Southwest Airlines And Its Stories Of Freedom

The world’s first and now largest low-cost carrier, Southwest is in the business of granting people freedoms — to work, to fulfil oneself, and to fly. The company’s strategy shaped by this philosophy has proven extremely successful, as it experienced dramatic growth over the years in an industry notorious for losses and bankruptcies.

Southwest Airlines Co. (Southwest) started flying planes in 1971 serving three Texas cities. Since then, it has expanded to 99 destinations across the US and 10 other countries. Today, the airline competes with both full-service and alternative low-cost carriers from American Airlines and United Airlines to JetBlue Airways and Virgin America.

The LUV stock was worth $6.33 a share on December 31, 2009; $1,000 invested in it at the time would grow to $10,340 by 31 December 2017 when shares went up in price to $65.45 a piece.

During the period of analysis, the company’s revenue increased by 92%, from $11b in 2008 to $21.2b in 2017. Net income saw an even steeper rise to $3.5b, from about $178m. In the same degree as revenue figures, the cost of sales increased by about 111% between 2008 and 2017. Gross margins averaged strong 55.65%, and net margin numbers increased from low single-digits to 16.48% in December 2017.

In terms of capital, retained earnings expanded prominently between 200 and 2017, from $4.9b to $14.6b. Preferred stock’s contribution to capital reduced by half from 30% to 14%, while debt remained capped at 2%. Capital conversion into revenue — or revenue generated for every dollar invested in business — stayed flat, averaging $1.09 by end-December 2017.

The company’s operating expenses almost doubled from $3.3b in 2008 to $7.3b in 2017. However, the effectiveness of sales (which stands for revenue generated for every dollar spent on operating expenses) held around 0.31 during the period of analysis. Meanwhile, employee productivity went up by about 22%.

Overall, Southwest has been expanding faster than the US airline industry. (Domestic destinations make up 96% of the airline’s traffic.) The five-year average revenue of the airline industry grew 2.4%; Southwest’s revenue increased 4.4% per year. Efficiency wise, the company’s five-year gross margin averaged 70.97%, slightly below the industry’s 74.61%. At the same time, Southwest’s average net margin of 9.77% compared favourably with the industry’s 8.97%. As for employee productivity, Southwest generated slightly lower sales per employee than the industry, $469,549 to $477,578.

The US airline industry generated $222b in revenue in 2017, making it the largest aviation market in the world. The number of passengers travelling increased to 965m. In the same year, Southwest held a 10% market share based on revenue and a 15% market share based on the number of travellers. When zoomed in on domestic flights (where Southwest excels), the airline company accounted for 17.8% of all domestic flights in the US. The competition in this space remains high, as Southwest’s budget model has been widely replicated by many full-service US airlines.

The global airline industry’s profitability has been on an uptrend, with net profit reaching $37.7b in 2017. Growth in the number of passengers is being fueled primarily by emerging economies, with China, India and Asia Pacific leading the pack. (Asia Pacific is expected to see additional 2.1b passengers by 2022, or twice as many passengers currently flying in the US.) It remains to be seen if Southwest is able to capitalise on these far-land opportunities by going outside of North and Latin Americas.

Pioneering a budget model. Southwest was the first airline to launch low-cost, low-price, no-frills flights, making air travel affordable to the American masses. With the largest Boeing fleet in the world, it now flies more than any other airline, making up for lost margins through higher sales volumes. This strategy of price elasticity has worked amazingly well for the company, for it is the only domestic airline in the US with an unbroken record of profitability for more than four decades. In terms of technological advancements too, Southwest has been a forerunner being the first airline to introduce online reservation of tickets and e-tickets.

Approachable customer-focused branding. A capital reason for Southwest’s success has been its customer-centric focus in both management and marketing. Despite being a low-cost carrier, the company’s service level has been exceptional in terms of hospitality and experience. Southwest refuses to compromise on customer value and insists on maintaining a single class and an all-inclusive lowest fare. The carrier consistently appears on Fortune’s list of the Most Admired Companies — as the only commercial airline in the Top 10 — and has topped the US Department of Transportation’s Consumer Satisfaction Ranking for the last 23 years.

Employees first attitude. The true secret of Southwest’s success lies in its people first corporate culture, a belief that happy employees keep customers happy. From supportive leadership to profit-sharing, the company has implemented a number of initiatives to build a highly-dedicated, motivated workforce. (Some $586m were disbursed to 54,000 employees through the profit-sharing scheme in 2017, equivalent to a 13.2% bonus per person.) These efforts have paid off manifold as Southwest is known for the best people in the airline industry and has been recognised as a top employer by various industry makers.

10xre is focused on fundamental research of extraordinary investment return cases. We uncover these stories through data and visualisation to derive lessons for the future. Find more studies at medium.com/@10xre.

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