy than Delta,
because Delta’s revenue is dispersed internationally, and vice versa (Figure 41).
Southwest Airlines Co. and Delta are reducing the portion due to the uncertainty
of global economy and profitability of passenger market. Cargo/Sales of
Southwest Airlines Co. stays below 1%. However, Cargo is expected to achieve
the best growth ratio since 2010 due to the re-activation of the economy. For the
long-term perspective, Southwest Airlines Co. need to expand cargo business in
case of global economy boom (Figure.).
Table 7.
15. Figure 43. Opex / Ask
Figure 44. Cost typicaly passed through to prices
Figure 45. Net Profit Margins
Figure 46. Longer-term impact of lower fuel prices
not clear
Figure 47. Free Cash Flows
Industry Metrics (Revenue and Cost)
Total Revenue/ASK is remained at the similar level of the two companies. That means the
revenue structure is stable and increasing the number of passengers is only way to
increase revenue. In the meanwhile, Southwest Airlines Co. has been successfully reducing
operating expenses, so it no longer reduce it, while Delta should keep reducing cost
(Figure.). This shows how Southwest Airlines Co. should develop its business for the future.
To make organic growth and profit, reducing cost no longer benefit, so Southwest Airlines
Co. is necessary to increase new routes and airplanes domestically and internationally
(Figure 43).
Table 8.
I/S (Profit Margin)
Southwest Airlines Co. had recorded highest growth in Net Income for 2014 and 2015(E)
because of the historically low oil price that reduced operating cost over $400 M for 2014
and of the AirTran integration effect completing the transaction in 2015. However, the
revenue trend of Southwest Airlines Co. as well as Delta has been steady and are going to
still steady because market growth is restricted by global economy and competition of
domestic market. Thus, the increase in the Net Income not based on the organic growth
of revenue would be possible to cease with in short-term (Figure.). Furthermore, the
historically lowest oil price obviously helps all airline industry in the short and mid-term
reducing jet fuel cost significantly. However, low oil price means the recession of global
economy, so the effect of low oil price would not contribute much to the industry in the
long run. Therefore, the increasing trend in Net Income and Net profit margin after 2015
will be expected to be diminished (Figure 45).
Table 9.
Cash Flow (Free Cash Flow)
Market consensus give Delta high score in predicting Free Cash Flows, which means Delta
has more potential growth than Southwest Airlines Co.. This results from the different
business models between two companies. Southwest Airlines Co. has been almost 100%
focused on the regional air travel market based on the North America, while Delta has
pursued global market both air travel and Cargo business. So, when global business cycle
is growing, Delta would generate more cash than regional airlines. Analysts are expecting
global economy will be gradually recovered for the future that’s why Delta is better off on
the assumption (Figure 47).
Table 10.
16. Figure 48. EPS
Figure 49. P / E ratios
Figure 50. Delta’s Revenue by Country
Figure 51. Delta’s Revenue by Region
Figure 52. Delta’s Revenue by Economy
Per Share (EPS)
Since 2013 the EPS of Southwest Airlines Co. has explosively grown from $1.12 to $3.54.
Along with the increase of EPS, the stock price also has increased from around $10 to $45.
Again, what we have to carefully observe is whether this radical EPS growth has been
mostly generated by its Revenue or more related to cost reduction. As mentioned above,
over half of operating income has owed the historically low oil price. Market consensus
sees that oil price would rebound from 2016 due to recovery of global economy, and the
growth rate of EPS will be diminished.
Table 11.
Valuation (P/E ratio)
Price to Earnings ratio increase when market has strongly positive expectation to the
future performance of the company. Conversely, P/E ratio could decrease when the
company makes continuous earning surprises. In 2015, Southwest Airlines Co. is making
continuous earning surprises, P/E ratio decreases. However, analysts are expecting P/E
ratio will have decreased after 2015 due to the steady increase in EPS.
Table 12.
Consensus of Analyst. (Target Price)
Now, the Southwest Airlines Co. target price formed by analysts is $53.13 upside potential
18% from the current price $45.89. Since 2013 the green portion, Buy plus Overweighting
ratings, has been increased to 72% from 44%, while Holding ratings, yellow portion, and
Underweight plus Selling ratings, red portion, have been reduced respectively to 17% and
11% from 38% and 19%. This shows market consensus view Southwest Airlines Co. very
positive to making future performance. And the distance between target price and current
price gets closer. That means new higher target prices would come up with.
