Southwest Financial note by - Jean Lemercier, Cécilia Cosnard des Closets, Charline Poher, Derek Fleck and Violaine Lièvre. Including risk assessment, peers comparison, internal financial analysis and environmental analysis.

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SOUTHWESTAIRLINESFINANCIAL REPORT
Ticker : LUV Recommendation: BUY
Price: $8.47 (Dec. 5th 2011)
Highlights
Business mix & market position: Southwest is one of the largest American airlines
in terms of domestic passengers carried, with operating revenue amounting to
$12 billion in 2010. The company revenue breakdown in 2010 is the following:
Passenger (95% of revenue), freight (1%) and others (4%).
Strong effect of the Global Financial Crisis:Southwest Airlines profitability has
been seriously affected by the Crisis – its net income went down from $645
million by the end of 2007 to $99 Million in 2009 (-84.6%). Nevertheless this
figure is definitely a good result since other major US based Airlines companies
experienced huge losses (Delta Airlines: $-1.2 billion in 2009; American Airlines -
$1.5 billion).
Post-GFC relief:Southwest Airlines recovered quite well from the crisis, with an
overwhelming increase of the net income from $99 million in 2009 to $459 in
2010 (+363%) thanks to a 16% growth of the operating revenues to $12,104
million. This is a good performance considering that the WTI crude oil barrel price
passed the $100 mark in March 2010.
Consistent profitability & lower volatility than competitors: In 2010, Southwest
remained profitable for the 38th
consecutive year which is a major achievement in
a fairly cyclical Airline industry. This is mainly due to the fact that Southwest
Airlines is less volatile than the majority of its competition: its volatility (based on
3 month historical values fluctuations) is 20% lower than domestic peers.
Good medium-term prospects: Analysts forecast both a growth of the revenue
and the net profit margin, which result in an increase of the net profit to $844
million in 2013 (the figure is made up of 12 estimations). Nevertheless, those
expectations are still very dependent on the very volatile fluctuations of oil prices
that represent a third of the Southwest operating expenses.
Earnings/Share June Dec. Year P/E ratio
2008A $0.44 $-0.09 $0.20 X35.84
2009A $0.12 $0.15 $0.19 x85.76
2010A $0.15 $0.18 $0.62 x21.14
2011E $0.21 $0.40 X20.53
Industry:
Airline Industry
Travel services
December 2nd
, 2011
Jean Lemercier
Cécilia Cosnard
des Closets
Charline Poher
Derek Fleck
Violaine Lièvre

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Investment Summary
Main risk factors in the Airline industry
 High volatility of oil prices: fluctuations are very hard to forecast and their increases deeply
affectthe company’s profitability. Fuel represents an average of 35% of the Airline industry
operating expenses, and this percentage is likely to increase in the next few years.
o This aspect has been even more important lately due to the instability in oil
exporting countries in the Middle East (Libya, Egypt…) pushing the prices of crude-oil
up.
 Economic slowdown in developed countries and especially in the United States sparked off a
decrease in purchasing power; the demand in the Airline industry is hence weaker.
 Regulations of Greenhouse gases emissions could increase costs. For instance, the European
Parliament is planning to add aviation to the European emissions trading scheme, airlines
companies could therefore be taxed according to their gases emissions. It is a risk for the
Airline industry that further regulations take place in the future.
Market Profile (Data as of November, 12th
2011)
Market Capitalization $6.391 Billion
Ownership 83% by Institutions
Beta (1year) 1.23
52 week High/Low $13.75/$7.35
Daily Average Volume (3 months average) 2,394,896
Return on Equity (2010) 7.84%
Return on Assets (2010) 3.09%
Debt to equity ratio 54,19%

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 Airlines companies face the risk of liability in the event of an aircraft accident or a terrorist
accident such as the World Trade center attacks. These kinds of incidents could involve costs
related to the repair of the aircraft, damages and brand image damages.
Southwest Key strategic factors:
 Fuel hedging – Southwest is using a sound strategy using fuel hedge contracts to reduce its
exposure to fluctuations in oil prices. By doing so, the company is able to fix the price of its
fuel and oil expenses for the year, and is not impacted if oil prices rise during the year. This is
positive for investors as it reduces the overall volatility of the company results. However, the
company loses money when oil prices declines.
 Low cost model – Southwest top management cuts costs by flying only one aircraft model
(Boeing 737), running a streamlined point to point network (domestically) rather than a hub
and spoke diagram (average aircraft trip length is 653 miles with an average duration of an
hour and 55 minutes) and minimizing the time their planes spend languishing in airports.
 Strategic Acquisitions – Southwest has completed mainly four acquisitions since its creation,
in order to increase revenue. Furthermore, the company has been able to enable cost
synergies, expand its operations by gaining airport landing slots and aircraft.
 Corporate culture & Brand Identity: The Company is extremely devoted to its unique
corporate culture: to make employees, customers feel like they are more than just a business
– they are part of a family. In order to do so, the company undertook diverse actions:
Southwest extensively invested in its customer service to reduce delays and cancellations, it
raised its employee’s wages and provided them with customized training in order to be
promoted, and developed a unique range of commercials based on humor. Consequently,
the company has always obtained the lowest complaints ratio per passengers among all
major U.S. carriers since 1987.
Main Challenges:
 Maintain the quality of its services in recession times: The company is facing a very
challenging business environment,which is why its overall profitability is slumping. The
company’s customer policy has always stated it will provide the best experience possible, for
instance not to charge hidden fees for extra bags, fees to take pets onboard, etc. It will get
even more difficult for the company to stick to its policy in recession times, with labor union
claiming wage increases – jet fuel prices decreasing the profitability and other challenges.
 Find new ways to differentiate its offer: The airline’s competitive landscape has changed
since the company’s inception: there are more merging companies and that can
consequently focus on low-fare offers, targeting the same market segment than Southwest.
The Southwest low cost competitive advantage used to exploit is now questionable. It seems
as though the company will have to broaden its competitive scope in order to gain market
share.

