AVA2003: Financial Analysis of Southwest Airlines Annual Report

This report provides a comprehensive financial analysis of Southwest Airlines, focusing on its performance in 2018. It examines key financial ratios, including liquidity, profitability, and asset management, to assess the airline's financial health. The analysis includes a discussion of the company's future outlook, considering both opportunities and risks within the aviation industry, such as fuel costs and demand for services. The report also explores the company's risk management strategies, particularly concerning financial risks and commodity price fluctuations. The report concludes with a summary of the airline's financial performance and future prospects, highlighting the importance of factors like economic conditions and operational efficiency. The report uses ratio analysis as a quantitative assessment tool.

Running head: AVIATION MANAGEMENT
Aviation Management
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Financial Analysis.......................................................................................................................2
Future Outlook and Opportunities...............................................................................................6
Risk Management........................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
Appendix........................................................................................................................................13

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Introduction
The financial analysis has been done for the Southwest Airlines Entity that is a major
American Airlines that is headquartered in Dallas, Texas and the entity is now said to be the
world’s largest low-cost carrier that is operating in the Aviation Sector. The financial analysis
has been done for the Southwest Airline Entity for the year 2018 whereby the profitability and
financial performance for the evaluated entity has been well done. In order to well analyze the
financial performance of the entity has been well analyzed over a period of time. In order to
better understand the business opportunities available with the entity the business operations has
been well evaluated for the stated entity. Risks are an important constraints for the entity it is
equally important to identify the major risks that would be potentially affecting the business
operations of the entity.
Discussion
Financial Analysis
The financial analysis has been done for the entity with the help of ratio analysis an
quantitative assessment tool in order to determine the performance and operations of the entity in
terms of liquidity, profitability, asset management and financial risk that is associated with the
bank (Investors.southwest.com 2019).
Liquidity Ratio: In order to well analyse the liquidity position or the ability of the evaluated
entity for meeting up the reported current obligations. The current ratio has been calculated. The
current ratio of the entity has been around 0.64 times in the year 2018 and the same can be well

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said to be too low as compared to the current liabilities reflected in the books of account for the
entity (Annual Report 2019). A graphical analysis of the liquidity ratio can be well shown below:
2014 2015 2016 2017 2018
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80 0.74
0.54
0.66 0.70 0.64
Current Rati o
Profitability Analysis: The profitability aspect of the entity can be well evaluated with the help
of net profit margin and return generated on shareholder’s equity.
Net Profit Margin: The net profit margin for the entity was around 11.22% and on an average in
the five-year time period the same has remained somewhat to around 11.16% on an average in
the five-year time period (Macrotrends.net 2019). The sustainable growth in the net profit for
the entity can be well contributed or related to the rise in the revenue figure for the entity.
2014 2015 2016 2017 2018
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
6.11%
11.00% 10.99%
16.48%
11.22%
Net Profi t Rati o

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Return on Shareholder’s Equity: The return on shareholder’s equity can be well computed
with the help of the net profitability generated by the entity on the total equity value that has
been deployed by the entity. The return on shareholder’s equity for the Southwest Airline has
been quite volatile but the same has been quite impressive standing at around 25.02% for the
entity in the financial year 2018 (Marketscreener.com 2019).
2014 2015 2016 2017 2018
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
16.77%
29.64% 26.58%
33.44%
25.02%
Return on Equity Shareholder's
Activity Ratios: In order to well analyze the activity ratio of the entity the total asset turnover
ratio and inventory turnover ratio for the entity.
Total Asset Turnover Ratio: The calculated ratio for the entity was around 0.84 times it shows
that the amount of revenue that is generated by the entity is around 84% of the total assets
deployed by the entity. The higher the asset turnover ratio the higher is the efficiency ratio for
the entity reflecting the ability of the management of the entity in utilizing the total assets of the
entity.

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2014 2015 2016 2017 2018
0.78
0.80
0.82
0.84
0.86
0.88
0.90
0.92
0.94 0.92 0.93
0.88
0.84 0.84
TotaL Assets Turnover
Inventory Turnover Ratio: The inventory turnover ratio for the entity has been around 34 times
in the year 2018 and the same has well decreased in the five year time period which can be well
evaluated in the five-year time period. The inventory turnover ratio for the entity was around
34.51 times in the year 2018.
2014 2015 2016 2017 2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
41.08 43.16 41.99
35.64 34.51
Inventory Turnover Ratio
Financial Risk Ratio: In order to well analyze the financial risk associated with the entity the
debt to equity ratio has been well computed for the entity whereby the debt to equity ratio has
been computed for the entity, The debt to equity ratio has been consistently decreased in the five-
year trend period for the entity. The reported debt to equity ratio for the entity in the year 2018
was around 28.12%.

