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

2. Overview Southwest Airlines – Who we are, What we do, and How we got here Mission and Vision Internal Assessment - Financial Condition - IFE Matrix External Assessment - EFE Matrix - CPM Matrix Strategy Formulation - SWOT Matrix - Space Matrix - IE Matrix - Grand Strategy Matrix - QSPM Matrix - Matrix Analysis Strategic Planning for the Future EPS/EBITImplementation 2004 Financials Southwest in the News

3. Southwest Airlines Co. Headquarters: P.O. Box 36611 2702 Love Field Drive 2702 Love Field Drive Dallas, TX 75235 Dallas, TX 75235 Phone: 214-792-4000 Phone: 214-792-4000 Stock Symbol: LUV (NYSE) Stock Symbol: LUV (NYSE) all graphics and information found on Southwest Airlines website at www.iflyswa.com or www.southwest.com

4. Who We Are and What We Do Major domestic airline that provides short haul, high frequency, point-to-point, low fare service Incorporated in Texas and commenced Customer Service on June 18, 1971 with 3 Boeing 737 aircrafts serving 3 cities – Dallas, Houston, and San Antonio Today, SW operates over 400 Boeing 737 aircrafts in over 59 cities Lowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest fares

5. Fun Facts In 2004, SW served: In 2004, SW served: 49 million cans of soda, juices, and water 8.1 million alcoholic beverages 3.3 million bags of pretzels 95.3 million bags of peanuts

6. Innovation 1 st airline to offer a profit-sharing plan to employees beginning in 1979, employees now own about 10% of company stock 1 st major airline to offer “ticketless” travel system-wide 1 st major airline to enter information superhighway by creating its own web page 1 st airline to offer online booking

7. 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 4 th largest airline 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 4 th 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.

8. 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. 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.

9. 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. 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.

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

11. Delta’s 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 best— airline 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. 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 best— airline 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 * From www.delta.com

12. Financial Condition Overall Posted a profit for 31 st consecutive year Airline industry as a whole suffered a net loss for 3 rd consecutive year

13. 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) (includes leases as debts) * From 2003 Annual Report * From 2003 Annual Report

14. Net Income increased 83.4% in 2003 Operating Revenue increased 415 million (7.5%) 400 million (7.5%) increase in passenger revenues 5.6% increase in revenue passenger miles 4.2% increase in added capacity as measured in available seat miles Addition of 13 aircrafts in 2003 * From 2003 Annual Report * From 2003 Annual Report

15. Key Financial Ratios Valuation Ratios P/E Ratio Price to Sales Dividends Dividend Yield Payout Ratio Growth Rates % Sales vs 1 Yr Ago EPS – 5 Yr Growth Financial Strength Quick Ratio Total Debt to Equity Southwest24.721.84.143.187.52-.261.16.30Industry23.711.24.271.8812.79-2.271.201.19Sector25.411.621.3823.058.276.801.18.59 S&P 500 24.013.332.0426.7811.9012.151.26.85

16. Profitability Ratios % Gross Margin Net Profit Margin Management Effectiveness % Return on Assets Return on Investment Return on Equity Southwest29.977.464.695.639.41Industry26.525.274.716.5111.68Sector33.156.776.668.5914.57 S&P 500 47.3213.126.409.9718.71

17. Stock Information

18. LUV compared to Airline Industry

19. Net Worth Analysis Cash Value of Southwest Airlines at year-end 2003 1.Equity + PIC + RE = $4930 2.Net Income x 5 = $2210 3.SP (14.5)/EPS(.66)xNI(398) = $8879 4.# Shares Outstanding x SP = $11446 Method Average = $6886

21. Strengths / Weaknesses Strengths – 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 increase by 8 percent to 5.94 billion in fiscal year 2003 5. Net income increased 83 percent to $402 million 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 year

22. Weaknesses – 1. No international flights 2. No segmented seating 3. Dependent on a single producer 4. Lack of exposure towards online booking agencies 5. Four out of 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