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 Thoroughly integrate the company it took over – AirTran Airways: Southwest acquired
AirTran Airwayson May 2, 2011 for a total transaction cost of $3.2 billion. The company will
have to make choices – it is now able to operate internationally (destinations including
Mexico, the Caribbean, and Atlantawhether this fits the company's global strategy or not will
have to be discussed. In addition, the company will have to successfully integrate AirTran’s
workforce into its operations.
Business description
Established in 1967 in Dallas, Texas by Herb Kelleher, Southwest Airlines is the most successful low-
cost US airline. The company’s strategy of selling low-cost flights combined with high quality service,
customer approach (no assigned seats, no additional fees and flights are always on time), high labor
costs and flying “point-to-point” routes to low-cost airports made the company profitable every year
since its founding, with a $459 Million net income in 2010. Southwest Airlines currently share 2% of
the world air value share, employs more than 35,000 employees and flies with 548 Boeing 737
aircrafts, with a an average of 3,400 daily departures.
Southwest’s Business strategies
Company Ethics
“The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered
with a sense of warmth, friendliness, individual pride and company spirit” is Southwest’s mission
statement. Gary Kelly, CEO and chairman of the company since 1986, makes sure that the company
conveys an image of a caring and welcoming airline: in fact, Southwest stock are traded on the New
York Stock Exchange (NYSE) under the ticker “LUV”, in reference to their headquarters based on 2702
Love Field Drive in Texas. LUV has since been a shortened motto for the company, indicating their
love for customers, love for their employees, and love for the company.
Southwest’s initial business strategy was to serve low-cost airports in a few cities in the USA (and in
the USA only), targeting the average traveler with a low traveling-budget: it all started between
Dallas, Houston and San Antonio in Texas. As the business grew, their strategy remained the same:
Southwest kept attracting people with its famous no baggage-fee, timely departures, low-fare tickets
and friendly service to name but a few. Today Southwest also targets Business travelers and serves
72 cities in 37 states.
Although the airline’s strategy is to serve its customers with the lowest prices available, Southwest is
known for its high labor-costs: employees earn a relatively high salary in exchange of devoting
themselves to offering the best service and being hard-workers and treating people in an egalitarian
way (some of the many required skills and qualities needed to be a Southwest employee). Fuel cost is
the most important expense and hence the biggest issue in keeping the prices low due to the
versatility of the raw material. However, in order to level these uncontrollable events, the company
makes money where it could lose some and makes considerable efforts in adapting its ways to keep
prices low: in fact, Southwest does not distribute any meals (only snacks), they don’t assign seats,
don’t charge for any ticket change; this is seen through its constant positive financial structure (see

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balance sheet and income statement). The airline also started using electric ground power and
installed blended winglets in order to reduce draft and increase fuel efficiency.
Southwest offers three services: air services, car rentals and hotel reservations. Air services are the
biggest activity for the airline, generating 95% revenue for the company. However, Southwest works
with partners such as Marriott, Best Western and Choice hotels as well as Budget, Avis and Hertz car
rental companies to allow customers to build the best travel experience and ease their way through
their journey, always offering the best deals at the lowest prices. These partnerships generate 5%
revenue.
Through Internet
Southwest has a strong internet presence: one can only purchase tickets through the company’s
internet website (Southwest does not work as a charter company: absolutely no tour operator can
sell Southwest tickets). This decision reflects their strategy to keep the prices at their lowest (no
distribution costs), enhancing buying convenience and drawing customers into the “Southwest Way
of living”. The website also detects and saves passengers’ preferences according to their latest
travels and reservations in order to make it easier for them to book flights, cars and hotels in the
future, as well as learning about new needs and wants. Southwest’s home page allowed the
company to generate 84% of total revenue as of December 2010: the best way for the airline to
communicate promotions and carry out their marketing campaign. InMarch
2011, southwest.com was the largest airline site in terms of unique visitors.
The airline not only shares information about the company and its culture and financial data, it also
aims to build a relationship with its customers through blogs and social media. Indeed, Southwest
created a blog entitled “Nuts about Southwest” (www.blogsouthwest.com), posting articles of daily
events from employees, videos, pictures and such. Customers and fans can also participate to the
elaboration of the blog, give feedback and share articles. Southwest has more than 1,730 million
followers on Facebook, and more than 1,195 million followers on Twitter: the company always
makes sure to update the latest information and answer requests and possible disappointments.
Customer Care
What makes Southwest Airlines so different from other airline companies is that the company is
customer focused and devoted. Southwest always ensures to provide the best customer service to its
passengers, from departing airport to arriving airport. A way of rewarding customers and gaining
brand loyalty Southwest decided to implement is the “Rapid Rewards Frequent Flyer” program,
which gives points to passengers every time they purchase a ticket on the home page. Customers can
then collect points and eventually book a flight thanks to the earned points (the more paid for the
ticket, the greater the reward).
Southwest ensures passengers a comfortable flight thanks to spacious seating, leather chairs, WiFi,
snacks and a friendly and funny crew. The aim is to give customers the best flight experience and
increase loyalty. Passengers all benefit from the same services: the egalitarian and democratic aspect
of customer care only encourages them to come again. Southwest earned many awards and was
ranked “#1 friendliest airline” in 2006 by Times.com and “#1 most Reliable Airline for dependability”
from the Forbes magazine in 2008.

