Case Prepared By: Corey Daigle, Seth Fraser, and Megan Foreman

OverviewSouthwest Airlines Who we are, What we do, and How we got hereMission and VisionInternal Assessment- Financial Condition- IFE MatrixExternal Assessment- EFE Matrix- CPM MatrixStrategy Formulation- SWOT Matrix- Space Matrix- IE Matrix- Grand Strategy Matrix- QSPM Matrix- Matrix AnalysisStrategic Planning for the FutureEPS/EBITImplementation2004 FinancialsSouthwest in the News

Southwest Airlines Co.Headquarters: P.O. Box 36611 2702 Love Field Drive Dallas, TX 75235 Phone: 214-792-4000 Stock Symbol: LUV (NYSE)

all graphics and information found on Southwest Airlines website at www.iflyswa.com or www.southwest.com

Who We Are and What We DoMajor domestic airline that provides short haul, high frequency, point-to-point, low fare serviceIncorporated in Texas and commenced Customer Service on June 18, 1971 with 3 Boeing 737 aircrafts serving 3 cities Dallas, Houston, and San AntonioToday, SW operates over 400 Boeing 737 aircrafts in over 59 citiesLowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest fares

Fun Facts In 2004, SW served:49 million cans of soda, juices, and water 8.1 million alcoholic beverages3.3 million bags of pretzels95.3 million bags of peanuts

Innovation1st airline to offer a profit-sharing plan to employees beginning in 1979, employees now own about 10% of company stock1st major airline to offer ticketless travel system-wide1st major airline to enter information superhighway by creating its own web page1st airline to offer online booking

How We Began 32 years ago, Rollin King and Herb Kelleher got together and on a cocktail napkin they came up with a simple notion that turned into the 4th largest airline- If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline.

Existing Mission Statement 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.

New and Improved The mission of Southwest Airlines is to provide excellent customer service and timely air travel at an affordable price for markets in the United States. We commit ourselves to the highest standards of integrity in doing what is best for our passengers, the airline industry, our employees and our stockholders. By using the latest technology in engine maintenance, we ensure safety, efficiency, and keep fuel emissions below governmental regulations. Through this mission, we at Southwest ensure high company spirit and long term financial prosperity.

Vision Statement To provide the most affordable, reliable, and comfortable air transportation in the world.

Deltas Vision Since the founding of Delta Air Lines, our company has stood for safe and reliable air transportation, distinctive customer service, and hospitality from the heart. Our vision is for Delta to build on its traditions and always to meet our customers expectations while taking service to even higher levels of excellence. We are a leader in a business we know bestairline transportation. We intend to be an even greater company and will focus our time, attention, and investment on building that leadership. We are dedicated to being the best airline in the eyes of our customers. We will provide value and distinctive products to our customers, a superior return for investors, and challenging and rewarding work for Delta people in an environment that respects and values their contributions. * From www.delta.com

Financial ConditionOverall

Posted a profit for 31st consecutive year

Airline industry as a whole suffered a net loss for 3rd consecutive year

Strong Financials (End of 2003)- 1.87 billion in cash on hand- fully available bank revolving credit of 575 million- unmortgaged assets of over 5 billion- debt to capital ratio of less than 40% (includes leases as debts) * From 2003 Annual Report

Net Income increased 83.4% in 2003Operating Revenue increased 415 million (7.5%) 400 million (7.5%) increase in passenger revenues5.6% increase in revenue passenger miles4.2% increase in added capacity as measured in available seat miles Addition of 13 aircrafts in 2003 * From 2003 Annual Report

Key Financial Ratios

Stock Information

LUV compared to Airline Industry

Net Worth AnalysisCash Value of Southwest Airlines at year-end 2003Equity + PIC + RE = $4930Net Income x 5 = $2210SP (14.5)/EPS(.66)xNI(398) = $8879# Shares Outstanding x SP = $11446

Method Average = $6886

Strengths / WeaknessesStrengths 1. High capacity usage2. Named the best low cost airline leader for the last three consecutive years3. Diversity in upper management4. Revenues increase by 8 percent to 5.94 billion in fiscal year 20035. Net income increased 83 percent to $402 million in fiscal year 20036. Dominates the short haul segment of airline industry7. Fourth largest domestic airline8. In 2003 Southwest posted a profit for the 31st consecutive year

Weaknesses 1. No international flights2. No segmented seating3. Dependent on a single producer4. Lack of exposure towards online booking agencies5. Four out of five employees are members of the union6. Carry a small amount of freight and cargo7. Do not use chat communication such as e-mail8. Do not offer morning flights