Figure 53. Flow of Target Price
17. Appendix A Corporate Governance strengths
Company Code of Ethics
Southwest Airlines Code of Ethics sets forth the expectation that their Employees, Board members, and certain business associates
comply with the law, both in letter and in spirit, and specifically addresses matters such as confidentiality, insider trading, competition
and fair dealing, payments to government personnel, conflicts of interest, corporate opportunities, safeguarding of Company property,
and recordkeeping.
Insider Trading Policy
Southwest Airlines Insider Trading Policy prohibits their Employees, Board members, and consultants as well as related persons from
(i) purchasing or selling Southwest securities while in possession of material nonpublic information about the Company, (ii) purchasing
or selling securities of another company while in possession of material nonpublic information about that company that has been
acquired while in the course of performing services for the Company, and (iii) communicating material nonpublic information about
the Company or about other companies with which they do business to others who may trade based on the information.
Auditing Procedures
Southwest Airlines also employs robust auditing procedures to analyze and monitor business activities, which further enhance our
ability to maintain high ethical standards. They continually review their systems to provide transparency and accountability, and they
update their corporate governance policies when needed.
DirectStockOwnership
The Board believes that, in order to align the interests of Directors and Shareholders, Directors should have a financial stake in the
Company. Each Director who has served on the Board for a minimum of at least two years should beneficially own a minimum of
1,000 shares of Southwest common stock. The Board will evaluate whether exceptions should be made for any Director on the basis
of financial hardship.
Appendix B The Wright Amendment
“The Wright Amendment Section 29 of the International Air Transportation Competition Act of 1979, as amended (commonly known
as the “Wright Amendment”), prohibited the carriage of nonstop and through passengers on commercial flights between Dallas Love
Field and all states outside of Texas, with the exception of the following states (the “Wright Amendment States”): Alabama, Arkansas,
Kansas, Louisiana, Mississippi, Missouri, New Mexico, and Oklahoma. Originally, the Wright Amendment permitted an airline to offer
flights between Dallas Love Field and the Wright Amendment States only to the extent the airline did not offer or provide any through
service or ticketing with another air carrier at Dallas Love Field and did not market service to or from Dallas Love Field and any point
outside of a Wright Amendment State. In other words, a Customer could not purchase a single ticket between Dallas Love Field and
any destination other than a Wright Amendment State. These restrictions did not apply to flights operated with aircraft having 56 or
fewer passenger seats. The Wright Amendment also 17 did not restrict the Company’s intrastate Texas flights or its air service to or
from points other than Dallas Love Field.
In 2006, the Company entered into an agreement with the City of Dallas, the City of Fort Worth, American Airlines, Inc., and the DFW
International Airport Board, pursuant to which the five parties sought enactment of legislation to amend the Wright Amendment.
Congress responded by passing the Wright Amendment Reform Act of 2006, which immediately repealed the original through service
and ticketing restrictions by allowing the purchase of a single ticket between Dallas Love Field and any destination (while still requiring
the Customer to make a stop in a Wright Amendment State), and reduced the maximum number of gates available for commercial air
service at Dallas Love Field from 32 to 20. The Wright Amendment Reform Act also provided for the repeal, on October 13, 2014, of
the Wright Amendment federal flight restrictions at Dallas Love Field, for travel to destinations within the 50 States and to the District
of Columbia. Accordingly, the Company became, and remains, authorized to fly to any U.S. destination from Dallas Love Field unless
such destination is restricted or otherwise limited by law. Nonstop international service to or from Dallas Love Field will continue to
be prohibited. The Company currently operates out of 16 gates it leases at Dallas Love Field. As discussed further in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in January 2015, the Company announced a long-term
sublease agreement that will transfer usage of two additional gates, giving the Company 18 gates at Dallas Love Field.” (LUV Southwest
Airlines Co. Airlines Co. 10-K, 2015
19. Appendix D – Glossary of Airline Industry Terminology
RPK= Revenue Passenger Km
FTK= Freight Tonne Km
ATK= Available Tonne Kilometer
ASK= Available Seat Kilometer
GVA = Gross Value Added (firm level GDP)
ROIC= Return on invested Capital
WACC= Weighted Average Cost of Capital
EBIT= Earnings Before Interest and Tax
YoY= Year on Year.
Appendix E – Airline Industry performance
Appendix F – Tax Collection for Government
Appendix G – Airline Industry Investments and Profits
Appendix H – Worldwide Aircraft Fleet, departures and load
factors.