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Results from the strategy
Southwest’s strategy paid-off in the short and long term, as these following facts and events show
bellow.
Southwest acquired AirTran Holdings Inc. in September 2010 for $3.2 Billion, allowing the company
to expand its route network throughout the USA (new airports include Atlanta, Logan Airport in
Boston and Ronald Reagan in Washington DC) and introduces international routes towards Mexico
and the Caribbean, thus a new strategy for the airline. This acquisition has many positive aspects:
 it will progressively eliminate some of the East Coast competition giving Southwest more
visibility, access to customers and pricing power;
 AirTran provides Southwest with expertise on the international environment, 138 new
aircrafts and 37 new cities to serve;
 Attract more business travelers thanks to the newly acquired international airports.
Southwest has decided to maintain the “no baggage fee” strategy, as it has been its major
competitive advantage, and AirTran will progressively adopt and adapt to the Southwest Culture
(Southwest plans on painting the aircrafts and train new employees). The acquisition is expected to
generate $400 million net annual sales through the synergies of the two companies by 2013;
however, the total cost of integration in the long-term will cost the company $300 to $500 million.
Together, AirTran and Southwest combine and hope to serve more than 125 million customers and
plan on reaching $13 billion sales.
Shareholders
As of October 2011, the airline issued 747,434,272 outstanding shares, one share valued at $7.94 on
November 30th
2011. Southwest accounts 4 major investors, namely Capital Research Global
Investors (11.5%), Manning and Napier Advisors, Inc. (5.1%), PRIMECAP Management Company
(10.5%) and T. Rowe Price Associates, Inc. (9.1%). Over the past few years, Southwest has been
increasing its stockholder’s equity from 35% in 2008 to 44% in 2010, meaning that the company
continuously attaches great importance to its shareholders.
In conclusion, we can say that Southwest is an outstanding company that passengers and
shareholders trust: Southwest was able to increase sales by 17% from 2009 to 2010 in a time of
economic crisis and low traveling expenses. The company’s strategy combined with its culture and
financial structure makes the airline a successful company listed on the Fortune 500 ranking in 2011.

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Porters Five Forces
The Porter’s five forces model will now be described in order to analyze the profitability of the
industry, hence to estimate the interest for investors to buy company stocks:
First of all, it is essential to clearly identify in which market Southwest is operating. Southwest
Airlines is classified by the “North American Industrial Classification System” as a Scheduled Air
Transportation company.
Threat of New Entrants: (3/5)
The threat of New Entrants is quite low owing to various factors: the centralization of the industry,
high startup costs, post market entry competition and relatively low earnings of companies in the
industry. Most of the new carriers have failed to succeed in the industry historically, and stopped
operations: from 2003 to 2006 companies such as Southeast Airlines, Midway Airlines and Aloha
Airlines have halted operations. However, although strong barriers to entry are present in the airline
industry, some airlines have successfully invested in the airline business. For example, JetBlue, who
began operations in 2000, has become quickly profitable due to a low cost position and high load
factors.
In conclusion, there is a possibility that new competitors could arise in the airline industry, but it is
quite unlikely since becoming viable would take years for a new airline.

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Rivalry among competitors (5/5)
The rivalry among airline companies is overwhelming, mainly due to the fact that the industry is
made of numerous competitors offering almost undifferentiated services. This intense competition,
resulting in a real price war, pushes down the profitability prospects of the industry. As a result,
many airline companies have experienced huge losses and some of them even had to face
bankruptcy (United Airlines, ATA Airlines). Even though some companies tried to differentiate their
service (High quality, more comfortable flights, etc.) most of them failed, because the price
sensitivity of customers is so strong that the price war seems inevitable.
Many of the currently operating airlines will have to trim their margins in order to gain market share
and remain competitive on the market. In conclusion, the rivalry among competitors is so that the
overall profitability of the industry is very low.
Buyer Power (5/5)
As explained earlier, the price sensitivity and low differentiation of airline companies are giving the
buyers tremendous power. Moreover, the relatively high number of airline companies and the low
growth in customers due to bad business environment reinforce the buyer power. In addition,
booking platforms and fare comparators are increasing the amount of pressure on airline tickets
prices, helping increase the buyer power.
In conclusion, the buyer power is high due to significant price sensitivity and low brand loyalty,
leaving little room for Southwest and other airline companies to maneuver.
Supplier Power (4/5)
The airline industry is greatly exposed to supplier power, which we have to breakdown into two
parts: fuel and airplanes. Jet-fuel suppliers are constantly pushing up prices or at least maintaining
them, by cutting off production whenever demand for fuel is decreasing. Besides, even when oil
prices fall, the jet fuel prices do not systematically decrease as well. Jet fuel suppliers’ power is
therefore soaring.On the other hand, current economic conditions have lessened the supplier power
of airframe manufacturers. Airbus and Boeing are highly dependent on airline companies buying
their planes and the recent downturn in sales is increasing this dependency.
In conclusion, if jet fuel and airframe suppliers’ power is quite high, the decrease in airframes sales
and fuel hedging alternatives for airlines are pushing it down.
Threat of Substitutes (1/5)
Substitutes to flights in the US include bus, car and train transportation. Because of an extensive
highway system in the U.S, travelling by car is possible virtually anywhere in the country. However on
long distance trips, people tend to prefer traveling by plane as the time needed is shorter. Trains also
offer long distance trips, and have the advantageof being cheaper than flights. However, the slow
travel rate for trains, the limited number of stations and the relative longer trip duration are the
reason why train transportation only attracts a small percentage of customers in the US.
In conclusion the threat of substitutes is very low and is not likely to increase over the next few years.

