Southwest Airlines 2009 n Outstanding Service at the Lowest

Southwest Airlines(2009) n Outstanding Service at the Lowest Fares 1

Mission Statement (actual) 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. Vision Statement (Proposed) n At Southwest, we strive to be the new generation of flight transportation while providing luxury at a price anyone can 2 afford.

Mission Statement (expanded) We are committed to quality service for the everyday person (1). Southwest provides air transportation to cities all around the United States (2, 3). We fly the most luxurious planes on the market with the latest technology money can buy (4). We competitively provide the lowest airfare price in search for the greatest advantage in today’s busy world (5). We provide the highest standards of safety for all our customers while still offering a reasonable price (6, 7). A portion of our proceeds are donated to various charities throughout the United States (8). Since our first flight in 1971, our employees have been the vital asset in making Southwest the most recognized 3 airline today (9).

Mission Statement Components 1. Customer 2. Product or services 3. Markets 4. Technology 5. Concern for survival, growth, profitability 6. Philosophy 7. Self-concept 8. Concern for public image 9. Concern for employees 4

Competitive Profile Matrix South. West American Critical Success Factors Weight United Rating Weighted Score Rating 0. 52 0. 20 0. 12 0. 20 0. 60 0. 30 0. 27 0. 18 0. 45 3 2 1 2 2 2 3 2 1 Weighted Scor e Rating 0. 26 0. 40 0. 36 0. 40 0. 60 0. 40 0. 27 0. 18 0. 60 4 2 1 2 4 3 3 Market Share Price competitiveness Financial Position Consumer Loyalty Advertising Management Security Precautions Organizational Structure Customer Service 0. 13 0. 10 0. 12 0. 10 0. 15 0. 10 0. 09 0. 06 0. 15 2 4 3 4 4 4 3 3 4 Total 1. 00 3. 47 2. 84 Weighted Score 0. 39 0. 20 0. 12 0. 20 0. 30 0. 27 0. 12 0. 15 1. 95 5

EFE Matrix-Opportunities 6

EFE Matrix-Threats 7

Ratios (12/07) 8

Ratios (12/07) Continued 9

Ratios (12/07) Continued 10

Ratios (12/07) Continued 11

Ratios (12/07) Continued 12

Net Worth Analysis (Year-end 2007) 13

IFE Matrix-Strengths 14

IFE Matrix-Weaknesses 15

SWOT Analysis-Strengths 16

SWOT Analysis-Weaknesses 17

SWOT STRATEGIES-SO 18

SWOT STRATEGIES-WO n n n Hire more part time workers (W 1, O 11). Add new technology to older planes in order to become up-todate and accommodate the handicapped (W 6, O 8). With airline companies selling planes SW can purchase models similar to the 737, which could lead to better press if a problem with the 737 arises (W 5, O 2). Offer in flight meals for those who meet appropriate requirements based on points received from Visa card usage (W 11, O 6). Install televisions and satellite radio in planes for enhanced customer service (W 10, O 7). Provide higher quality and luxuries (first class) in some jets for customers willing to pay extra (W 8, O 9). 19

SWOT STRATEGIES-ST 20

SWOT STRATEGIES-WT n n n Using the code share with ATA airlines begin offering flight to select areas outside the US including (Cozumel Mexico, Select Canada locations, Paris, London, etc. ) Shorten the flight life span of the B 737’s in order maintain planes that are consistently up to date with technology. This will allow us to hedge any risk of negative problems arising with the 737’s. Maintaining new equipment allows us to easily liquidate the assets when new items are needed to be purchased. Add new cities not flown to by Southwest such as Atlanta, Charlotte, Chicago, and New York 21

SPACE Matrix 22

SPACE Matrix 23

Grand Strategy Matrix 24

IE Matrix 25

QSPM-STRENGTHS 26

QSPM-WEAKNESSESS 27

QSPM-OPPORTUNITIES 28

QSPM-THREATS 29

RECOMMENDATIONS n The QSPM strategies assessed adding 12 new planes to the fleet or retiring older planes. It is recommended Southwest add 12 new planes at a total cost of $500 million. 30

