Southwest Financial Analysis
SOUTHWEST AIRLINES Southwest Airlines is the nation 's low fare, high customer satisfaction airline. Southwest was incorporated in Texas in 1967 and commenced Customer Service on June 18, 1971, with 3 Boeing 737 aircraft serving 3 Texas cities Dallas, Houston, and San Antonio. At year-end 2004, Southwest operated 417 Boeing 737 aircraft and provided service to 60 airports in 59 cities in 31 states throughout the United States. Southwest Airlines topped the monthly domestic passenger traffic rankings published by DOT for the first time in May 2003 (www.southwest.com). Based on the monthly data for October 2004 provided in their company website, Southwest Airlines is the largest carrier in the United States based on originating domestic passengers boarded and scheduled domestic departures. One of Southwest 's primary competitive strengths is its low operating costs. Southwest has the lowest cost, adjusted for stage length, on a per mile basis, of all the major airlines. Among the factors that contribute to its low cost structure are a single aircraft type, an efficient, high-utilization, point-to-point route structure, and hardworking innovative and highly productive employees.
RATIO ANALYSIS Various ratios are used by Southwest Airlines to analyze and forecast the profitability and efficiency of their organization. To measure the ability of Southwest Airlines to meet its short-term financial obligations and to assess the liquidity to convert current assets to cash to reduce current liabilities, they used four financial ratios for establishing the company 's short-term liquidity. The table below shows the activity of Southwest Airlines using the four financial ratios and compared them to their leading competitor Jet Blue Airways and to the airline industry averages.
Financial Ratio Southwest Jet Blue Industry
Profitability Ratio 2004 2003 2002 2004 2003 2002 2004 2003 2002
Return on Equity(%) 5.67 8.75
RATIO ANALYSIS Various ratios are used by Southwest Airlines to analyze and forecast the profitability and efficiency of their organization. To measure the ability of Southwest Airlines to meet its short-term financial obligations and to assess the liquidity to convert current assets to cash to reduce current liabilities, they used four financial ratios for establishing the company 's short-term liquidity. The table below shows the activity of Southwest Airlines using the four financial ratios and compared them to their leading competitor Jet Blue Airways and to the airline industry averages.
Financial Ratio Southwest Jet Blue Industry
Profitability Ratio 2004 2003 2002 2004 2003 2002 2004 2003 2002
Return on Equity(%) 5.67 8.75
References: Berry, S. (2004), "Regression analysis v. ratios in the cross-section analysis of financial statements", Accounting of Business and Research, Issue 21, pp Brief, A. (2004), The role of the accounting rate of return in financial statement analysis, Accounting Review, pp Deakin, E. (2004), "Distributions of financial accounting ratios", Accounting Review, p.90 Gordon, L. (2004), "Accounting rate of return vs. economic rate of return", Journal of Business Finance and Accounting, pp Horrigan, J. (2004), "Some empirical bases of financial ratio analysis", Accounting Review, p Ijiri, S. (2004), "Recovery rate and cash flow accounting, Financial Executive (March, 2003), p 87 Kanto, J. (2004), "A confirmatory test of a classification pattern of financial ratios: empirical evidence with US data", Finnish Journal of Business Economics, Chapter 1, pp Ledford, H (2004), "Ratio analysis: application to US airline industry", Business Economics, September 2001, pp Libby, C. (2004), "Accounting ratios and the predictions of failure", Journal of Accounting Research, pp Long, W. (2004), "The misuse of accounting rates of return: Comments", American Economic Review, pp Stauffer, T. (2004), "The measurement of corporate rates of return", Bell Journal of Economics and Management Science, pp Tamminen, V.(2004), A theoretical study in the profitability of a firm, Accounting Review, Issue 41, p Vatter, J. (2004), "Income models, book yield, and the rate of return", Accounting Review, pp Whittington, G. (2004), "Some basic properties of accounting ratios", Journal of Business Finance and Accounting, p Wright, K. (2004), Accounting rate of profit and internal rate of return, Oxford Economic Papers, pp