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Conclusion (18/25)
The industry analysis by Porter’s Five Forces reveals that the airline industry is poorly profitable due
to a remarkable competitive rivalry and the strong supplier power. Nevertheless, the airline market
demand is quite high and if one steps up and beats the competition, profits could be very high.
Therefore investors have to know that investing in an Airline company such as Southwest is quite risky
but potential rewards are significant as well.
Industry overview
Industry Overview and Competitive Positioning:
There are many competing companies in the airline industry. We can notice that the four best airline
companies are Asian ones, and their capitalization ranges between 13 Billion € and 7 Billion €.
However, Southwest is well defending its place by being classified 8th best capitalized company on
the NYSE with 6.29 Billion €.
Strengths:
 Southwest has invested a lot and capitalized on its competitive strengths: the service is
always on time and the airline is a business-friendly company. There is also a positive
organizational culture which leads to a very high-quality service: some of these factors
include a good crew who cares a lot about their customers, a great teamwork and the overall
efficiency of the airline. These elements convey a good image to the customer and make
them feel confident about the brand.
Strengths
 Strong position in the
market
 Many acquisitions
 High number of passengers
Weaknesses
 Only operating on the
domestic market
 Dependence on producer
 Limited offer
Threats
 Fuel-Prices are increasing
 Strong competition
 More legal restrictions
 Terrorism fear
Opportunities
 Many market opportunities
 Growing market
 Advancement of
technology

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 Southwest has a strong position as a low-cost carrier in the North American airline market; as
a result, customer loyalty is high and the risk of losing customers is low.
 Southwest accounts an average of 3 400 flights a day and is one of the most profitable
companies in the US: the consecutive profitability has always been increasing since 2009; this
allows a good and constant inflow and involves fewer risks for the company.
 The company was the first to launch the ticketless travelling and discounts for senior people.
The leadership in this domain reinforces the company’s positive image toward customers.
Moreover, there are no additional feesto shift reservation, which enables customers to feel
more confident about their buying power and will purchase tickets more easily.
 Southwest previously acquired many airlines: Muse Air, Morris Air, ATA airlines and the last
one AirTran, increases Southwest’s capital and helps improving its image and visibility
towards customers and shareholders. These acquisitions represent an improved access to
business travelers and international routes. This is another way for Southwest to boost its
market shares.
 Southwest is listed 8th best capitalized company on the NYSE (New York Stock Exchange),
with 6.29 Billion €, another proof of its reliability.
Weaknesses:
 Until recently, Southwest only relied on its domestic market: apart from recent flying routes
to Mexico and the Caribbean, there are no direct flights away from the USA. Consequently,
the company is missing out on potential customers as it narrows its flights offer, and is
exposed to US market risks, risks that could be outweighed if the company had more
international presence.
 The company highly depends on fuel expenses and fluctuations. As the company is
continuously doing its best to offer low-cost fares,it can never predict future oil price raises
and Southwest has to therefore constantly adapt its way to save money on other expenses.
 Southwest does not offer many morning flights (before 7 AM) and this can easily discourage
early birds/business passengers from traveling with Southwest. Those elements could lead to
customer’s dissatisfaction and a loss of market share.
 Southwest has a single aircraft supplier as it only uses Boeing 737 aircrafts. This can create a
dependence effect towards the supplier, which increases his power, and can possibly
increase prices.
 Since Southwest does not sell its tickets on online booking agencies, it reduces its visibility
and purchasing possibilities.

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 Southwest features very good strengths which ensures its strong position in the market;
however, Southwest encounters weaknesses which can easily beconverted into strengths by
bringing some modifications to its strategy, especially in their offer range.
Opportunities:
 Since the company is targeting business travelers more aggressively, this should boost
coming sales and increase inflows as the US total population is composed of a large active
work force.
 Many national and international markets and airports are still not tapped, which means that
Southwest can possibly expand to them. Southwest is slowly starting to internationalize its
flying routes, so this opportunity can be approached in the long term run.
 Industrial technologies have developed and improved, representing new opportunities for
the airline industry; Southwest could take advantage of them to solve current problems and
increase their aircraft technology and efficiency.
 Traveler traffic should rise from 2011 to 2014; moreover, globalization leads to an increase in
international tourism and in longer flights. These points give the company good sales
perspectives for the coming years.
 The US airline industry is competent, technologically superior with financial potency and
access to global market. Southwest can take advantage of it to correct its defects.
 American Airlines, the third biggest airline on the US market recently declared that it was
going in bankrupt: a falling competitor is an opportunity for Southwest.
Threats:
 The American airline market is an intense competitive market due to the expansion of low
cost carriers, and reorganization of competitors. Despite its strong position in the market,
Southwest has to compete with all the new entrances which could lead to a loss of market
share.
 There are more limitations regarding the terms and legal obligations nowadays therefore the
company restricted in what it want to do.
 Terrorism impacts customer trust and can reduce considerably the number of travelers
across the world. This element has to be taken into account in case of internationalization.
 Many opportunities should make Southwest’s market shares increase easily and some
others can be profitable for the company if it decides to convert its weaknesses. On the
contrary, price of basic expenditures are increasing, consequently making fare-prices for
customers higher. As globalization is significantly gaining power and the company is
classified as a low cost company, these forces should not have a major impact.