Appendix I – Fuel Spend and Efficiency
20. Appendix J
Balance Sheet
Years 2014 2013 2012 2014 2013 2012
Assets Southwest airlines Co. Delta airlines
Cash & Short-Term Investments 2988 3152 2970 4383 3925 3749
Cash Only 1282 1355 1024 2088 2966 2791
Total Short Term Investments 1706 1797 1946 2295 959 958
Short-Term Receivables 365 419 332 3222 1609 1693
Inventories 342 467 469 852 1063 1023
Other Current Assets 709 418 456 4008 3054 1807
Total Current Assets 4404 4456 4227 12465 9651 8272
Net Property, Plant & Equipment 14292 13389 12766 21929 21854 20713
Construction in Progress 621 453 -- 617 -- --
Leases 214 -- -- 1141 1296 1381
Other Property, Plant & Equipment 566 764 -- -- 381 253
Accumulated Depreciation 8221 7431 6731 9340 7792 6656
Total Investments and Advances 48 189 347 118 -- --
Intangible Assets 1333 1136 1108 14397 14452 14473
Net Goodwill 970 970 970 9794 9794 9794
Net Other Intangibles 363 166 138 4603 4658 4679
Other Assets 123 175 148 892 1303 1092
Total Assets 20200 19345 18596 54121 59394 44550
Liabilities & Shareholders' Equity
Accounts Payable 123 1247 1107 2622 2300 2293
Income Tax Payable 163 -- -- -- 673 585
Other Current Liabilities 5379 3800 3272 13041 9632 8765
Accrued Payroll 325 161 634 2266 1926 1680
Miscellaneous Current Liabilities 5054 3639 2638 10775 7706 7085
Total Current Liabilities 5923 5676 4650 16879 14152 13270
Long-Term Debt 2434 2191 2883 8561 9795 11082
Provision for Risks & Charges 169 138 289 15138 12392 16005
Deferred Tax Liabilities 3259 2934 2884 -- 7142 2047
Other Liabilities 1640 1070 898 4730 4270 4277
Other Liabilities (excl. Deferred Income) 1413 842 835 2128 1711 1649
Deferred Income 227 228 63 2602 2559 2628
Total Liabilities 13425 12009 11604 45308 47751 46681
Common Equity 6775 7336 6992 8813 11643 -2131
Common Stock Par/Carry Value 808 808 808 0 0 0
Additional Paid-In Capital/Capital Surplus 1315 1231 1210 12981 13982 14069
Retained Earnings 7416 6431 5768 3456 3049 -7389
Treasury Stock -2026 -1131 -675 -313 -258 -234
Total Shareholders' Equity 6775 7336 6992 8813 11643 -2131
Total Equity 6775 7336 6992 8813 11643 -2131
Total Liabilities & Shareholders' Equity 20200 19345 18596 54121 59394 44550
21. Balance Sheet Common Size
Years 2014 2013 2012 2014 2013 2012
Assets Southwest airlines Co. Delta airlines
Cash & Short-Term Investments 14.8% 16.3% 16.0% 8.1% 6.6% 8.4%
Cash Only 6.3% 7.0% 5.5% 3.9% 5.0% 6.3%
Total Short Term Investments 8.4% 9.3% 10.5% 4.2% 1.6% 2.2%
Short-Term Receivables 1.8% 2.2% 1.8% 6.0% 2.7% 3.8%
Inventories 1.7% 2.4% 2.5% 1.6% 1.8% 2.3%
Other Current Assets 3.5% 2.2% 2.5% 7.4% 5.1% 4.1%
Total Current Assets 21.8% 23.0% 22.7% 23.0% 16.2% 18.6%
Net Property, Plant & Equipment 70.8% 69.2% 68.6% 40.5% 36.8% 46.5%
Construction in Progress 3.1% 2.3% -- 1.1% -- --
Leases 1.1% -- -- 2.1% 2.2% 3.1%
Other Property, Plant & Equipment 2.8% 3.9% -- -- 0.6% 0.6%
Accumulated Depreciation 40.7% 38.4% 36.2% 17.3% 13.1% 14.9%
Total Investments and Advances 0.2% 1.0% 1.9% 0.2% -- --
Intangible Assets 6.6% 5.9% 6.0% 26.6% 24.3% 32.5%
Net Goodwill 4.8% 5.0% 5.2% 18.1% 16.5% 22.0%
Net Other Intangibles 1.8% 0.9% 0.7% 8.5% 7.8% 10.5%
Other Assets 0.6% 0.9% 0.8% 1.6% 2.2% 2.5%
Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Liabilities & Shareholders' Equity
Accounts Payable 0.6% 6.4% 6.0% 4.8% 3.9% 5.1%
Income Tax Payable 0.8% -- -- -- 1.1% 1.3%
Other Current Liabilities 26.6% 19.6% 17.6% 24.1% 16.2% 19.7%
