Southwest Airlines Jake Morris ACG

Executive Summary The accounting firm in charge of making the 10-K report for Southwest did a fantastic job bringing crucial statistics to the forefront for shareholders. In the 10-K Southwest recognizes future hurdles they might have to overcome such as fuel, and they also list ways in which they are heading up the airline industry. Some of these ways are expanding there domestic markets and keeping strong ties with there employees, a vital part of any company. Southwest also said that they will be %85 hedged on fuel on prices lower then $30 a barrel. This alone will drastically affect the bottom line. _05.pdf _05.pdf

Corporate Governance Corporate Governance Gary C. Kelly – CEO Gary C. Kelly – CEO Herbert D. Kelleher- Chairman of the Board Herbert D. Kelleher- Chairman of the Board Colleen C. Barrett -President Colleen C. Barrett -President Physical Address:2702 Love Field Drive Dallas, Texas Physical Address:2702 Love Field Drive Dallas, Texas Mailing Address: P.O. Box Dallas, Texas Mailing Address: P.O. Box Dallas, Texas Fiscal Year End- December 31 Fiscal Year End- December 31 Southwest airlines main goal is to offer affordably air travel to destinations throughout the country. Southwest airlines main goal is to offer affordably air travel to destinations throughout the country.

Audit Report Audit Report Earnest & Young LLP. Earnest & Young LLP. This firm had been working for Southwest since the inception of the company. This firm had been working for Southwest since the inception of the company. Audit Committee: Audit Committee: William H. Cunningham- Chair William H. Cunningham- Chair Louis Caldera Louis Caldera William P. Hobby William P. Hobby Travis Johnson Travis Johnson Rollin W. King Rollin W. King June Morris June Morris The audit of Southwest airlines done by Earnest &Young LLP; Completed on February 2, 2005, was done in ordinance with the Public Company Accounting Oversight board. According to the PCAO, the job of the auditors is to obtain reasonable assurance about weather the financial statements are free of material misstatements. In opinion to Earnest & Young the financial statements are presented in a fair and reasonable manner and the cash flow statements are in conformity with United States accounting principals. The audit of Southwest airlines done by Earnest &Young LLP; Completed on February 2, 2005, was done in ordinance with the Public Company Accounting Oversight board. According to the PCAO, the job of the auditors is to obtain reasonable assurance about weather the financial statements are free of material misstatements. In opinion to Earnest & Young the financial statements are presented in a fair and reasonable manner and the cash flow statements are in conformity with United States accounting principals.

Stock Market Information Stock Market Information As of March 2, 2006, the stock price was $16.92 As of March 2, 2006, the stock price was $16.92 Stock Trading Period Stock Trading Period January 1, December 31, 2004 January 1, December 31, 2004 Dividends declared on Dividends declared on January 15, May 19, July 15 and November 18, each paid less then a cent at.0045 January 15, May 19, July 15 and November 18, each paid less then a cent at.0045 Dividends were paid on: Dividends were paid on: March 25, June 30, September 23 and January 6, March 25, June 30, September 23 and January 6, Due to the volatility of oil, transportation stocks are never a sure thing. However, Southwest is a large cap company that is predicted to outperform its sector. It also has a very low risk and higher then moderate return. Due to the volatility of oil, transportation stocks are never a sure thing. However, Southwest is a large cap company that is predicted to outperform its sector. It also has a very low risk and higher then moderate return.

Industry Situation and Company Plans Industry Situation and Company Plans In 2004, Southwest airlines recorded its 34 th consecutive year of profitability, with a gain of 313 million or $.38 a diluted share. Although the company saw a gain in each quarter the fourth quarter had a negative effect on the airline. During the fourth quarter, Southwest experienced a unit revenue decline at the same time fuel hedging cost rose %20.1. Due to the combination of both the loss in unit revenue and price increase in fuel, Southwest managed only a 56 million dollar gain which was down more then %15 from the previous year. Despite the drop in revenue per seat mile the airline was able to lower cost by %4.5 excluding fuel thanks to productivity. Unfortunately, for Southwest its not that easy for them to just raise prices to make up for fuel loss with all the competition. Management blames they oversupply of airline seats causing ridiculously low prices to fill them. They also blame failing airlines who are operating at a loss with government help. With the loss of another United States airliner Southwest would benefit tremendously. For the Entirety of 2005, Southwest has %85 hedged fuel for the equivalent of $27 a barrel oil, but management is still pessimistic about the other %15 that they will have a acquire at market value. The company is sure fuel will rise over $.89 cents a gallon which they paid in Q Despite the rising cost of fuel Southwest is dedicated to taking new markets such as Philadelphia and Pittsburgh, which used to be largely run by, US Airways, until a recent Chapter 11 filing which has the company regressing. With the mindset to take new markets and the ability to offer them at a low fare make Southwest such a viable Airline in an industry which is failing.