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Competition is getting more intense, as a result, Southwest has to improve its offer and
focus on its competitive advantages to remain profitable.
General conclusion
In both conclusions above, we can notice that the positive parts (opportunities and strengths) are
always stronger. Opportunities can be easily profitable for the company and threats can be beaten by
using well-thinking strategies. To conclude, the Southwest SWOT is really positive and forecasts a
good future for the company.
Financial Analysis
2007/2008: 11.78% growth revenue (2007/2010): 18.53%
2008/2009: -6.10%
2009/2010: 16.95%
Analysis of income statement’s performance:
Revenues:
2007/2008: The revenues grew by 11.78%, with a contribution of 95.8% from passenger, 1.32% from
freight and 2.88% from other.
0
2000
4000
6000
8000
10000
12000
14000
2007 2008 2009 2010
Revenues
Revenues

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2008/2009: The revenues dropped by -6.10% with a contribution of 95.63% from passenger, 1.23%
from freight, and 3.13% from other.
2009/2010: The revenues grew by 14.49% with a contribution of 95.23% from passenger, 1.07% from
freight and 3.64% from other.
What we can conclude from these numbers:
First, we can say that when the subprime crisis started in 2008, the revenues of the company
immediately decreased. The inflation has obviously had a great impact on the company’s level of
operation. But another important fact to take in consideration is that through these four years, the
contribution to the revenue of other factors is growing progressively, while the contribution of
passengers (the main source of revenues) is declining softly. The conclusion that we can get from this
fact and from the report is that the prices of seats are falling but the number of passengers is still the
same. The company gets its money from other partnerships, such as hotels, car renting, banks…etc. It
emphasizes the change in the company’s strategy. Over the 2007, 2008, 2009, and 2010 fiscal years,
South West’s revenues grew by 18.53%.
Cost of goods sold:(Salaries, wages and benefits, Fuel and oil, Maintenance materials and repairs,
Aircraft rentals, Landing fees & other rentals)
2007 2008 2009 2010
Cost of goods sold $ 7 081,00 $8 590,00 $8 135,00 $9 062,00
2007/2008/2009/2010: 21.86%
Sales were enhanced followed by an increase of costs of goods sold over the four fiscal years (from
2007 to 2010).
EBIT:
2007 2008 2009 2010
EBIT $791,00 $449,00 $262,00 $988,00
Growth EBIT 20%
EBIT (Earnings before Interest and Taxes) is an indicator of the company’s profitability excluding
taxes and interests and shows the cash flow generated by the operating process. EBIT grew by 20%,
roughly in line with revenues (that grew by 18.53%)
As we can notice, in South West’s case the EBIT growth is 20% while the revenue growth represents
18.53%. We can thus say that interests and taxes change the profitability of the company.
Operating margin:
The operating margin stands for the margin that the firm earns after all the operating expenses.
Thanks to the ratios (excel sheet), this margin shrank by 5.49% from 2007 until 2009, but then rose
by 5.63% between 2009 and 2010. Compared to other airlines’ margins, such as United continental

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(for example for 2007/2008: decrease of 19.57%), South West’s one is fairly stable. This fact is a key
point to take into account as a potential investor.
Net profit margin:
This margin is meaningful for investors, since it helps to predict the future earnings per share,
hencethe expected return. The Net profit margin had the same tendency than the operating margin;
it decreased moderately over the first three years (from 2007 till 2009) and then amplified in 2010.
Yet again, compared to other companies, the net profit margin fluctuations are quite modest.
Therefore the conclusion remains the same for the operating margin: Southwest is a healthy
company for possible investors.
Thanks to the operating margin and the net profit margin, Southwest managed to catch up its pre-
crisis’s activity levelwithout being as profitable as it used to be.
Conclusion for the income statement: Basically, we learnt from the income statement’s analysis
that, even if the company sometimes generates less cash than other competitors, it is overall more
balanced because the variations of its operating margin and of its revenues are narrower aside to
other airline companies. A stable company is more attractive for prospective investors.
Balance sheet:
Accounts receivable days:
This amount symbolizes the number of days clients have to pay the company back. Southwest had an
average account receivable of 7.17 days over the four past fiscal years.
Compared toother airline companies, Southwest’s average accounts receivable days is low. By
maintaining accounts receivable days, firms are indirectly “allowing”clients to benefit from interest-
free loans. A low ratio implies that the company should re-assess its credit policies in order to ensure
the timely collection of imparted credit - that is not earning interest for the firm.Indeed, a high ratio
implies that a company operates on a cash basis or that its extension of credit and collection of
accounts receivable is very efficient. The higher the ratio, the quickerwill a business collect its
receivables and the more cash will the company have on hand. However, an unusual high ratio could
indicate that the company’s credit terms are tighter than its competitors and that it is running the
risk of losing customers.
Accounts payable days:
APD is an accounting entry that corresponds to an entity's obligation to pay off a short-term debt
to its creditors. Just as the Accounts Receivable ratio is used to evaluate a company’s incoming cash
situation, this figure can demonstrate how a business handles its outgoing payments.
Southwest has an average of 24.24 days accounts payable over the four fiscal years. Compared to its
main competitors, this number is low. It usually means that the company is slow in paying its
suppliers. But sometimes, it could be a strategic choice from the company. Indeed high accounts
payable ratio is not always in the best interest of a company. Many companies extend the period of
credit turnover, getting extra liquidity.

