COMPANY PROFILE

Southwest Airlines Co

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Southwest Airlines CoTABLE OF CONTENTS

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TABLE OF CONTENTS

Company Overview …………………………………………………………………………………………..3Key Facts………………………………………………………………………………………………………….3SWOT Analysis …………………………………………………………………………………………………4

Southwest Airlines CoCompany Overview

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Company Overview

COMPANY OVERVIEW

Southwest Airlines Co (Southwest Airlines) is a provider of passenger airline services. The company provides point-to-point flight services that offer direct nonstop routing as compared to hub-and-spoke service. It also offers high-frequency short-haul routes supported with the long-haul nonstop service between markets such as Dallas Love Field and Houston Hobby, Denver Chicago Midway, Los Angeles International and Las Vegas, Phoenix and Denver, Los Angeles and Nashville, Los Angeles and Baltimore, and San Diego and Baltimore in the US. It also offers various ancillary services such as upgraded boarding, EarlyBird Check-In, and transportation of pets and unaccompanied minors. Southwest Airlines is headquartered in Dallas, Texas, the US.

The company reported revenues of (US Dollars) US$15,790 million for the fiscal year ended December 2021 (FY2021), an increase of 74.5% over FY2020. The operating profit of the company was US$1,693 million in FY2021, compared to an operating loss of US$3,816 million in FY2020. The net profit of the company was US$977 million in FY2021, compared to a net loss of US$3,074 million in FY2020. The company reported revenues of US$6,728 million for the second quarter ended June 2022, an increase of 43.3% over the previous quarter.

Key Facts

KEY FACTS

Head Office Southwest Airlines Co2702 Love Field DrPo Box 36611DallasTexasDallasTexasUSA

Phone 1 214 7924000Fax Web Address www.southwest.comRevenue / turnover (USD Mn) 15,790.0Financial Year End DecemberEmployees 62,333New York Stock Exchange Ticker LUV

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SWOT Analysis

SWOT ANALYSIS

Southwest Airlines Co (Southwest Airlines) is a provider of passenger airline services. Operational performance, fleet network and business expansion are the company’s key strengths, even as increasing trade receivables remains a cause for concern. Growth prospects for the aviation industry, a positive outlook for the US T&T industry and growth initiatives could provide new opportunities to the company. However, fluctuations in fuel prices, increasing manpower costs in the US, coronavirus (COVID-19) and stringent government regulations could affect the company’s performance.

Strength

Fleet NetworkOperational PerformanceBusiness Expansion

Weakness

Increasing Trade Receivables

Opportunity

Positive Outlook for US T&T IndustryGrowth Prospects: Aviation IndustryGrowth Initiatives

Threat

Coronavirus (COVID-19)Fluctuations in Fuel PricesIncreasing Manpower Costs in USStringent Government Regulations

Strength

Fleet Network

Southwest Airlines has a strong fleet network. Based on the US Department of Transportation's most recent data, the company is the US's largest carrier in terms of originating domestic passengers boarded. As of December 31, 2021, the company had 728 Boeing 737 aircraft of which 70 were finance leased and 67 were under operation. Out of 737 aircraft, 452 are Boeing 737-700; 207 are Boeing 737-800, and 69 are Boeing 737 MAX 8. The company also has plans to add 380 aircraft by 2026 comprising 219 MAX 8 Firm aircraft, 115 Max 8 aircraft and 30 Max 7 Firm aircraft. It served 107 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and ten near-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos.

Operational Performance

Operational performance helps in enhancing investor confidence and the company’s ability to pursue growth plans. Southwest Airlines recorded a strong operating performance in FY2021 during which it recorded revenues of US$15,790 million, with an annual growth of 42.7%. The increase was primarily a result of improvement in revenue of its Passenger, Freight and Other segments. The company reported an operating income of US$1,693 million in FY2021 as compared to an operating loss of US$3,816

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million in FY2020. The company’s operating margin was 10.7% in FY2021, which was higher than the operating margin of -42.2% in FY2020. Its return on equity (ROE) was 9.4% in FY2021, significantly higher than ROEs of -34.6% in FY2020.

Business Expansion

Southwest Airlines has strengthened its business operations by expanding the existing businesses that complement its operations. An inorganic growth strategy enhances the company’s depth of expertise, broadens its product and service portfolio, and increases its shareholder value. The company launched six new destinations, which are Hilo International Airport, Cozumel International Airport, Miami International Airport, Palm Spring International Airport, Montrose Regional Airport and Yampa Valley Regional Airport. The company has plans to add other new destinations, which are Chicago O’Hare International Airport, Sarasota Bradenton International Airport, Colorado Springs Municipal Airport, Savannah/Hilton Head International Airport, Houston’s George Bush Intercontinental Airport, Santa Barbara Airport, Fresno Yosemite International Airport and Jackson-Medgar Wiley Evers International Airport in Mississippi.

Weakness

Increasing Trade Receivables

Southwest Airlines has reported an increasing trend in its trade receivables for the past years. Increasing trade receivables could adversely affect the company’s cash flows. The company’s trade receivables stood at US$490 million in FY2021, and US$320 million in FY2020, reflecting an increase of 34.6% over the previous year. The company maintains a substantial amount of current assets in the form of receivables. In FY2021, the company’s trade receivables accounted for 2.7% of its current assets.

