Mbaa602

Business and Financial Analysis

of Southwest Airlines

Interpreting Accounting Information MBAA602

Professor Angela Brown

March 1st, 2011

Southwest Executive Summary

Southwest Airlines started business in 1967 and has been growing ever since. While some growth has been organic, Southwest has grown through a variety of mergers as well. Currently Southwest is the second largest airline in the United States by market capitalization and flights and quickly gaining on Delta Airlines. If the proposed merger between Southwest and AirTran goes through, Southwest should be able to claim the number one spot. Looking at Southwest’s financials it is easy to see what has been helping them climb to #1. They have run their business the same way from the beginning, by providing a low cost, point-to-point service combined with excellent customer service.

Looking closer at Southwest’s financials, there are many trends that emerge; all of them have been favorable. Their liquidity and solvency ratios have increased over time, showing that they are managing their assets effectively, for example their current ratio has increase from 0.6 in 2007 to 1.3 in 2009. This shows that management is effectively using their short term assets and managing their current liabilities to make sure that have enough funds to cover any short term expenses.

Southwest has also shown great consistency when it comes to profitability, 2009 marked the 37th consecutive year in which Southwest was profitable! That is no small step in the airline industry and especially during the recent economic downturn, when many airlines went bankrupt and other lost significant amounts of money. One of the main reasons why Southwest has been able to remain profitable is how they manage their fuel expenses. Southwest has been very active in the fuel hedging market, which served them well during the oil price increases, as they were able to make money off their hedge positions and cover their fuel demand. Fuel...