Accrued Payroll 1.6% 0.8% 3.4% 4.2% 3.2% 3.8%
Miscellaneous Current Liabilities 25.0% 18.8% 14.2% 19.9% 13.0% 15.9%
Total Current Liabilities 29.3% 29.3% 25.0% 31.2% 23.8% 29.8%
Long-Term Debt 12.0% 11.3% 15.5% 15.8% 16.5% 24.9%
Provision for Risks & Charges 0.8% 0.7% 1.6% 28.0% 20.9% 35.9%
Deferred Tax Liabilities 16.1% 15.2% 15.5% -- 12.0% 4.6%
Other Liabilities 8.1% 5.5% 4.8% 8.7% 7.2% 9.6%
Other Liabilities (excl. Deferred Income) 7.0% 4.4% 4.5% 3.9% 2.9% 3.7%
Deferred Income 1.1% 1.2% 0.3% 4.8% 4.3% 5.9%
Total Liabilities 66.5% 62.1% 62.4% 83.7% 80.4% 104.8%
Common Equity 33.5% 37.9% 37.6% 16.3% 19.6% -4.8%
Common Stock Par/Carry Value 4.0% 4.2% 4.3% 0.0% 0.0% 0.0%
Additional Paid-In Capital/Capital Surplus 6.5% 6.4% 6.5% 24.0% 23.5% 31.6%
Retained Earnings 36.7% 33.2% 31.0% 6.4% 5.1% -16.6%
Treasury Stock -10.0% -5.8% -3.6% -0.6% -0.4% -0.5%
Total Shareholders' Equity 33.5% 37.9% 37.6% 16.3% 19.6% -4.8%
Total Equity 33.5% 37.9% 37.6% 16.3% 19.6% -4.8%
Total Liabilities & Shareholders' Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
22. Southwest Airlines Co. - Income Statement
Common Size
Years 2014 2013 2012
Total operating
revenues
100.0% 100.0% 100.0%
Passenger 94.9% 94.5% 94.2%
Freight 0.9% 0.9% 0.9%
Other 4.1% 4.6% 4.9%
Total operating
expenses
-88.0% -92.8% -96.4%
Salaries, wages, and
benefits
-29.2% -28.4% -27.8%
Fuel and oil -28.4% -32.6% -35.8%
Maintenance
materials and repairs
-5.3% -6.1% -6.6%
Aircraft rentals -1.6% -2.0% -2.1%
Landing fees and
other rentals
-6.0% -6.2% -6.1%
Depreciation and
amortization
-5.0% -4.9% -4.9%
Other operating
expenses
-12.5% -12.5% -13.0%
Acquisition and
integration
-0.7% -0.5% -1.1%
Other operating
expenses excluding
acquisition and
integration
-11.9% -12.0% -11.9%
Operating income /
loss
12.0% 7.2% 3.6%
Total other expenses /
income
-2.2% -0.4% 0.4%
Interest expense -0.7% -0.7% -0.9%
Capitalized interest 0.1% 0.1% 0.1%
Interest income 0.0% 0.0% 0.0%
Other gains / losses,
net
-1.7% 0.2% 1.1%
Income / loss before
income taxes
9.8% 6.8% 4.0%
Provision / benefit for
income taxes
-3.7% -2.6% -1.5%
Net income / loss 6.1% 4.3% 2.5%
Delta airlines - Income Statement Common Size
Years 2014 2013 2012
Total operating revenues 100.0% 100.0% 100.0%
Total passenger revenue 86.6% 87.2% 86.6%
Mainline 71.1% 70.2% 68.6%
Regional carriers 15.5% 17.0% 17.9%
Cargo 2.3% 2.5% 2.7%
Other 11.1% 10.3% 10.7%
Total operating expense -94.5% -91.0% -94.1%
Salaries and related costs -20.1% -20.4% -19.8%
Aircraft fuel and related taxes -28.9% -24.9% -27.7%
Regional carrier expense -13.0% -15.0% -15.4%
Fuel
Other
Aircraft maintenance materials and
outside repairs
-4.5% -4.9% -5.3%
Depreciation and amortization -4.4% -4.4% -4.3%
Contracted services -4.3% -4.4% -4.3%
Passenger commissions and other
selling expenses
-4.2% -4.2% -4.3%
Landing fees and other rents -3.6% -3.7% -3.6%
Profit sharing -2.7% -1.3% -1.0%
Passenger service -2.0% -2.0% -2.0%
Aircraft rent -0.6% -0.6% -0.7%
Restructuring and other items -1.8% -1.1% -1.2%
Other -4.5% -4.0% -4.3%
Operating income / loss 5.5% 9.0% 5.9%
Total other expense, net -2.8% -2.3% -3.1%
Interest expense, net -1.6% -2.3% -2.7%
Miscellaneous, net -1.2% -0.1% -0.4%
Loss on extinguishment of debt -0.7% 0.0% -0.3%
Miscellaneous, net excluding loss
on extinguishment of debt
-0.5% -0.1% -0.1%
Loss / income before reorganization
items, net
2.7% 6.7% 2.8%
Income / loss before income taxes 2.7% 6.7% 2.8%
