Southwest Airlines

This paper evaluates the key financial challenges facing organizations in Risk Management, Managing International Acquisitions, and Managing Working Capital simulations. Secondly, an evaluation of Southwest Airlines (SWA) management of working capital and the optimal financial strategies employed is presented. Also evaluated are the potential improvements in financial performance along with long-term and short-term strategies. Lastly, considered in this paper is whether a merger or acquisition would affect SWA's employed strategic outlook.

The financial challenges facing the company in the working capital management simulation showed how companies are able to play a balancing act with incoming and outgoing cash flow floats. Companies can juggle cash flows by withholding payments to retain capital or negotiate with companies that withhold payments to receive an incoming cash flow. Either way, keeping as much cash to fund operations with out heavy financial leveraging was the greatest challenge. Another juggling act was to keep management and business partners happy. The decisions made were not always positive for everyone.

The financial challenge facing the company in the managing international acquisitions simulation was to decide which bank presented the best choice for acquisition. Some criteria was finding the bank with the best fit, determining the financial stability of the country, and business valuation. The choice was not solely based on financial criteria such as assets, liabilities, and financial position but included other criteria such as the customer base, competitive position, number of branches, and product portfolio. The use of discounted cash flows was then employed to arrive at a final bid price.

The financial challenge in the managing risk simulation was to balance between preserving capital and capital appreciation in the investment of funds based on a persons' risk tolerance. The simulation targeted the stock mix for a client's aversion to risk and the ability of the investment portfolio to have an expected rate of return. The prediction of fund future prices acted as a hedge and had an impact on the rate of return depending on the changing financial landscape of a company. The overall effect was to juggle the mix based on past history and predict a future outcome.

Working capital management is a critical function of the daily operations of SWA. The ability to manage the day-to-day cash of the company which includes balancing things like collections, bad debt, disbursements, future revenues, borrowing, and loan repayments. Officially created in June 1971, Southwest Airlines (SWA) has become the nation's largest airlines in terms of domestic customers. Year-end for 2003 marked the 31st consecutive year of profitability based off previous financial income statements. SWA has been able to accomplish this by providing short flights, low fares, and city-to-city frequent flights.

The chart provided below from Mergent Online provides details for the key financial ratios that are important to SWA's financial health.

Southwest Airlines Co

2003 2002 2001 2000 1999

Return on Equity (%) 8.75 5.45 12.73 18.12 16.73

Return on Assets (%) 4.47 2.69 5.68 9.37 8.39

EBITDA of Revenue (%) 15.16 14.57 17.59 23.43 22.05

Operating Margin (%) 8.14 7.56 11.36 18.07 16.5

Net Profit Margin (%) 16.41 9.86 20.6 24.95 22.65

Working Capital/Total Assets 0.06 0.09 0.03 -0.07 -0.06

Current Liabilities/Equity 0.34 0.32 0.56 0.38 0.34

Long Term Debt to Assets 0.13 0.17 0.15 0.11 0.15

Revenues/Total Assets 0.6 0.62 0.62 0.85 0.84

Revenues/Working Capital 10.06 6.92 19.77 -12.1 -14.4

The calculated values above represent indicators that can assist investors, bankers, managers, board members, and other financial analyst when making key decisions regarding SWA. When examining these key financial ratios it is very important to compare them against the industry average along with industry leaders. This will assist in determining the financial well being of SWA. One key trend observable when looking at these financial ratios will be the decline in performance because of the September 11, 2001 terrorist attacks.

The working capital simulation had similar challenges to SWA in that both had to deal with the ability to manage both incoming and outgoing cash floats. The September 11, 2001 terrorist attack created a lot of financial problem areas for SWA. These included an overall decline in air travel demand, increased security costs, and aggressive airline industry discounted fairs.

Provided below is the airline industry comparison for 2003 relating to operating and net profit margin ratios from Mergent Online.

Operating Margin Net Profit Margin

Avr: (0.47) Avr: 12.66

Alaska Air Group, Inc. -0.54 1.73

America West Holding Corp. 1.46 2.56

AMR Corp. (DE) -4.84 -7.96

Expressjet Holdings Inc. (U.S.) 13.88 18.45

Federal Express Corp. 5.29 null

FedEx Corp 5.83 7.28

Southwest Airlines Co 8.14 16.41

Trans World Airlines, Inc. -10.51 -10.65

UAL Corp -9.91 -20.46

US Airways Group, Inc. -13.49 106.58

SWA is second in the industry to Expressjet Holdings Inc. in both operating margin and net profit margin. The common denominator in both of these calculations is revenue. 2003 revenue reported at over 5.9 billion dollars made a big impact on both of these ratios. SWA's ratio of 8.14 for operating margin and 16.41 is well above the airline industry averages of -0.47 and 12.66, respectively. The trend for these ratios is again on the increase after the September 11 terrorist attacks.

The greatest strength of the company is its ability to create a profit utilizing the short flights, low fares, and city-to-city frequent flights. The short-term financial strategies of SWA are to capitalize on these strengths. This will create increased cash inflows that will help with short-term

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