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Southwest airlines business analysis
Southwest airlines business analysis
Southwest airlines business analysis
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Financial risk is the risk a corporation faces due to its exposure to market factors such as interest rates, foreign exchange rates, commodities and stock prices. Financial risks for the most part, can be hedged due to the existence of large, efficient markets through which these risks can be transferred. This is unlike operating risk, which is associated with more manufacturing and marketing activities. Operating risk cannot be hedged because these risks are not traded.
In GM’s case they used a passive hedging policy in which they hedged 50% of all significant foreign exchange exposures arising from cash flows associated with ongoing business. Passive hedging is used by highly risk-averse companies that would like to be completely certain of their future cash flows through hedging a significant portion of their risk exposure. This can be achieved by locking in a specific price either through long- term contracts between a supplier and buyer, or through a derivatives contract such as futures, forward or swaps, which are available on most leading commodity exchanges. In the case of GM, they used forward contracts to hedge exposure arising within six months. GM’s longer-term strategy is that of options, which allows them to either buy or sell in the spot market without necessarily being committed to hedge contract. But such a method imposes a heavy hedging cost in the form of option premiums which have to be paid up front at the time of hedging.
The hedging strategy that I have chosen is that of Southwest Airlines strategy over the past decade. Up until the 3th quarter of 2008 they enjoyed 69 straight quarterly profits dating back to 1991. In 2008 Southwest had over 70% of its fuel needs hedged at around $51 a barrel. Using an...
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...mpany overall. They do not take the calculated risks that other foreign auto manufactures have done in the past and they have been very slow in implementing any kind of fuel efficient cars. Southwest has proved to be a very wise and smart player in the airline industry, even though they posted losses in the past 2 quarters, this does not overshadow the 17 year streak, which has allowed them to expand more than any other airline in the industry. Southwest would be my preferred business to work with.
Bibliography
1: http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf
2: http://news.morningstar.com/articlenet/article.aspx?id=271669
3: http://www.chron.com/disp/story.mpl/business/steffy/6063444.html
4: http://www.purchasing.com/article/CA6631782.html
Resources
http://www.usatoday.com/money/industries/travel/2008-07-23-southwest-jet-fuel_N.htm
Another internal challenge for Southwest Airlines is the conflicting management style and business operation with AirTran. On top of that, the external challenges such as the increase of competitions and gas prices are some of issues f...
Despite its growing domestic network, the company didn’t offer international flights until July 2014, and even then, it only offered limited destinations (“Southwest Corporate Fact Sheet,” n.d.). Furthermore, the company’s reliance on a single aircraft is cause for concern. Southwest Airlines was also weak with technology utilization initially but has since turned this into an asset, as described later. Finally, the company has a limitation with providing customer perks due to its low-cost operations (Ross & Beath,
The seventh largest major domestic airline in the United States (US), Southwest Airlines, is commonly known or referred to as a low-cost carrier. Southwest Airlines is the only major airline that provides short-haul, point-to-point service in the United States. In fact it was the first airline of its type ever started; it has become the archetypical low-cost airline. The idea has proven itself so well, that other start-up airlines have based their company strategies upon the basics of Southwest. Today, there are two other low-cost air carriers (the other two airlines are considered national airlines and not major airlines) that are actively and aggressively competing with Southwest Airlines for business and profit turning. The three American low-cost air carriers are currently posting profits even in light of the US economy’s current state of affairs, with Southwest Airlines first, JetBlue second, and Air Tran third, in profits. How is this possible when the major six airlines are reporting losses of millions and millions of dollars each quarter? The answer to this question begins about 30 years ago.
hedging risks and what instruments to use are really depend on whether the company is risk
Southwest Airlines strategy of focusing on short haul passenger and providing rates as low as one third of their competitors, they have seen tremendous growth in the last decade. Market share for top city pairs on Southwest's schedule has reached 80% to 85%. Maintaining the largest fleet of 737's in the world and utilizing point-to-point versus the hub-and-spoke method of connection philosophy allowed Southwest to provide their service to more people at a lower cost. By putting the employee first, Southwest has found the key to success in the airline business. A happy worker is a more productive one as well as a better service provider. Southwest will continue to reserve their growth in the future by entering select markets only after careful market research.