Income Statement Income Statement Southwest Airlines works on a multi-step accounting system. Southwest Airlines works on a multi-step accounting system. The revenue chart on the next page shows a steady increase in revenue from 2003 through the chart in broken down into quarters in which the trend shows that the 3 rd quarter is usually the strongest. The revenue chart on the next page shows a steady increase in revenue from 2003 through the chart in broken down into quarters in which the trend shows that the 3 rd quarter is usually the strongest.

Revenue Revenue - Quarterly Results (in Millions) FY (12/05)FY (12/04)FY (12/03) 1st Qtr1, , , nd Qtr1, , , rd Qtr1, , , th Qtr1, , , Total7, , ,936.00

Balance Sheet Balance Sheet

Statement of Cash Flows Statement of Cash Flows Over the past two years net income has been on the rise from 313 million in 2004 to 548 million in In both years the Net income has been lower then the Net cash provided by operating activities. Over the past two years net income has been on the rise from 313 million in 2004 to 548 million in In both years the Net income has been lower then the Net cash provided by operating activities. Southwest continues to grow and expand its operations with the purchase of many assets. They have recently purchased assets from ATA airlines totaling 40 million in the past two years. They also purchased almost 3 billion dollars worth of property, plant and equipment from ATA in the past two years. Southwest continues to grow and expand its operations with the purchase of many assets. They have recently purchased assets from ATA airlines totaling 40 million in the past two years. They also purchased almost 3 billion dollars worth of property, plant and equipment from ATA in the past two years. Southwest has two primary sources of financing; proceeds from employee stock plans which totaled 132 million in 2005 and 88 million in 2004, and the issuance of long term debt for 300 million and 520 million respectively. Southwest has two primary sources of financing; proceeds from employee stock plans which totaled 132 million in 2005 and 88 million in 2004, and the issuance of long term debt for 300 million and 520 million respectively. From 2004 to 2005 the total amount of cash or cash equivalents on hand rose by more then 1.2 billion from 1,048 to A substantial growth coming in large part to buying back less stock and not having to pay back as many long term debts. From 2004 to 2005 the total amount of cash or cash equivalents on hand rose by more then 1.2 billion from 1,048 to A substantial growth coming in large part to buying back less stock and not having to pay back as many long term debts.

Accounting Policies Accounting Policies In the airline industry there are special statistics used to measure the progress of an airline. Revenue per seat mile RPM’s and available seat miles ASM’s. The latest report from the airline posted at the end of 2006 cited that 4.6 billion RPM’s were flown this February, a %17 jump from February Available seat miles also increased more then %8 to 6.8 billion as opposed to 6.1 the previous year. This shows that Southwest is adding planes to its fleet and therefore growing. In the past months Southwest load factor numbers have been on the rise along with there RPM’s and ASM’s key factors in the bottom line. In the airline industry there are special statistics used to measure the progress of an airline. Revenue per seat mile RPM’s and available seat miles ASM’s. The latest report from the airline posted at the end of 2006 cited that 4.6 billion RPM’s were flown this February, a %17 jump from February Available seat miles also increased more then %8 to 6.8 billion as opposed to 6.1 the previous year. This shows that Southwest is adding planes to its fleet and therefore growing. In the past months Southwest load factor numbers have been on the rise along with there RPM’s and ASM’s key factors in the bottom line.

Financial Analysis Liquidity Ratios Financial Analysis Liquidity Ratios Working Capital- $30,000,000 Working Capital- $30,000,000 Current Ratio- 2005, , Current Ratio- 2005, , Receivable turnover- 2005, ,1.26 Receivable turnover- 2005, ,1.26 Average days’ sales uncollected- 2005, , Average days’ sales uncollected- 2005, , Inventory turnover Inventory turnover- 24.8

Financial Analysis Profitability Ratios Financial Analysis Profitability Ratios For the past two years the profit margin has been on a steady rise going from %4.8 in 2004, to %7.2 in For the past two years the profit margin has been on a steady rise going from %4.8 in 2004, to %7.2 in Asset turnover is times. Asset turnover is times. The return on assets has also been on the rise from a respectable %2.8 in 2004 to %3.9 in The return on assets has also been on the rise from a respectable %2.8 in 2004 to %3.9 in Return on Equity was also up from its 2004 mark of %5.7 to %8.2 in All these ratios show that Southwest is on the right path for financial success. Return on Equity was also up from its 2004 mark of %5.7 to %8.2 in All these ratios show that Southwest is on the right path for financial success.

Financial Analysis Solvency Ratio Financial Analysis Solvency Ratio Debt to equity is the measure of capitol structure and leverage. During 2004 Southwest had a ratio of.3878 and subsequently the year after they had a debt to equity ratio of Debt to equity is the measure of capitol structure and leverage. During 2004 Southwest had a ratio of.3878 and subsequently the year after they had a debt to equity ratio of.5765.

Financial Analysis Market Strength Ratios Financial Analysis Market Strength Ratios Price/earnings per share for 2003 and 2004 were: Price/earnings per share for 2003 and 2004 were:.45 and.47 respectively.45 and.47 respectively The dividend yields for 2003 and 2004 were: The dividend yields for 2003 and 2004 were: and respectively and respectively