Southwest Airlines

Southwest Airlines
Annual Report Project
Michaela Fellerman
ACG2021 Sect. 001

Executive Summary
In today’s economy, less and less people are willing to
spend money on air travel. Southwest Airlines is a low-cost
airline that is profitable in this economic climate. They are one of
the world’s most profitable airlines, posting profits for 35 years
straight. It’s the largest airline in the United States and carries
the most passengers of any airline in the world.
With the economy in turmoil, Southwest is moving forward
with caution. They are not increasing the size of their fleet or
charging higher prices to offset higher energy costs, which puts
them in high demand for American travelers. With their popular
Web site and strong focus on convenience and customer
service, Southwest may survive the turbulent times ahead.
http://www.southwest.com/investor_relations/fs_financials.html

Introduction
Chief Executive Officer: Gary Kelly
Location of Home Office: Dallas, Texas
Ending Date of Last Fiscal Year: December 31, 2007
Principal Services: Low-fare, point-to-point airline carrier
Main Geographic Area of Activity: Southwest provides domestic
flights to 64 cities in 32 states.

Audit Report
Company’s Independent Auditors: Ernst & Young LLP based in
Dallas Texas
The auditors though that Southwest Airlines Company’s
financial statements, operations and cash flows, presented
objectively their financial position in the year that ended
December 31, 2007. They also believed that Southwest
maintained effective internal control over financial reporting.

Stock Market Information
Most Recent Price of Stock: $13.44
Twelve Month Trading Range: $11.02 – $16.77
Dividends Per Share: $0.02
Date of Above Information: October 3, 2008
I would suggest to hold Southwest Airlines stock because they
are in a better position than other airline companies in today’s
economy.

Industry Situation and
Company Plans
In the airline industry, steeply rising energy prices continue
to be a challenge. Spending on air travel has decreased
relative to the nation’s economy. However, while crude oil
prices are currently selling at $93.22, Southwest has locked
in 70% of their oil for 2008 at a price of $51. This allows
them to offer lower fares than their competitors and attract
new customers. Southwest plans to meet this demand for
low fares by offering more flights to more cities.
www.airlines.org (2008 Economic Report by the Air Transport Association)
http://www.oil-price.net/
http://www.southwest.com/investor_relations/swaar07.pdf

Income Statement
The format is similar to a single-step format.
IN MILLIONS 2007 2006
Gross Profit $2,506 $2,573
Income from Operations $791 $934
Net Income $645 $499
The gross profit is decreasing while the net income is
increasing. They’re making more revenue and less
profit, which seems to indicate rising operation
expenses.

Balance Sheet
IN MILLIONS ASSETS = LIABILITIES + STOCK HOLDER’S
EQUITY
2007 16,772 = 9,831 + 6,941
2006 13,460 = 7,011 + 6,449
From 2006 to 2007, Southwest Airline Company increased
their cash accounts, accounts receivable, inventory and
equipment. The largest increase was in an account called fuel
derivative contracts. Their accounts payable also increased,
and their accrued expenses more than doubled. Their stock
holder’s equity increased slightly. Their common stock stayed
exactly the same.

Statement of Cash Flows
Cash flows from operations is greater than net income for the
past two years.
In 2007, the company invested less in long-term assets, such as
property and equipment, than in 2006. They spent more on
short-term investments.
Cash decreased significantly from 2005 to 2006, yet increased
almost that same amount from 2006 to 2007.

Accounting Policies
Revenue Recognition
tickets sold are initially deferred as “Air traffic liability”. Passenger
revenue is recognized when transportation is provided
Cash and Cash Equivalents:
short-term, highly liquid, income-producing investments with
maturities of three months or less
Short-term Investments:
auction rate securities with auction reset periods of less than 12
months, stated at fair value
Inventories:
flight equipment, expendable parts, materials, aircraft fuel, and
supplies
Property and Equipment
Depreciation is over periods generally ranging from 23 to 25 years
for flight equipment and 5 to 30 years for ground property and
equipment once the asset is placed in service.

Topics of Notes to
Financial Statements
Summary of Significant
Accounting Policies
Recent Accounting
Developments
Acquisition of Certain Assets
Commitments
Accrued Liabilities
Revolving Credit Facility
Long-Term Debt
Leases
Project Early Departure
Derivative and Financial
Instruments
Comprehensive Income
Common Stock
Stock Plans
Employee Retirement Plans
Income Taxes
Net Income per Share
Contingencies

Financial Analysis Liquidity Ratios
IN MILLIONS 2007 2006 2007 2006
Working Capital 4,443 -4,838 2,601-2,887 -395 -286
Current Ratio 4,443
Receivable
Turnover
Average Days’
Sales Uncollected
Inventory
Turnover
Average Days’
Inventory on
Hand
4,838
9,861
279
365
35.34
7,056
259
365
27.24
2,601
2,887
9,086
241
365
37.70
6,311
181
365
34.87
.918 .901
35.34 37.70
10.33 9.68
27.24 34.87
13.4 10.47
Southwest has not been very liquid at all recently. They cannot
pay their bills.

Financial Analysis Profitability Ratios
IN
MILLIONS
Profit Margin 645
2007 2006 2007 2006
9,861
Asset Turnover 9,861
16,772
Return on Assets 645
16,772
Return on Equity 645
6,941
499
9086
9,086
13,460
499
13,460
499
6,449
6.5% 5.5%
.5879 times .6735 times
3.85% 3.71%
9.3% 7.7%
Profitability seems to be increasing with the exception of
asset turnover.

Financial Analysis Solvency Ratio
IN MILLIONS 2007 2007 2006 2006
Debt to Equity 9,831
6,941
1.42 7,011
6,449
For the past two years, the solvency ratio leads me to
conclude that the creditors are in control of the company.
The increase in debt to equity means they’re gaining even
more control.
1.09

Financial Analysis
Market Strength Ratios
IN MILLIONS 2007 2007 2006 2006
Price/earnings per
share
13.44
.85
Dividend yield .02__
13.44
15.81 15.32
.63
.149% .02__
15.32
The price/earnings per share went down from 2006 to 2007
because there is not a lot of confidence in the market, so
investors were willing to pay less per share than they earn.
The dividend yield went up, so investors can expect to
receive more dividends in 2007 than they did in 2006.
24.32
.131%