Income tax provision / benefit -1.0% 21.2% 0.0%
Net income / loss 1.6% 27.9% 2.8%
Net loss / income attributable to
common stockholders
1.6% 27.9% 2.8%
23. Appendix M. Estimates. Southwest Airlines Co. and Delta
Southwest Airlines Co. Estimates Delta Air Lines, Inco. Estimates
24. Appendix N. Recent News
Southwest Air reports October traffic +10.8% - November 06, 2015: Capacity +7.2%, Load factor +2.8 pts to 85.9%, Reaffirms 4Q15
RASM +1.0% y/y. The Company flew 10.0 billion revenue passenger miles in October 2015, a 10.8 percent increase from the 9.0 billion
RPMs flown MoM2014. Available seat miles (ASMs) increased 7.2 percent to 11.6 billion in October 2015, compared with MoM2014
level of 10.8 billion.
Southwest Airlines Pilot Union rejects agreement: company expects mediated discussions to resume in the spring of 2016 -
Wednesday, November 04, 2015
Southwest Airlines announced 10 new non-stop routes that will begin flying this spring, along with a round of route cuts - October
28, 2015
According to the report of Moody's Investors Service, they “assigned a Baa1 rating to Southwest Airlines Co.'s new $500 million of
senior unsecured notes due in November 2020.”(2015)
As we can see this classification is positive.
This positive classification is due Southwest is creating a plan to have good liquidity for the next years, having a Debt- to- EBITDA of
1.5 times and EBIT-to-interest of 12 times in 2015. According to these values, Southwest is improving its performance in terms of
operations, waiting that demand for USA domestic travel continues increasing. However, if there is a decrease in the number of travels
during 2016, according to the previous values, Southwest is going to be able to fight to this decreasing.
Another important point to mention is that according to Moody “anticipates that the average spot price of jet fuel Will Remain well
below $ 2.00 per gallon in 2016 , removing jet fuel as a pressure point on earnings in 2016”. (2015)
Comparing with the classification that Delta has, according to report of Moody's Investors Service, “Delta Air Lines, Inc. ("Delta"),
including the Corporate Family Rating to Ba2 from Ba3”. (2015), which is lower that the classification of Southwest.
25. Bibliography
LUV Southwest Airlines Co. Airlines Co. 10-K, http://southwest.investorroom.com/sec-filings, 2015
Wikipedia – Southwest Airlines https://en.wikipedia.org/wiki/Southwest_Airlines, 2015
Southwest Airlines Co – 2014 Annual Report Southwest Airlines, March 15, 2015
Factset Statistics and metrics on Southwest Airlines Co. & Delta Airlines, http://www.factset.com/ , 2015
Pearce, Brian, Economic Performance of The Airline Industry 2015 Mid-Year Report, www.iata.org/economics, June 2015.
Pearce, Brian, Economic Performance of The Airline Industry 2015 Mid-Year Presentation, www.iata.org/economics, June
2015.
SEC, EDGAR System, http://www.sec.gov/edgar/searchedgar/companysearch.html, 2015
Moody's Investors Service’s Report on Southwest Airlines Co., https://www.moodys.com/, 2015
Fitch’s Report on Southwest Airlines Co, http://www.marketwatch.com/, 2015
S&P’s Report on Southwest Airlines Co, http://marketrealist.com/2015/01/sp-upgrades-southwests-credit-rating-improving-
financials/, 2015
Morningstar Statistics and metrics on Southwest Airlines Co. & Delta Airlines,
http://financials.morningstar.com/ratios/r.html?t=LUV & http://financials.morningstar.com/ratios/r.html?t=DAL , 2015