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2014 2015 2016 2017 2018
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00% 35.93% 34.53% 33.42% 31.83%
28.12%
Debt to Equity Rati o
Future Outlook and Opportunities
The future outlook for the entity can be well evaluated with the help of the business
environment and the external factors that would be affecting the operations of the entity. The
business operations of the entity is highly dependent on the growth and prosperity in the aviation
sector. Certain key aspects like the demand for the aviation services which has particularly
increased due to increased demand in better connectivity and efficient transportation way has
enabled companies like Southwest Airlines to increase their business operations and revenue
base of the entity (St 2017). It is consecutively important to note that the growth of the economy
on the one hand side has also helped the entity and would be helping the entity expand the
business activities it undertakes. Operational costs as reviewed through the financials of the
entity also clearly states that salary wages and fuel costs plays a predominant role. The
management in order to increase the efficiency of the business and reduce the operational costs
has undergone several technological changes like up gradation of aircraft engines, fuel efficiency
parameters, and other tools and machineries that would simplify the operations and activities
undertaken by the entity (Marketwatch.com 2019). Automation of various business activities is
the one key business challenges that the entity is facing and the management of the entity is

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taking several initiative like application of Artificial Intelligence in the various business courses
so that it can better strategize the operations of the entity. The future outlook of the entity also
seemed to be positive when analyzed and viewed from the airlines or aviation growth that is well
shown below:
The key opportunities that the entity has is the low cost fares that it offers and a wide range of air
routes it covers. The turn-around time taken by the entity in the airlines in their operations is
comparatively less, which is around 25 minutes. The entity is also operating various types of
Boeing Airplanes that would be helping the entity in increasing the overall efficiency.

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Risk Management
Risk Management plays an important role and in order to well analyze the risk
management strategies followed by the entity both business and financial risks that are
associated with the entity will be evaluated (Nasdaq Market site Investor Relations Diversity and
Diversity 2019). Financial Risks can be well evaluated with the help of the financial risk of the
entity were by the debt to equity ratio for the entity has been evaluated in the stated time period
(Prezi.com 2019). On the other hand, the entity has taken substantial measures in order to curb
down the business risk of the entity by applying derivatives contract in order to curb down the
commodity risk that is faced by the entity. The key commodity that is used by the entity in the
business operations of the entity is Oil and the entity has undertaken various derivatives contracts
whose coverage details in terms of years of contract covering the risk exposure are as follows:

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It is important to note that fuel is an important commodity in the business course of
operations that is utilized by the entity and the management of the entity have taken preemptive
actions for stabilizing the price fluctuations of this commodity. If the cost of crude oil changes
by 1% then the same could potentially impact the overall business revenue and the overall
profitability of the entity (Levine-Weinberg 2019). The estimated economic fuel price per gallon
for the fuel has been well determined so that the entity can take derivatives as a hedging tool.
With the changes in the prices of the commodity prices in the fiscal year 2019 that is expected
and the associated hedging cost that the entity would be incurring is well stated below:

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Conclusion
The financial analysis has been well done for a stated five year term period by
specifically taking the financial performance of the entity for the year 2018. The key future
outlook for the industry and for the entity by taking the business factors and macro-economic
conditions were the key factors considered. Macro-Economic factors like inflation, interest rates
and growth in the GDP of the economy would be some of the key aspects that the entity would
be considering. On the other hand, the risk management policies undertaken and the action plan
planned out by the management of the entity were some of the key aspects discussed. In order to
well conceptualize and graphically present the financial performance of the entity in the current
and historical year ratio analysis was applied as an quantitative assessment tool.

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References
Annual Report. 2019. [online] Available at:
http://investors.southwest.com/~/media/Files/S/Southwest-IR/LUV_2018_Annual
%20Report.pdf [Accessed 8 Oct. 2019].
Investors.southwest.com. 2019. Annual Reports. [online] Available at:
http://investors.southwest.com/financials/entity-reports/annual-reports [Accessed 8 Oct. 2019].
Levine-Weinberg, A. 2019. Southwest Airlines Earnings: A Solid End to 2018 -- and 2019 Looks
Even Better | The Motley Fool. [online] The Motley Fool. Available at:
https://www.fool.com/investing/2019/01/24/southwest-airlines-earnings-a-solid-end-to-
2018.aspx [Accessed 8 Oct. 2019].
Macrotrends.net. 2019. Southwest Airlines Financial Ratios for Analysis 2005-2019 | LUV.
[online] Available at:
https://www.macrotrends.net/stocks/charts/LUV/southwest-airlines/financial-ratios [Accessed 8
Oct. 2019].
Marketscreener.com. 2019. SOUTHWEST AIRLINES : Financial Data Forecasts Estimates and
Expectations | LUV | MarketScreener. [online] Available at:
https://www.marketscreener.com/SOUTHWEST-AIRLINES-13439/financials/ [Accessed 8 Oct.
2019].
Marketwatch.com. 2019. Southwest Airlines Co.. [online] Available at:
https://www.marketwatch.com/investing/stock/luv/profile [Accessed 8 Oct. 2019].

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Nasdaq Market site Investor Relations Diversity, I. and Diversity, I. 2019. Southwest Airlines
Entity Common Stock (LUV) Financials. [online] Nasdaq.com. Available at:
https://www.nasdaq.com/market-activity/stocks/luv/financials [Accessed 8 Oct. 2019].
prezi.com. 2019. Southwest Airlines Financial Analysis. [online] Available at:
https://prezi.com/ju66q8wn1zqu/southwest-airlines-financial-analysis/ [Accessed 8 Oct. 2019].
St, S. 2017. All You Need To Know About Southwest Airlines Co’s (LUV) Financial Health.
[online] Simply Wall St. Available at: https://simplywall.st/news/all-you-need-to-know-about-
southwest-airlines-cos-luv-financial-health/ [Accessed 8 Oct. 2019].

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Appendix
1) Ratio Analysis