Term Paper on "Financial Statement Analysis"
Term Paper 8 pages (2141 words) Sources: 4
[EXCERPT] . . . .
Financial Statement AnalysisSouthwest Airlines (the Company) prides itself as the nations low-fare, high Customer Satisfaction airline. The Company primarily serves shorthaul and mediumhaul city pairs, providing single-class air transportation, which targets business and leisure travelers. The Company was incorporated in Texas and commenced Customer Service in 1971, with three Boeing 737 aircraft serving three Texas cities -- Dallas, Houston, and San Antonio.
In 2006, the Company operated 481 Boeing 737 aircraft and serviced 63 airports in 32 states throughout the country. It continues to have one of the lowest operating cost structures in the domestic airline industry and consistently offers the lowest and simplest fares.
ASSESSMENT of 2006 FINANCIAL PERFORMANCE
Variance
2006 vs. 2005
2006 vs. 2004
Amount
OPERATING REVENUES
Passenger
B5-C5 # "#,##0" 1,471
E5/c5*100 # "0.00%" 20.21%
B5-D5 # "#,##0" 2,470
G5/d5*100 # "0.00%" 39.33%
Freight
B6-C6 1
E6/c6)*100 # "0.00%" 0.75%
B6-D6 17
G6/d6*100 # "0.00%" 14.53%
B7-C7 30
E7/c7*100 # "0.00%" 17.44%
B7-D7 69
G7/d7*100 # "0.00%" 51.88%
SUM (ABOVE) # "#,##0" 9,086
SUM (ABOVE) # "#,##0" 7,584
SUM (ABOVE) # "#,##0"
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SUM (ABOVE) # "#,##0" 1,502
E8/c8*100 # "0.00%" 19.80%
SUM (ABOVE) # "#,##0" 2,556
G8/d8*100 # "0.00%" 39.14%
Amount in millions
For the past three years, operating revenues of the Southwest Airlines have continued to increase. Passenger revenues increased primarily due to an increase in capacity and in Revenue Passenger Mile (RPM) yield. Available Seat Mile (ASM) increased as a result of the net additions of 36 aircrafts in 2006 and 28 aircrafts in 2005. Average passenger fares increased 11.4% in 2005 and 5.8% in 2004, due to the strong demand for air travel and reduction of industry wide domestic capacity reductions.
Freight revenue in 2006 increased only by 1% compared its 14% increase in 2005. This is the result of the Company's decision to discontinue carrying mail for the U.S. Postal Service effective as of the end of the second quarter of 2006. However, this was offset by the higher rates charged for freight and cargo services.
Increase in other revenues for the past two years is due to higher commissions earned from Company sponsored programs with certain business partners such as the Chase® Visa Card and the increase in excess baggage charges in 2005.
Variance
2006 vs. 2005
2006 vs. 2004
Amount
OPERATING EXPENSES
Salaries, wages & benefits
B5-C5 # "##0" 270
E5/c5)*100 # "0.00%" 9.71%
B5-D5 # "##0" 474
G5/d5*100 # "0.00%" 18.39%
Fuel and Oil
B6-C6 797
E6/c6)*100 # "0.00%" 59.43%
B6-D6 1,138
G6/d6*100 # "0.00%" 113.80%
Maintenance materials and repairs
B7-C7 22
E7/c7)*100 # "0.00%" 4.93%
B7-D7 -4
G7/d7*100 # "0.00%" -0.85%
Aircraft rentals
B8-C8 -5
E8/c8*100 # "0.00%" -3.07%
B8-D8 -21
G8/d8*100 # "0.00%" -11.73%
Landing fees and other rentals
B9-C9 41
E9/c9*100 # "0.00%" 9.03%
B9-D9 87
G9/d9*100 # "0.00%" 21.32%
Depreciation and Amortization
B10-C10 46
E10/c10*100 # "0.00%" 9.81%
B10-D10 84
G10/d10*100 # "0.00%" 19.49%
Other operating expenses
B11-C11 122
E11/c11*100 # "0.00%" 10.13%
B11-D11 268
G11/d11*100 # "0.00%" 25.33%
SUM (ABOVE) # "#,##0" 8,152
SUM (ABOVE) # "#,##0" 6,859
SUM (ABOVE) # "#,##0" 6,126
SUM (ABOVE) # "#,##0" 1,293
E12/B12 # "0.00%" 0.16%
SUM (ABOVE) # "#,##0" 2,026
G12/d12*100 # "0.00%" 33.07%
Amount in millions
Salaries, wages and benefits represents 37%, 41% and 42% of the Company's operating expenses in 2006, 2005 and 2004 respectively. Salaries, wages and benefits per ASM increased in 2006 by 6% while decreased in 2005 by 2.4%. Increase in 2006 is primarily due to the increase in average wage rates, which is mostly offset by productivity efforts that have enabled the Company to decrease headcount per aircraft from 74 in 2004 to 71 in 2005 and to 68 in 2006 while decrease in 2005 is due to a reduction in share-based compensation expense.