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This strategy can be confirmed by examining the quick ratio. Indeed, this ratio indicates whether or
not the company has enough liquidity to cover its short term liabilities. For Southwest, during most
years, this ratio is inferior to 1. (For instance: year 1: quick ratio=0.63) It means that the company
does not have enough cash to pay its short term liabilities. This is why it is adjusting its strategy to get
more liquidity.
Debt-asset ratio:
Indicates what proportion of the company’s assets are being financed through debt. In this case, the
ratio isalwayskept under 1. This suggests that a majority of its assets are financed by equity rather
than by debt.
Southwest is thus, a very attractive company for potential investors, as it is financing its assets with
equity: the risk is therefore lower for investors. A high debt-to-equity ratio will imply significant
interest payments.
Enterprise value:
It measures the company’s value and also straightforward market capitalization. In Southwest’s case,
this value is steadily increasing over the four fiscal years, when competitors’ enterprise value is highly
volatile: it is very stable and attractive to investors.
Price-earnings ratio:
This ratio is a key element to investors: it is a valuation of a company’s current share price compared
to its per-share earnings. By relating share prices to actual profits, the P/E ratio highlights the
connection between the price and recent company performance. If prices and profits increase, the
ratio stays the same. The ratio only fluctuates as price and profits become disconnected.
Concerning Southwest, this amount is increasing drastically during the 3 first years and then
decreases during the fourth year: recent profit levels seem to be no longer the main factor in stock
pricing. This might be because change is occurring - investors are expecting a much better or worse
performance the next year - or because impressionsare now the dominant factor.
Statement of cash flows:
Total cash flow has increased from $1.10B in 2009 to $1.24B in 2010. This increase displays
Southwest’s ability to be self-sufficient with regards to financing. Furthermore, this increase shows a
healthy similarity to the increase in sales growth around 15-20%. In addition, cash flows from
operating activities have grown steadily from -$1.52B in 2008 to $1.56B in 2010. This can be
explained by the easing of the financial crisis on the airline industry since its severe drop in 2008.
Even when comparing with fiscal year 2009, operating activities have increased by 158% in 2010.
However, cash flows from investing activities have not experienced a similar rebound. While this
number did increase slightly in 2010 to -$1.26B, Southwest’s purchases in this area are continuously
greater than the sales from the proceeds of short-term investments. While investment cash flows
are often negative for companies of this size, it would be important for future investors to keep an

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eye on this information. This rise in investment spending is largely due to some of Southwest’s
recent acquisitions, most notably the purchase of AirTran Airways.
In 2010, cash flows from financing activities were also negative. Decreasing from $1.65B in 2008 to -
$149M in 2010, Southwest can mainly attribute this decrease to a lack of issuance of long-term debt.
Because no further details were given, it is difficult to understand why this occurred.
At the end of fiscal year 2010, Southwest saw a positive net change in cash and cash equivalents for
the first time in three years. When this is paired with an increase and a positive total cash flow, it is
clear that Southwest is doing a sufficient job in financing activities with its own resources.
It is finally important to note the stable increase of the free cash flow margin of Southwest, which
seems to have recovered since the 2008 financial crisis. When compared to other airlines and the
industry median, we see once again that Southwest is outperforming the competition.
South west Performance compared to peers
Introduction
A good way to assess a company’s performance is to compare it to the industry average and its main
competitors. “Taking the pulse” of an investment by doing so helps to pick stock. Regardless of
current news, and announcement that have a great influence on stock prices, the company’s
historical profitability and overall performance related to its industry is a good way to estimate its
future stock price fluctuation (Rise, straight line or fall).
Main Competitors
United Continental Holdings :
This Chicago based company is the result of a 2010 merger combining United Airlines and
Continental Airlines. In 2010, United Continental had revenue of $23.4 billion. The company flies
extensively in the United States and throughout the world as well. When the merger is finally
complete, United will have become the world’s largest airline based on revenue passenger miles.
JetBlue :
Founded in 1999, this airline company appeals to middle and upper class flyers. It has achieved the
highest rankings of any commercial American airline and is the country’s only 4-star airline.
However, JetBlue flies to fewer destinations, both domestically and internationally, in comparison
the other main American competitors.
AMR Corporation :
Originally known simply as American Airlines, AMR has expanded to include TWA Airlines, American
Eagle Airlines and Executive Airlines. A traditional American airline with services focused on the
domestic market, American Airlines has experienced significant financial trouble lately and filed for
bankruptcy in November 2011.

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Profitability
Southwest has been one of the only airlines to maintain profitability over the last four years despite a
challenging business environment (GFC, jet-fuel prices rising). Its four years average profitability
indicators (Operating, net profit and free cash flow margins, in reference to the excel sheet) are all
positives while most of competitor’s 4 years average indicators are negatives (Avg Net profit margin:
-3,4%). In the heart of the crisis, Southwest has definitely outperformed the market – with a net
profit margin of 1,61% (2008) when competitors experienced large losses (12,5% average peer’s net
profit margin). Additionally, its capacity to turn profit into cash is outstandingly greater than its peers
(Southwest’s average FCF: 3,46% - Peers average FCF -1,27%).
Likewise, the company has a better return on investment than its peers (2,2% and -3,09% for its
peers) meaning that Southwest resources are used efficiently. On the other hand, Southwest’s return
on equity has been lower over the last few years than it’s peers’ (5,52% and 7,72% for the peers) due
to a greater market capitalization. Overall, Southwest’s superior profitability makes it more
interesting to invest in than its competitors. The fact that Southwest’s profitability is greater than its
competition is exceptional taking in consideration the fact that it is a bigger company in terms of
market capitalization and operations on the US market.
Financial Liquidity
First of all, it is necessary to understand that airline companies tend to have lower levels of liquidity
than other industries due to the high level of capital needed to enter this market. Thus the peer’s 4
year average current ratio is below 100% (88,70%), meaning that Southwest’s competitors were
technically unable to pay off their short term obligations if they had come due at that point. Quite
surprisingly, Southwest has been able to maintain a good current ratio for the airline industry (4yrs
average : 110) : the company is able to pay off its short term debt by selling off its assets and is
therefore less risky than its peers. In addition, Southwest liquidity has improved, the current ratio
went up from 91,84% in 2007 (competitors avg :83,5%) to 110% (competitors avg 88%). Likewise,
Southwest 4yrs avg quick ratios, cash ratios and operating ratios are all better than its competition
(respectively 88%, 43% and 22% compared to 70%, 30% and 19%). Thus it is apparent that Southwest
is more liquid hence less risky than most of its competitors. Moreover, the competitors have a
negative 4 yrs avg net working capital ($-1134 M) when Southwest’s 4yrs avg net working capital is
positive ($ 272M) – meaning that Southwest has had extra current asset (ex : cash) that have helped
the company’s growth when competitors had to finance the negative net working capital by either
extra debt or equity.
From the analysis of the leverage ratios, we can say that Southwest has been more liquid, generated
more cash from its operations and held more cash compared to its short term liabilities than its
competitors did over the last 4 years on average. This means that Southwest is less risky, detains
more cash from its operations and is therefore able to invest more without using debt/equity
financing compared to its competitors.
Financial leverage ratios
It is very important to look at financial leverage ratios to understand how companies are financed
(debt/equity) and the relative importance of assets and earning to the company’s leverage. However

