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The mission of Southwest Airlines is dedication to the highest quality of ... Southwest Airlines does not actually fall into any of the models in the M&M proposition ... – PowerPoint PPT presentation

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Title: Presented by:


1
Southwest Airlines
  • Presented by
  • Brad Newton
  • Tiffany Nachtwey
  • Laura Comeaux
  • Carmen Franco
  • Uyen Phan

Southwest Airlines
2
Background Analysis
3
Mission Statement
  • 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.

4
We are Ready for Take-Off
  • Founded by Rollin King and Herb Kelleher
  • Started in 1971
  • Focus on low prices and customer service
  • Maiden voyage between Dallas, Houston, and San
    Antonio

5
Up…Up Away
  • First airline to win the Triple Crown
  • Best On-Time Record, Best Baggage Handling, and
    Fewest Costumer Complaints.
  • Southwest has won it more than 30 times
  • Top Ten Most Admired Corporations
  • Fortune Magazine 2003
  • Number one carrier in domestic passengers

6
Southwest Aircrafts
  • Southwest Airlines has more than 355 of the
    newest jets in the nation.
  • Several of the aircrafts are painted with various
    themes.

Classic Color Scheme
Shamu One
7
Southwest Aircrafts
Canyon Blue Color Scheme
Triple Crown One
Silver One
Lone Star One
8
Interesting Facts
  • Southwest received 202,357 resumes and hired 908
    new Employees in 2003
  • In 2003 Southwest served
  • 52.6 million cans of soda, juices, and water
  • 8.7 million alcoholic beverages
  • 3 million bags of pretzels
  • 85 million bags of peanuts
  • 1.1 billion gallons of jet fuel in 2003
  • 236 million pounds of cargo and mail in 2003
  • Over 2,000 Southwest Employees have spouses who
    also work for the company
  • Member of the FORTUNE 500

9
Top Ten Domestic Airlines
10
Where we Fly…
  • Southwest flies to 58 cities in 30 states

11
Who is Southwest
Colleen Barrett President, COO
James F. Parker CEO
Herb Kelleher Chairman of the Board
12
Financial Ratio Analysis
LUVs Growth Rate is UNSATISFACTORY
13
Financial Ratio Analysis
LUV has MORE production risk and earnings are
GROWING SLOWLY
14
Financial Ratio Analysis
LUVs management is making investment and
financial decisions VERY WELL
15
Financial Ratio Analysis
LUV is more EFFICIENT than other airlines
16
Financial Ratio Analysis
Investment returns of LUV over all are EXCELLENT
17
Financial Ratios
Overall, Management Efficiency is FAIR
18
Holding Period Return
  • Ending Price Beginning Price Distributions
  • Beginning Price

19
Free Cash Flow to Equity
Estimated Growth Rate 57.6
Shares 789 Million
Current Price 14.80
20
Cost of Equity
  • Whats the Cost of Equity?
  • Ke0(FCFE1/Shares0) G
  • P0
  • KeLUV -112

21
Risk Analysis
22
Beta Calculated, ß
  • ßLUV COV(RLUV, RSP500)
  • VAR(RSP500)
  • ßLUV 0.8266
  • LUV is LESS RISKY than the average security.
  • This is a STRENGTH.
  • It causes a lower Required Return from
    Investors.

23
Cost of Equity
  • DCF model yielded negative Ke
  • Due to negative FCFE
  • Dividend model yielded an unreasonable result
  • Due to the small dividend
  • Both models failed, so how do we estimate Ke?

24
Estimating Ke
  • Based on Kd
  • Government grants in 2001 and 2003
  • Totaling over 550 million
  • Interest expense

Ke
25
Weighted Average Cost of Capital
  • No preferred stock issued
  • WACC fairly stable especially considering industry

26
Capital Structure
  • Southwest has much less debt than the industry.

27
M M Proposition Chart
28
M M Proposition Chart
  • Southwest Airlines does not actually fall into
    any of the models in the MM proposition
  • We can assume that LUV would fall under the Model
    III
  • Why? Because most United States companies are
    taxed, calculate distress costs and have agency
    costs

29
Market Efficiency
Company Specific News
News 8.8 increase in passenger revenue over the
previous year
  • Weak Form

30
Market Efficiency
Non-Company Specific News
News OPEC cuts oil production by 4
  • Weak Form

31
Strengths Weaknesses
  • Strengths
  • Financial Ratios
  • Gross Margin
  • Net Profit Margin
  • Debt Ratio
  • Income/Employee
  • EPS
  • Stable WACC
  • Low Beta (.83)
  • 31 years of profit
  • Weaknesses
  • Financial Ratios
  • Sales Growth
  • Return on Equity
  • Asset Turnover
  • Small Dividend
  • 2 cents per year

32
5 Year Stock Price Chart
  • Current price is in the middle of the 5 year range

33
Analyst Opinion
  • Overall recommendation is BUY.

34
Buy, Sell or Hold
  • Analyst Opinion BUY
  • 67 say buy
  • 5-year Stock Price HOLD
  • Middle of 5 year range
  • DCF Ke vs. CAPM Ke UNDETERMINED
  • -120 vs. 20
  • Holding Period Return BUY
  • 19.1 return for 2004
  • OVERALL RECOMMENDATION - BUY
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