Fuel and Oil expense represents 26%, 20% and 16% of operating expenses in 2006, 2005 and 2004 respectively. It also continues to increase as average jet fuel cost increases as it is impacted by several political and economic factors. The Company's fuel hedge position in 2006 weakened compared to 2005, but it still managed to reduce its fuel and oil expense of $634 million.
Maintenance materials and repairs increase in 2006 due to additional aircrafts but maintenance materials and repairs per ASM have continued to decreased from 1.9% compared to 2005 and 16% compared to 2004, which is primarily due to decrease in repair events for aircraft engines.
Aircraft rentals have continued decrease over the past years due to additional acquisitions of aircrafts while landing fees and other rentals increase due to increase in operations, but have continue to remain flat per ASM at 0.53 cents.
Depreciation expense increases per total and per ASM in 2006 due to the additional 36 aircraft acquired by the Company, while in 2005 depreciation per ASM decreased due to retirement of the Company 737-200 fleet and all 737-200 remaining spare parts during the year.
Other operating expenses increased per total and per ASM in 2006 due to increase in credit card processing fee and also in 2005 due to increase in security fees in the form of $24 million retroactive assessment the Company received from the Transportation Security Administration.
Variance
2006 vs. 2005
2006 vs. 2004
Amount
OTHER INCOME (EXPENSES), NET
Interest expense
E5/c5)*100 # "0.00%" -4.92%
B5-D5 # "#0" -40
G5/d5*100 # "0.00%" 0.00%
Interest income
B6-C6 37
E6/c6)*100 # "0.00%" 78.72%
B6-D6 63
G6/d6*100 # "0.00%" 300.00%
Capitalized interest
B7-C7 12
E7/c7)*100 # "0.00%" 30.77%
B7-D7 12
G7/d7*100 # "0.00%" 30.77%
Other gains (losses), net
B8-C8 (241)
E8/c8*100 # "0.00%" -267.78%
B8-D8 (114)
G8/d8*100 # "0.00%" 308.11%
SUM (ABOVE) ($144)
E9/B9 # "0.00%" 1.38%
G9/d9*100 # "0.00%" 121.54%
Amount in millions
Interest expense increased in 2006 and 2005 due to increase in floating interest rates, since majority of the Company's long-term debt is at floating interest rates. Interest income in 2006 and 2005 continued to increase as rates earned on cash and investments increased in both years. Capitalized interest increased in 2006 as a result of higher 2006 progress payment balances for scheduled aircraft deliveries in the future and also due to higher interest rates.
In 2006, primarily due to the significant decrease in fair values of the Company's fuel derivative and the loss of hedge accounting for specific hedges, the Company recognized $101 million of net loss while in 2005 the Company recognized $110 million net gain on its hedging activities.
