Southwest Airlines Co. (NYSE:LUV)
ANALYSIS

GROUP MEMBERS
Clayton Ramer; Mark Ball; Wei Zhao; Zhiyu Fan
February.15.2015

Financial Statement Analysis Project

Contents

INTRODUCTION .....................................................................................................................................3 PART A. PROFITABILITY .....................................................................................................................3 PART B. CREDITWORTHINESS ..........................................................................................................6 PART C. INDUSTRY ANALYSIS ...........................................................................................................8 REFERENCE ........................................................................................................................................... 10 FINANCIAL STATEMENTS ................................................................................................................ 11

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Financial Statement Analysis Project

INTRODUCION This assay takes Southwest Airlines Co. as an example to analyze profitability, creditworthiness and related industrial analysis. For part A, we use profitability analysis to examine year-to-year changes in profitability for Southwest from 2013-2014. For part B, we analyze and discuss the credit risk for the company for 2013 and 1014. For part C, we discuss the company’s industry using the SWOT analysis and the five forces frame work. We also discuss the firm’s strategy and how that strategy is reflected in part A and B

PART A I. PROFITABLITY ANALYSIS
2013

2014

NOPAT (1)

797.47

1,393.67

AVE.NOA (2)

7,090

6,741.5

RNOA (1)÷(2)

11.25%

20.67%

ROE

10.52%

16.1%

II. TWO-LEVEL-ANALYSIS
a) Level one:

2013

2014

RNOA

11.25%

20.67%

NOPM

4.51%

7.5%

NOAT

2.50

2.76

b) Level two: NOAT Analysis (Assets/Sales):

2013

2014

INVENTORY

0.026

0.018

PP&E

0.757

0.768

GOODWILL

0.055

0.052

A/P

0.070

0.065

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Financial Statement Analysis Project

c) Level two: NOPM ANALYSIS

Total revenues
Salaries, wages and benefits Fuel and oil
Maintenance materials and repairs
Aircraft rentals
Landing fees and other rentals Depreciation and amortization Acquisition and integration
Other operating expenses
NOPBT
Tax
NOPAT

Southwest Airlines
2013
CS
$17,699
100.00%
5,035
28.45%

2014
18,605
5,434

CS
100.00%
29.21%

5,763
1,080

32.56%
6.10%

5,293
978

28.45%
5.26%

361
1,103

2.04%
6.23%

295
1,111

1.59%
5.97%

867

4.90%

938

5.04%

86
2,126
1,278
481
787

0.49%
12.01%
7.22%
2.72%
4.45%

126
2,205
2,225
831
1,394

0.68%
11.85%
11.96%
4.47%
7.49%

III. NON-OPERATING RETURN:
2013

2014

ROE (1)

10.52%

16.1%

RNOA (2)

11.25%

20.67%

NON-OPERATING

-0.73%

-4.57%

FLEV

-0.0103

-0.0445

Spread

.6999

1.0273

(3)=(1)-(2)

V.CALCULATION PROCESS
1. OPRATION
2013:
a) NOPAT2013=NOPBT-Tax=1,278-480.53=797.47
− Tax=tax provision + tax shield = 455+ 69*37%= 480.53
b) Average NOA=7,090 (NOA2013= 7,004; NOA2012=7,176)
c) RNOA2013=NOPAT/Ave. NOA=797.47/7090=11.25%
− NOPM=NOPAT/SALES=797.47/17,088=4.51%
− NOAT=SALES/AVE.NOA=17,088/7,090=2.50
d) ROE2013=NET INCOME/Ave. Equity=754/7,164=10.52%

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Financial Statement Analysis Project

2014:
a) NOPAT2014=NOPBT-Tax=2,225-831.33=1,393.67
− Tax=tax provision + tax shield = 680+409*37%=831.33
b) Average NOA=6,741.5 (NOA2014=6,479 NOA2013= 7,004)
c) RNOA2014=NOPAT/Ave. NOA=1,393.67/6,741.5=20.67%
− NOPM=NOPAT/SALES=1,393.67/18,605=7.5%
− NOAT=SALES/AVE.NOA=18,605/6,741.5=2.76
d) ROE2014=NET INCOME/Ave. Equity=1,136/7,055.5=16.1%
2. NON-OPERAION
Non-operating Return=FLEV*Spread
FLEV=Ave. NNO/Ave. Equity
NNO= Non-operating Liabilities – Non-operating Assets

Spread=RNOA-NNEP
NNEP=(NOPAT-NI)/Ave. NNO

2013:
a) FLEV2013=-74/7164 = -0.0103
b) Spread2013=0.1125-[(797.47-754)/-74] =0.6999
2014:
a) FLEV2014=-314/7055.5 = -0.0445
b)