Opportunity

Positive Outlook for US T&T Industry

The company is likely to benefit from the positive outlook for the US Travel and Tourism (T&T) industry. In spite of being affected by the COVID-19 pandemic, the Travel and Tourism (T&T) sector is optimistic about growth as vaccine distribution across the world gains momentum and economic activities return to pre-Covid levels. According to the World Travel & Tourism Council (WT&TC), in 2028, the direct contribution of the US T&T industry to the country’s GDP is expected to reach US$673.9 billion, while the industry's contribution to the US economy is expected to reach US$1,954.1 billion. Visitor exports are expected to reach US$291.7 billion in 2028. The increase in investments to US$246.2 billion in 2028 is likely to spur growth in the US T&T industry.

Growth Prospects: Aviation Industry

Southwest Airlines could benefit from the positive outlook for the global aviation industry, which could drive the demand for its services in the aviation market space. According to the Airports Council

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International (ACI) report, the global passenger volume is projected to reach 20.9 billion by 2040, with an annual growth of 4.1%. China is forecasted to be the largest air passenger market with 4.0 billion passengers, a 19% share of the global air passenger traffic. The US and India are expected to be second and third largest air passenger traffic markets with 3.1 billion and 1.3 billion passengers, respectively. Emerging economies including Indonesia, Turkey and Vietnam are expected to play significant roles in the global passenger traffic market. The global air cargo volume is also expected to reach 203.4 million tonnes by 2040. It is also expected that over 20% of all air cargo could be handled in the US alone by 2040, while China and the UAE could be considered as the second and third largest air cargo markets. The US, China and India are estimated to be the primary markets for global aircraft movements by 2040, representing 21%, 16% and 4% of aircraft movements, respectively.

Growth Initiatives

Southwest Airlines taking various initiatives to drive growth. The initiatives are expected to strengthen the company’s operations and increase its returns. In June 2022, the company announced an investment into SAFFiRE Renewables LLC to develop and produce scalable, sustainable aviation fuel (SAF). In May 2022, the company launched a new fourth fare product in Wanna Get Away Plus providing travellers with more flexibility and additional perks. In April 2022, the company launched new routes in San Diego and San Jose Gain Big. In March 2022, the company announced the opening of a new Technical Operations complex at Denver International Airport. In February 2022, the company and Travelport bring EarlyBird Check-In to Travelport. In February 2022, the company collaborated with Luck Reunion to become the Official Airline of Luck Reunion. In January 2022, the company launched interest-free payment instalments to Hawaii with Buy Now Pay Later Leader, Uplift. In the same month, the company and iAero Thrust signed an MRO services agreement to provide CFM56-7 engine hospital repair, on-wing support, and test services.

Threat

Coronavirus (COVID-19)

The coronavirus (COVID-19) pandemic affected global economy severely. It resulted in huge human loss, and protection measures such as isolation, lockdown, quarantine, and social distancing to contain the spread of the virus brought economic activity to a standstill. It affected international economic and trade functions, ranging from tourism and hospitality, medical supplies and other global value chains, consumer electronics, and financial markets to energy, transportation, food, and various social activities. If the pandemic continues to ravage the world, it might have a negative impact on the global economy.

Fluctuations in Fuel Prices

The company’s business is highly dependent on the price and availability of aircraft fuel, and its performance could be adversely affected by high volatility in fuel costs, increased fuel prices and disruptions in the supply of aircraft fuel. The fuel market is volatile and changes according to market, political and economic movements. Therefore, a modest decline or increase in prices could have a significant impact on the company's business operations. Several factors are responsible for such changes including domestic and foreign supply of oil, global economic conditions, price and availability of

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alternative fuels, governmental regulations, weather conditions and technological advances, among others. Volatile prices could affect the company’s overall profitability.

Increasing Manpower Costs in US

Increasing manpower costs could increase the company’s operating costs and hamper its profits. The tight labor markets, government-mandated increases in minimum wages and a higher proportion of full-time employees are increasing labor costs. Effective January 2021, 21 states in the US increased their minimum wages. Alaska, Florida, Minnesota, Montana, Ohio, South Dakota, and Vermont increased their hourly minimum wage based on the cost of living to US$10.34, US$8.65, US$10, US$8.8, US$9.45 and US$11.7, respectively. Arizona, Arkansas, California, Colorado, Illinois, Maine, Maryland and Massachusetts increased their hourly minimum wages to US$12.15, US$11, US$13, US$12.32, US$11, US$12.15, US$11.75 and US$13.5, respectively. Whereas states such as Michigan, Missouri, New Jersey, New Mexico, New York, and Washington increased their hourly minimum wages due to previously approved legislation to US$9.65, US$10.3, US$12, US$10.5, US$12.5 and $13.69, respectively.

Stringent Government Regulations

Airlines are subject to extensive regulatory and legal compliance requirements that result in significant expenditures. For instance, the Federal Aviation Authority (FAA) is an authority body, which regulates all safety issues in civil aviation operations. FAA’s safety jurisdiction includes aircraft maintenance and operations such as equipment, ground facilities, dispatch, communications, flight training personnel, and other matters affecting air safety. These will increase the aircraft operations cost significantly. The company expects to continue incur expenses to fulfill the FAA's regulations. These authorization laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase operating expenses or reduce profit margins. As a result, complying with such laws, regulations and actions increases the operating costs of Southwest Airlines which could have a significant effect on its profitability and margins.

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