23. Key Internal FactorsWeightRatingWeighted Score Strengths 1. High capacity usage0.0840.32 2. Named the best low cost airline leader for the last three consecutive years0.1040.40 3. Diversity in upper management0.0430.12 4. Revenues increase by 8 percent to 5.94 billion in fiscal year 20030.0530.15 5. Net income increased 83 percent to $402 million in fiscal year 20030.0840.32 6. Dominates the short haul segment of airline industry0.1040.40 7. Fourth largest domestic airline0.0330.09 8. In 2003 Southwest posted a profit for the 31 st consecutive year0.1040.40 Weaknesses 1. No international flights0.091 2. No segmented seating0.0320.06 3. Dependent on a single producer0.0520.10 4. Lack of exposure towards online booking agencies0.0520.10 5. Four out of five employees are members of the union0.021 6. Carry a small amount of freight and cargo0.0220.04 7. Do not use chat communication such as e-mail0.0320.06 8. Do not offer morning flights0.0320.06 TOTAL1.002.73

24. Opportunities 1. 1.National and international markets 2. 2.Growth of older generation 3. 3.Industrial research and development 4. 4.Growth of Hispanic population 5. New technology opens the door for new products/services 6. 6.Increased Internet advertising 7. 7.Longer flights 8. Growth of business and leisure travel External Audit

25. Threats 1. 1.Decline of leisure travel due to economy and terrorism 2. Competing online ticket reservation systems. 3. 3.New government regulations that make operations costlier. 4. 4.Demand for air travel has dropped sharply since September 11th. 5. 5.Gas and oil price fluctuations. 6. 6.Terrorist attacks. 7. 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.

26. Key External Factors WeightRating Weighted Score Opportunities 1. National and international markets 0.0320.06 2. Growth of older generation 0.0520.10 3. Industrial research and development 0.0230.06 4. Growth of Hispanic population 0.0530.15 5. New technology opens the door for new products/services 0.0430.12 6. Increased Internet advertising 0.0630.18 7. Familiarity of Generation X with air travel and technology 0.0730.21 8. Growth of business travel 0.0630.18 Threats 1. Decline of leisure travel due to economy and terrorism 0.1030.30 2. Competing online ticket reservation systems 0.1130.15 3. New government regulations that make operations costlier 0.0340.12 4. Demand for air travel has dropped sharply since September 11 0.1020.32 5. Gas and oil price fluctuations 0.0630.18 6. Terrorist attacks 0.1530.45 7. Increased restrictions to limit noise (including restrictions on types of aircraft used and limits on a number of operations) 0.0320.06 8. Increasing annual airline security costs. 0.0420.08 TOTALS1.003.04 EFE Matrix

27. SouthwestDelta American Airlines Critical Success Factors WeightRating Weighted Score Rating Rating  Advertising  Product Quality  Price Competitiveness  Management  Financial Position  Customer Loyalty  Global Expansion  Market Share  Reward Programs  Security.15.11.14.09.14.08.06.05.05.1333444312230.450.330.560.360.560.240.060.100.100.3944232343430.600.440.280.270.280.240.240.150.200.3924231233230.300.440.280.270.140.160.180.150.100.39 Total1.003.153.522.41 Competitive Profile Matrix

28. SWOT

29. SPACE Matrix  Y axis  Financial strength +5+1 worst to + 6 best Y axis: 5 + (-3) = 2  Environmental stability -3-1 best to –6 worst  X axis  Industry strength 3 1 worst to 6 best X axis: 3 + (-2) = 1  Competitive advantage-2-1 best to -6 worst

31. IE Matrix  SegmentRevenue EFEIFE  Passenger $5.4 B 3.34 3.32  Freight $1.1 M 3.20 3.80

32. Grow and Build 1.0 to 1.99 IXVIIIVIILow Passenger2.0 to 2.99The EFE Total Weighted Score VIVIVMedium Freight Southwest 3.0 to 3.99 IIIIIIHigh 1.0 to 1.992.0 to 2.993.0 to 4.0 WeakAverageStrong SegmentRevenue EFEIFE Passenger $5.4 B 3.34 3.32 Freight $1.1 M 3.20 3.80