Key Internal FactorsWeightRatingWeightedScoreStrengths1. High capacity usage0.0840.322. Named the best low cost airline leader for the last three consecutive years0.1040.403. Diversity in upper management0.0430.124. Revenues increase by 8 percent to 5.94 billion in fiscal year 20030.0530.155. Net income increased 83 percent to $402 million in fiscal year 20030.0840.326. Dominates the short haul segment of airline industry0.1040.407. Fourth largest domestic airline0.0330.098. In 2003 Southwest posted a profit for the 31st consecutive year0.1040.40Weaknesses1. No international flights0.0910.092. No segmented seating0.0320.063. Dependent on a single producer0.0520.104. Lack of exposure towards online booking agencies0.0520.105. Four out of five employees are members of the union0.0210.026. Carry a small amount of freight and cargo0.0220.047. Do not use chat communication such as e-mail0.0320.068. Do not offer morning flights0.0320.06TOTAL1.002.73

External Audit

OpportunitiesNational and international markets

Growth of older generation

Industrial research and development

Growth of Hispanic population

5. New technology opens the door for new products/services

Increased Internet advertising

Longer flights

8. Growth of business and leisure travel

Threats

Decline of leisure travel due to economy and terrorism

2. Competing online ticket reservation systems.

New government regulations that make operations costlier.

Demand for air travel has dropped sharply since September 11th.

Gas and oil price fluctuations.

Terrorist attacks.

Increased restrictions to limit noise (including restrictions on types of aircraft used and limits on number of operations)

8. Annual airline security costs have increased.

EFE Matrix

Competitive Profile Matrix

SWOT

Strengths

Weaknesses

1. High capacity usage.

2. Named the Best Low Cost Airline leader for the last three consecutive years.

3. Diversity in upper management.

4. Revenues increased by 8% to 5.94 billion in fiscal year 2003.

5. Net Income increased 83% to $402million in fiscal year 2003.

6.Dominates the Short haul segment of Airline Industry.

7.

Fourth largest domestic airline.

8. In 2003 Southwest posted a profit for the 31st consecutive years.

1.No international flights.

2.No segmented seating.

3.Dependent on a single producer. (Boeing)

4.Lack of exposure towards online booking agencies.

5.Four out five employees are members of the union.

6.Carry a small amount of freight and cargo.

7.Do not use chat communication such as e-mail.

8.Do not offer morning flights.

Opportunities

S-O Strategies

W-O Strategies

1.National and International Markets

2.Growth Of Older Generation

3.Industrial Research and Development

4.Growth of Hispanic Population In U.S.A.

5.New Technology Opens the Door for New Products/ Services

6.Increased Internet advertising

7.Longer flights

8.Growth of business and leisure travel

1. Expand into other countries or new cities. (S2, S6, S7, O1, O7)

1. Expand into Canada.

2. Expand into Mexico. (W1, W2, W3, O1, O3, O6, O7)

Threats

S-T Strategies

W-T Strategies

1.Decline of leisure travel due to economy and terrorism

2.Competing online ticket reservation systems.

3.New government regulations that make operations costlier.

4.Demand for air travel has dropped sharply since September 11th.

5.Gas and oil price fluctuations.

6.Terrorist attacks.

7.Increased restrictions to limit noise (including restrictions on types of aircraft used and limits on number of operations)

8.Annual airline security costs have increased.

1. Increase advertising for southwest.com. (S8, T2)

SPACE Matrix

Y axisFinancial strength +5+1 worst to + 6 bestY axis: 5 + (-3) = 2Environmental stability -3-1 best to 6 worst

X axisIndustry strength 3 1 worst to 6 bestX axis: 3 + (-2) = 1Competitive advantage-2-1 best to -6 worst

IE MatrixSegmentRevenue EFEIFEPassenger $5.4 B 3.34 3.32 Freight $1.1 M 3.20 3.80

4. Joint venture3. Horizontal diversification2. Conglomerate diversification1. Concentric diversificationSLOW MARKET GROWTHQuadrant IVQuadrant IIISouthwest POSITIONCOMPETITIVEPOSITIONSTRONGCOMPETITIVEWEAKQuadrant IQuadrant IIRAPID MARKET GROWTHGrand Strategy Matrix

Matrix Analysis and SWOT summaryAlternative StrategiesIESPACE GRANDCOUNTForward Integration X X 2Backward Integration X X 2Horizontal IntegrationX X 2Market Penetration X X 2Market Development X X 2Product DevelopmentX X 2Concentric Diversification X X 2Conglomerate Diversification X X 2Horizontal Diversification X X 2Joint Venture X 1Retrenchment DivestitureLiquidation

Strategic plans for the futureSouthwest Airlines should expand into Mexico.Expand into CanadaExpand domestically

EPS/EBIT AnalysisAmount Needed$1,000MInterest 5%Tax Rate 38%Share Price $7.20Shares Outstanding 770M

EPS/EBIT Analysis

ImplementationObjectives5 Year PlanIncrease domestic routes to include 80% of the continental United StatesIncrease operating revenue by addition of more aircrafts10 Year Plan1st in industry for short-haul flights

2004 Financial ConditionOperating Revenue $6.53 billionNet Income $313 millionEPS $.40 Total Debt $1.7 billion

Southwest in the News

06/19/03 Southwest Airlines Pilot Honored as an American Hero