18. - 18 -
it has been difficult to take conclusion from the analysis of financial leverage ratios for many reasons:
Southwest’s competitors have had very low share prices, making their shareholders equity fall and
artificially increase their financial leverage ratio. Using a same reasoning process, their retained
earnings to total assets over the last 4 years is negative due to negative earnings. However, it is
important to see that Southwest’s financial leverage ratio is quite low (55% over the last 4 years) and
its 4 years retained earnings to total assets (33%) indicate that a third of the company’s growth is
financed by profit, which is a good result. Besides, Southwest 4 yrs avg debt to assets is lower than its
peers (61% compared to 96%) signifying that southwest is less leveraged than its competitors and
again, less risky.
We can surely say after a deep analysis of the financial leverage ratios that Southwest is relatively
safer than its competitors due to lower level of debts to equity and a greater value of its assets
compared to its debt. In other words South west is less leveraged than its competitors so it is safer to
invest in the company.
Efficiency ratios
Efficiency ratios give a grasp of how efficiently a business uses and controls its assets and how well
the company manages its suppliers and customers payments. The most significant findings after a
profound analysis are the following: Southwest got paid two times quicker by its customers than its
competitors over the last four years (days in account receivable: higher level of available cash and
therefore better future prospects. On the other hand, Southwest competitors had lower level of
inventory (Peers 4 yr avg days in inventory: 5 compared to 7,75) revealing a weakness on
Southwest’s inventory management. Efforts will have to be made by Southwest’s management on
this point, but when looking at the global efficiency of the company the outcome is positive
compared to competition.
Southwest is having better operating process than its competition, implying that sales will be turned
into cash more easily through Southwest’s operations than its peers’ operations.
Growth Rates
Growth rates give an indication of the future development of a business. However, comparing
Southwest growth rates to its peers is quite delicate due to the fact that most of them had low
operations level during the GFC (Global Financial Crisis) so they had gigantic growth rates after the
end of the GFC. Yet, it is interesting to see that Southwest net income growth has been 3 times
greater than its peers after the GFC (respectively 360 and 91%). Similarly, Southwest’s free cash flow
growth has been two times higher than its peers over the last 4 years (167% and 90,7%).
Southwest future developments are potentially greater than the majority of its peers (Jet Blue, AMR
and United Continental).
Conclusion
Based on a financial comparison to peers, Southwest is without a doubt a company we advise to
invest in. It has clearly outperformed its main competitors in terms of operating efficiency and
profitability, and at the same time it has been able to keep a low level of risk/leverage. It seems as
though Southwest shows better growth prospects than its competition, and is clearly less risky.

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Investment Risks
Market Risks
Like any airline around the world, Southwest’s economic results are heavily influenced by oil prices.
When prices of jet fuel increase, airlines either take a hit to their profit margin, or are forced to
charge customers extra for the fuel. The aeronautical industry and the raw materials it supplies to
Southwest are also variable, meaning that prices for these necessary parts could change at any time.
Economic Risks:
Within the past five years, the United States has suffered due to the economic crisis. This situation
means that travelers take fewer vacations requiring flights and businesses have cut back on the
number of flights for meetings and conferences. In addition, almost all of Southwest’s operations are
domestic, meaning if the American economy continues to suffer, so will their business.
Business Risks:
Southwest distinguishes itself from competitors by offering cheaper flights and friendly customer
service. If the company is unable to maintain this reputation, customers are likely to quickly look
elsewhere. Because Southwest is not providing a unique service, its economic vitality will depend on
its efforts to continue its successful business plan and culture. Furthermore, with its recent
acquisition of AirTran Airways, Southwest’s future depends on its ability to successfully manage
these new operations, particularly in Mexico and the Caribbean.
International/Translation Risks:
The international risks are limited because of Southwest’s heavy concentration on the American
market. No foreign currencies appear in any of the financial statements. This, in turn, means that
Southwest has not diversified its services in order to protect against negative domestic
circumstances.
General conclusion
Going through this Financial Report, we can say that Southwest is definitely a successful company
proven by the many financial, investment and background. Not only is it listed on the Fortune 500
ranking in 2011, Southwest is also classified 8th best capitalized company on the NYSE; two strong
reasons for shareholders to trust the airline. During the last few years, Southwest was able to face all
kinds of challenges the economy and market have to offer: from the crisis to the rising prices in raw
materials; in the end, Southwest continuously succeeded in increasing its sales. Moreover, forecasts
show that this tendency will keep on rising for the next years to come. It is true that investing in an
airline company can be risky; however, Southwest has already demonstrated its value and its
strengths by its strong strategy, culture, financial structure and stability. Finally, it seems as though
Southwest shows better growth prospects than its competition, and is clearly less risky: this is why
we highly recommend shareholders to invest in this company.