EPS/EBIT Analysis n $ Amount Needed: 500 M n Stock Price: $13 n Tax Rate: 35% n Interest Rate: 7% n # Shares Outstanding: 735 M 31

Mission/Vision n Give SW Customers the Freedom to Fly n Low Fares n Frequent Flights n Friendliest Service in the Sky 32

Strategy to Date n Low Cost, Low Fare n High Frequency n No Frills n Almost No Interlining n No Hubs, No International n Point-to-Point Short-Haul Service n Regional Service HQ in Texas 33

Strategy Success to Date I n Net Income at $499. 0 million in 2006 n Passenger Revenues in 2006 at $9. 086 Billion n Many years of top airline performance re: on-time; complaints; and lost luggage n 33 consecutive years of profit through 2006 34

Strategy Success to Date II n Diluted EPS of $. 61 in 2006 n Rivals Delta & United near Bankruptcy n Overall SW looks strong in 2007 despite the aftermath of 9/11 n Long Term Debt at $2. 887 billion in 2006 35

Internal Analysis: Strengths n Low Cost n Fast Turnaround n Work Force commitment and flexibility n Differentiation --not just low cost but better service (on time, no lost luggage, fewer complaints) n Leader in Re-engineering n Operational Simplicity 36

Internal Analysis: Weaknesses n Low Economies of Scale (small relative to other majors, short routes) n No Hub System n No code sharing -- can sell only tickets from its own offices n No Interlining n No International Routes 37

Internal Analysis n Financial n Marketing n Management n Operations n Information Technology 38

External Analysis: Opportunities n Market Expansion: over 100 cities have asked Southwest to offer service n Longer Flights n International Expansion to Canada and Mexico 39

External Analysis: Threats n Weak Demand n New Rail Service (Dallas to Houston) n Increased Competition -- if they lose their Love Field Restrictions n Increased Regulation (noise) n Dependence on Domestic Markets 40

External Analysis: Porter’s 5 Forces n Entry of New Competitors: Unlikely n Substitute Products: High Speed Rail, Video Conferencing n Competition Among Existing Competitors: Strong n Power of Suppliers: In 2007, Weak for Aircraft but Strong for Fuel Suppliers n Power of Customers: Strong 41

External analysis n Economics n Demographics n Environmental n Legal n …. . . 42

Strategy Alternatives n Continue Present Strategy -- --Problem is limited growth n Expand Geographically --Point-to-Point --serve other regions efficiently n Expand Geographically --Major Hubs n Remain Regional --through hubs n Increased ticketing via internet 43

Should Southwest Code Share? n PRO: Increase visibility and potential customers n CON: Increase Costs 44

How Can High Worker Commitment and Productivity be Sustained? n As Company Expands, New Workers Will Be Needed with Company Culture Transferred to them n Reward System with Bonuses and Incentives but within Cost Controls 45

Management Depth n Management will have to be extended to support expansion n Kelleher, Kelly and Barrett are still the top trio (see p. 242) 46

Conclusion n Southwest is a Benchmark Competitor -- Setting Industry Standards n They have successfully expanded and continued to innovate -- e. g. , ticketless travel, boarding pass download at home or office prior to going to the airport, friends fly free, use of underutilized airports, etc. 47

Recommendations n Continued Gradual Expansion n Maintain the characteristics that have enabled their success: Conservative Growth n Cost Containment n Commitment of Employees n n… n… n. . . 48

Update n 2008 Results (from SW Website) operating revenues at $11. 023 Billion up 10% over 2007 n Expansion continues with new service at San Francisco, planned service to New York n Stock Price 2/9/09 = $7. 18; 52 Week Range $16. 77 to $6. 56 n Hedging on Fuel was successful as Fuel Prices rose but costly when they fell in late 2008. 49