Overall Assessment on Financial Performance
Variance
2006 vs. 2005
2006 vs. 2004
Amount
Revenues
B5-C5 # "##0" 1502
E5/c5)*100 # "0.00%" 19.80%
B5-D5 # "##0" 2556
G5/d5*100 # "0.00%" 39.14%
Operating expenses
B6-C6 (1,293)
E6/c6)*100 # "0.00%" 18.85%
B6-D6 (2,026)
G6/d6*100 # "0.00%" 33.07%
Operating income
B7-C7 209
E7/c7)*100 # "0.00%" 28.83%
B7-D7 530
G7/d7*100 # "0.00%" 131.19%
Other income (expenses), net
B8-C8 (198)
E8/c8*100 # "0.00%" -366.67%
B8-D8 (79)
G8/d8*100 # "0.00%" 121.54%
Income before income taxes
B9-C9 11
E9/c9*100 # "0.00%" 1.41%
B9-D9 451
G9/d9*100 # "0.00%" 133.04%
Provision for income taxes
B10-C10 4
E10/c10*100 # "0.00%" -1.36%
B10-D10 (167)
G10/d10*100 # "0.00%" 134.68%
NET INCOME
B11-C11 # "#0" 15
E11/B11 # "0.00%" 0.03%
SUM (ABOVE) # "##0" 284
G11/d11*100 # "0.00%" 132.09%
Amount in millions
Total revenues increased as revenue passengers carried increased due to new two destinations opened during 2006, the Denver and Washington Dulles and due to the passage of the Wright Amendment Reform Act in October 2006. Also average passenger fare increased from $93.68 in 2005 to $104.40 in 2006 to meet continues increase in jet fuel cost and to utilize increased demand on air travel as a result of the industry wide domestic capacity reductions.
Operating expenses primarily increased due to increase in jet fuel prices while other expenses increased due to the loss on hedging activities.
The Company continues to report its 34th consecutive year of profitability which is due to its continuous effort to provide excellent customer service while maintaining its low fare brand and continuing to enter effective fuel hedge programs.
MOST IMPORTANT FACTORS AFFECTING the COMPANY'S CURRENT PERFORMANCE
Key success factors in the airline industry as identified by Dr. Richard Mc. Cabe are as follows: (1) Attracting customers; (2) managing its fleet; (3) managing its people, and (4) managing its finances. The Company has done well in all four respects over the years, which is evidenced by its consecutive 34 years of profitability.
Attracting customers. Two factors of measurement are used with regard to these factors, first is the attractiveness of the airline's service and the other is the effectiveness of the airline's promotional expenditures. The Company commits itself in keeping their customers happy. Managers monitor how employees are treating their customers' everyday. Based on the statistics published in the Department of Transportation, the Company had the highest customer's satisfaction and best on time performance ranking of all major airlines during 2006. They also offers the lowest fares in the industry, which have paved way to what is called the "Southwest Effect," wherein number of flights increases in a new market (route) to which… READ MORE
Quoted Instructions for "Financial Statement Analysis" Assignment:
I would like to have this on Southwest Airlines Co.
The purpose of Part Two is to discover and evaluate the material that can be found on the company of your choosing. This material is in addition to the annual report. It is written by market analysts, financial reporters, and others independent of the company.
Write a paper to summarize your findings and conclusions. All the needed material can be found on the Internet. Use sites referenced in the textbook, and discover other sites as you proceed. It is very important that you credit your sources of information for your paper. The paper must be a maximum length of seven pages, double-spaced. Your references may be cited outside the seven-page limit. No particular format is required.
Appropriate issues for your paper include your assessments of:
*****¢the company*****s financial performance over the last three years.
*****¢the most important factors concerning the company*****s current financial performance.
*****¢suggested financial strategies for the next five years.
*****
How to Reference "Financial Statement Analysis" Term Paper in a Bibliography
“Financial Statement Analysis.” A1-TermPaper.com, 2007, https://www.a1-termpaper.com/topics/essay/financial-statement-analysis-southwest/908278. Accessed 5 Oct 2024.
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