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APPENDICIS
Southwest Stock Price

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In million $
Year ended
31/12/2010
Revenues:
Passenger $ 11 489,00
Freight $ 125,00
Other $ 490,00
Total Operating revenue $12 104,00
Cost and expenses:
Salaries , wages and benefits $3 704,00
Fuel and oil $3 620,00
Maintenance materials and repairs $751,00
Aircraft rentals $180,00
Landing fees & other rentals $807,00
Depreciation & Amortization $628,00
Other operating expenses $1 426,00
Total operating expenses $11 116,00
Operating income $988,00
Other expenses (Income)
Interest expense $167,00
Capitalized interest ($18,00)
Interest income ($12,00)
Other (gains) losses,net $106,00
Total other expenses $243,00
Income from continuing operation before income taxes $745,00
Provision for income taxes $286,00
Net income $459,00
Basic net income per common share $0,62
Diluted net income per common share: $0,61
Southwest Income Statement 2010
Impact of Fuel Cost on Southwest Airlines Co Operations

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Cash flows from operating activities 2010
Net Income $459
Adjustements to reconcile net income to cash provided by operating activities :
Depreciation and amortization 628
Unrealized loss on fuel derivative instruments 139
Share based compensation expense
Excess tax benefits from share based compensation arrangements
Deferred income taxes 133
Amortization of deferred gains on sale and leaseback of aircraft -14
Changes in certain assets and liabilities :
Accounts and other receivables -26
Other current assets -8
Accounts payable and accrued liabilities 193
Air traffic liability 153
Cash collateral received from (provided to) fuel derivative counterparties 265
Other, net -361
Net cash provided (used) by operating activities $1 561
Cash flows from investing activities
Purchases of property and equipment,net ($493)
Purchases of short-term investments -5 624
Proceeds from sales of short-term investments 4 852
Other, net
Net cash provided (used) by investing activities ($1 265)
Cash flows from financing activities
Issuance of long-term debt
Proceeds from (payments of) Revolving credit facility
Excess tax benefits from share based compensation arrangements
Proceeds from sale and leaseback transactions
Proceeds from Employee stock plans 55
Payments of long-term debt and capital lease obligations -155
Proceeds from (payment of) credit line borrowing -44
Payment of cash dividends ($13)
Repurchase of common stock
Other, net 8
Net cash provided by (used in) financing activities ($149)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $116
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 096
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1 212
Southwest Cashflow Statement

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Southwest Stock price variation (in %) and (W&T Offshore.inc – an oil price indicator, in %)

24. - 24 -
W&T Offshore.inc stock price (Indicator of oil prices)
Data from INFINANCIALS

25. - 25 -

26. - 26 -
Profitability 2007 2008 2009 2010
Operating margin - Operating Income/Revenue 8,02% 4,07% 2,53% 8,16%
Net Profit Margin - Net profit/Revenue 6,54% 1,61% 0,96% 3,79%
Free Cash Flow margin : FCF/Revenue 15,35% -22,34% 3,86% 16,97%
Return on Assets - Net profit/Total Assets 3,85% 1,27% 0,69% 2,97%
Return on Equity - Net profit/Shareholder's Equity 9,29% 3,59% 1,82% 7,36%
Liquidity Ratios
Current ratio - Current Assets/Current liabilities 91,84% 94,55% 124,60% 129,47%
Net Working capital -Current Assets - Current liabilities (millions) -395 -153 663 974
Quick ratio - (Cash + ST investments + AR)/CL 63,21% 71,70% 102,49% 112,95%
Cash ratio - (Cash + Cash equivalents)/ CL 45,74% 48,75% 41,34% 38,15%
Operating CF ratio - (Cash Flow from operations)/ Current
Liabilities
58,81% -54,85% 36,55% 47,23%
Financial leverage Ratios
Financial leverage ratios - Total financial debt/Equity 30,13% 73,91% 64,45% 54,19%
Retained Earnings to Total Assets - Earning/total assets 28,55% 34,97% 34,84% 34,92%
Debt to Assets ratio -(Total liabilities/Total Assets) 58,62% 64,79% 61,78% 59,67%
Efficiency Ratios
Sales to total Assets - Sales/Total Assets 0,59 0,78 0,73 0,78
Days in Account payable - (360*AP)/Sales 27,71 24,62 31,58 37,24
Days in Account receivable - (360*AR)/Sales 10,19 6,83 5,88 5,80
Days in Inventory- (Inventory*360)/Sales 9,46 6,63 7,69 7,23
Growth Rates
Growth of Sales- (2010 Sales - 2009)/2009 8,53% 11,78% -6,11% 16,95%
Growth of Net income (2010 Net Income - 2009)/2009 29,26% -72,40% -44,38% 363,64%
Growth of Free Cash Flow(2010 FCF - 2009)/2009 Non meaningful Non meaningful Non meaningful 167,00%
Valuation Ratios
Market Capitalization (12 months avrg,infinancials) - in Million 8965 6379 8490 9702
Enterprise value (MC + Net debt) 8277 8237 9412 9544
Price to earnings ratio Market capitalization/net income 13,89922481 35,83707865 85,75757576 21,1372549
Enterprise value to Sales-EV/Sales 0,83531082 0,747255738 0,909371981 0,78849967
Price/Book RatioMarket capitalization/Shareholder Equity 1,291600634 1,287906319 1,556655666 1,555555556
Southwest Ratios

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2007 2008 2009 2010
Others
Freight
Passenger