33. 4. Joint venture 3. Horizontal diversification 2. Conglomerate diversification 1. Concentric diversification SLOW MARKET GROWTH Quadrant IVQuadrant III Southwest POSITION COMPETITIVEPOSITION STRONGCOMPETITIVE WEAK Quadrant IQuadrant II RAPID MARKET GROWTH Grand Strategy Matrix

34. Strategic Alternatives Key Internal Factors WeightExpand Into MexicoExpand Into Canada StrengthsASTASASTAS 1. High capacity usage0.08--- 2. Named the best low cost airline leader for the last three consecutive years0.10--- 3. Diversity in upper management0.04--- 4. Revenues increase by 8 percent to 5.94 billion in fiscal year 20030.05--- 5. Net income increased 83 percent to $402 million in fiscal year 20030.082.000.164.000.32 6. Dominates the short haul segment of airline industry0.103.000.302.000.20 7. Fourth largest domestic airline--- 8. In 2003 Southwest posted a profit for the 31 st consecutive year0.10--- Weaknesses 1. No international flights0.09--- 2. No segmented seating0.031.000.032.000.06 3. Dependent on a single producer0.05--- 4. Lack of exposure towards online booking agencies0.052.000.101.000.05 5. Four out of five employees are members of the union0.02--- 6.Carry a small amount of freight and cargo0.02--- 7.Do not use chat communication such as e-mail0.032.000.061.000.03 8.Do not offer morning flights0.03--- Total0.65

35. Key External Factors WeightExpand Domestic RoutesExpand Freight Loads OpportunitiesASTASASTAS 1. National and international markets0.032.000.064.000.12 2. Growth of older generation0.05--- 3. Industrial research and development0.022.000.043.000.06 4. Growth of Hispanic population0.053.000.151.000.05 5. New technology opens the door for new products/services0.042.000.083.000.12 6. Increased Internet advertising0.062.000.123.000.18 7. Familiarity of Generation X with air travel and technology--- 8. Growth of business travel0.06--- Threats 1. Decline of leisure travel due to economy and terrorism0.10--- 2. Competing online ticket reservation systems0.114.000.123.000.09 3. New government regulations that make operations costlier0.03--- 4. Demand for air travel has dropped sharply since September 110.10--- 5. Gas and oil price fluctuations0.06--- 6. Terrorist attacks0.15 7. Increased restrictions to limit noise (including restrictions on types of aircraft used and limits on a number of operations) 0.03--- 8. Increasing annual airline security costs.0.043.000.122.000.08 SUBTOTAL0.690.70 SUM TOTAL ATTRACTIVENESS SCORE1.341.35

36. Matrix Analysis and SWOT summary  Alternative StrategiesIESPACE GRANDCOUNT  Forward Integration X X 2  Backward Integration X X 2  Horizontal IntegrationX X 2  Market Penetration X X 2  Market Development X X 2  Product DevelopmentX X 2  Concentric Diversification X X 2  Conglomerate Diversification X X 2  Horizontal Diversification X X 2  Joint Venture X 1  Retrenchment  Divestiture  Liquidation

37. Strategic plans for the future Strategic plans for the future Southwest Airlines should expand into Mexico. Expand into Canada Expand domestically

38. EPS/EBIT Analysis Amount Needed$1,000M Interest 5% Tax Rate 38% Share Price $7.20 Shares Outstanding 770M

39. EPS/EBIT Analysis

40. Implementation Objectives 5 Year Plan Increase domestic routes to include 80% of the continental United States Increase operating revenue by addition of more aircrafts 10 Year Plan 1 st in industry for short-haul flights

41. 2004 Financial Condition Operating Revenue $6.53 billion Net Income $313 million EPS $.40 Total Debt $1.7 billion

42. Southwest in the News 03/09/05 05/10/04 Hungry? Southwest Airlines Takes Care of Its Customers With Free Inflight Snack and Beverage ServiceHungry? Southwest Airlines Takes Care of Its Customers With Free Inflight Snack and Beverage Service Southwest Airlines Flies Into Philly With a 'Ding 06/19/03 Southwest Airlines Pilot Honored as an American HeroSouthwest Airlines Pilot Honored as an American Hero