It is evident that the greatest strength that Southwest Airlines has is its financial stability. As known in the US airline industry, Southwest is one of those airlines who are consistently earning profits despite the problems the industry is facing. With such stability, the corporation is able to make decisions and adjust policies, which other heavily burdened airlines may not be able to imitate.
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
...ises for each period. This diagram assumes a positive contango. Exhibit 9 however assumes negative contango, and as we can see this leads to a lower profit for each period. Since the contract does not have a permanent delivery date, then the company does not promise to deliver gold for any one particular year. Therefore there is little risk that the company hedges more gold than is deliverable using this strategy. American Barrick was able to negotiate agreements giving them a 10-year maturity. If the company were to rollover up until maturity and the spot price at that time is greater than the forward price than they could miss out on a very high price rise. However, the company is able to lessen large amounts of opportunity costs by using the SDC and the chance of missing out on a high price at the year of maturity may very well be counterbalanced by this fact.
This is why they have become a company with high retention rates. Southwest Airlines is voted “the best place to work” for a simple reason. The company invests in their employees and is committed to their values and vision through training and development.
Southwest has comprehensive strategy and they work with harmony. They are low cost airlines which make the customer feel like royalty. Southwest have a winning strategy is proven by their profit year after year even thought they had economy crisis. Since 1973 Southwest reported a profit each year even when they lost billions of dollars from the year 1980 to 2009 because of the low operating cost strategy, low fares and customer service. Since the start of Southwest they have stay faithful of keeping low cost across the industry. Their value in corporate culture reflected through their prices and customer service.
Southwest Airlines has always proudly identified themselves as a low cost airline. They have successfully been able to incorporate Human Resource management, merger and acquisitions, financial performance and allocation of resources as part of their corporate strategy. When it comes to the meat and potatoes, Southwest Airlines has implemented a corporate value-creating strategy. Ultimately, because of this strategy, Southwest is surpassing its competitors and gaining a larger share of the market. Furthermore, this strategy is adding perceived value to its products and services by taking advantage of the economies of scope (Bradley, 2016). The airline’s business units can take advantage of their differentiation by lowering their cost structure. For example, Southwest Airlines 714 fleet consist of only one type of aircraft, the Boeing 737. The advantage of having one type of aircraft is extremely cost efficient as the airline only has to train mechanics to repair one type of aircraft and they only have to store parts for one type of aircraft therefore lowering overhead and human resources expenses which translates into lower fares to its passengers (Southwest,
It all started in 1971, when Rolling King and Herb Kelleher decided to challenge the existing rut of charging high prices for air travels. They considered the railways and roadways their competitors and decided to offer cheaper travel for smaller routes. The company was incorporated in 1967, apart from initial entry troubles, Southwest has been the only US airline to have earned profits since 1973. The eccentric company’s outlandish way of conducting themselves has been the sole reason for Southwest Airlines to succeed in a highly competitive and packed industry.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
The mission of Southwest Airlines is a dedication to the highest quality of service delivered with warmth, friendliness, individual pride, and company spirit (Mission…, 2007). The company also provides opportunities for learning and personal growth to each employee. Creativity and innovation is very important and highly encouraged, for the purposes of improving effectiveness. Employees are to be provided the same concern, respect, and caring attitude within the organization that the employees are expected to share with the customer. Southwest Airlines was initially created to be a low-cost alternative to high price of intra-Texas air carriers (Freiberg, 1996). Southwest’s fares were originally supposed to compete with car and bus transportation. It was a little airline, and it would withstand the test of time. As a discount, no-frills airline, it would provide stiff competition for larger airlines. Their strategy was to operate at low cost, offering no food, no movies, no first class, and no reserved seats. They created their own market and provided increased turnaround times at the gate, by avoiding hub-and-spoke airports and opting for short-haul, direct flights. Through this market approach, Southwest has a majority of market share in the markets they serve.
After the financial crisis of the late 1990s, the demands for risk management tools have increased. The investors have been effectively utilizing such products as KOSPI 200 futures and options, 3-Year KTB futures and USD futures to meet their hedging needs.