Southwest Airlines: Strengths, Weaknesses, Opportunities, Threats

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh off a decent third quarter earnings report, I would like to pinpoint one of the largest and most prominent American airline companies: Southwest Airlines (NYSE: LUV).  

Strengths:

  • Reasonable Valuation:  The company carries a price to earnings ratio of only 14.10, which by nearly all standards is relatively cheap
  • Widespread Reach: As of the end of 2011, the company serviced 72 cities in 37 states, stretching across the entire United States, and their AirTran acquisition now extends their reach into international skies, mostly over Mexico and the Caribbean islands; so, the company’s operations are by no means concentrated in a specific region
  • Dividend: The company currently pays out quarterly dividends of $0.01, which annualized puts the company’s dividend as yielding 0.44%; while this dividend may seem unimportant and insignificant, it is still almost half of a one year CD rate
  • Modest Sales Growth: Year over year sales growth has been in the double digits over the past years; however, the company’s growth is projected to slow to the still modest high single digit rate into the future
  • Established Brand:  Much of an airline’s success is due to their reputable brand, as fliers flock to more established and distinguished companies with track records of safety, and having an established brand is a major advantage   

Weaknesses:

  • Debt: The company is estimated to possess $361 million of debt on their balance sheet, and until they pay down these debts it will drag significantly on their business
  • Mounting Operating Expenses: The average cost per gallon of fuel from 2005 to 2011 grew 182.30%, the consumer is constantly demanding added services and amenities to their flights, and the unions are viscously battling for more money for their members; at the end of the day the company does not have much money left over (net profit margin is 1.14%)
  • Relative Expensive Price of Product: While Southwest is known for offering great values, it still is a very costly endeavor to buy a ticket on an airplane, and in times of economic downfall people simply do not have extra money

Opportunities:

  • Expansion: Just in 2011 the company added Charleston, South Carolina; Greenville-Spartanburg, South Carolina; and Newark, New Jersey to the list of cities the company services, and further expansion is probable
  • Gaining Market Share: Recently, American Airlines has appeared in the news in a negative light, with loose seats and massive layoffs; with this comes an opportunity for Southwest to capture the business American Airlines once had
  • Acquisitions: On May 2, 2011 Southwest acquired AirTran, and further acquisitions are undeniably a possibility, especially with Southwest being relatively large

Threats:

  • Weather Uncertainty: As we have seen most recently with Hurricane Sandy, natural disasters can cause major losses in business for the airlines, and because Mother Nature is so unpredictable, there is always major uncertainty revolving around the company
  • Immense Competition: The airline industry is incredibly competitive, and the race to get the consumer’s business often leads to margin contraction
  • Vulnerability to Rising Oil Prices: When jet fuel prices rise, airline companies are faced with the decision of passing the pain onto their customers and possibly losing business, or swallowing the costs and ruining their margins
  • Exposure to Shaky American Economy: The company operates mainly in the United States of America, and thus any economic slowdown exclusive to the American economy could drastically hurt Southwest’s business, while other international companies possess the ability to weather the storm

Competitors:

Major publicly-traded competitors of Southwest include JetBlue Airways (NASDAQ: JBLU) and US Airways (NYSE: LCC). JetBlue is significantly smaller than Southwest, and directly competes with Southwest in most of their core markets. JetBlue carries a more reasonable valuation; however, it pays out no dividend. US Airways is larger than JetBlue, and like JetBlue competes in all of Southwest’s main markets. US Airways carries an even more reasonable price to earnings ratio and pays out no dividend.   

The Foolish Bottom Line:

Southwest Airlines possesses several strengths, weaknesses, opportunities, and threats; however, in the end it's a trailblazer in the airline industry that appears to have just too many weaknesses. The main, and most important, is the fact that oil prices are heavily expected to rise into the future, and this rise will put an ever greater strain on Southwest’s already depleted margins. If oil prices are brought under control with certainty, then Southwest is a great investment; but until then, Southwest is just too vulnerable to oil prices.   


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Southwest Airlines. Motley Fool newsletter services recommend JetBlue Airways and Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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