The Next Big Move: Southwests aim to be

the No.1 airlines in the U.S.

outhwest Airlines Co. (NYSE: LUV) is a major U.S. airline and the world's

largest low-cost carrier, headquartered in Dallas, Texas. The airline was

established in 1967 and adopted its current name in 1971. The airline has
44,831 employees as of December 2013 and operates more than 3,400
flights per day. As of June 5, 2011, it carries the most domestic passengers of
any U.S. airline. As of November 2014, Southwest Airlines has scheduled
service to 93 destinations in 41 states, Puerto Rico and abroad.
Southwest Airlines has used only Boeing 737s, except for a few years in the
1970s and 1980s, when it leased a few Boeing 727s. As of August 2012
Southwest is the largest operator of the 737 worldwide with over 550 in
service, each averaging six flights per day.

Current fleet
As of November 2014, the Southwest Airlines fleet consists of the following
aircraft. The average fleet age is 11.5 years.
Aircraft

In
Orde Optio Passen
Servic
rs
ns
gers
e

Notes

Boeing 737300

121

137
143

Some retrofitted with

electronic flight decks
In the process of being retired

Boeing 737500

13

122

In the process of being retired

Boeing 737700

419

24

37

143

Orders convertible to -800

series.

Boeing 737800

79

41

175

All to be retrofitted with Split

Scimitar Winglets

Boeing 737
MAX 7

30

TBA

Scheduled to enter service in

2019

Boeing 737
MAX 8

170

191

TBA

Scheduled to enter service in

2017

Total

632

266

228

Southwest is the world's largest operator of the Boeing 737.

After completing the purchase of AirTran Airways, Southwest Airlines added
AirTran's existing fleet of 737-700 aircraft to its fleet. However, the 717s
acquired through AirTran will not be added to Southwest's fleet. Instead, they
will be phased out and transferred to Delta Air Lines until the end of 2015.

Newer Boeing 737-300 variants are retrofitted with electronic flight decks
and blended winglets to reduce operational costs. The retrofits make the
737-300s operationally compatible with the 737-700 and support the airline's
move to embrace the Global Positioning System enabled Required Navigation
Performance system. Southwest added the Boeing 737-800 to its fleet on
April 11, 2012. The aircraft has 175 seats, 38 more than the former largest
plane in Southwest's fleet. All-800s include the Boeing Sky Interior, and some
are equipped with ETOPS capability.

On December 13, 2011, Southwest placed a firm order for 150 Boeing 737
MAX 8 aircraft, becoming the launch customer for the type. First delivery is
expected in 2017. All 737 MAX 8 aircraft will include the Boeing Sky Interior.
On May 15, 2013, Southwest became the launch customer for the Boeing
737 MAX 7 aircraft and now has 30 MAX 7 aircraft on order. The first delivery
is expected in 2019.

Codeshare agreements
Southwest does not participate in any major global airline alliances, but the
airline has a codeshare agreement with AirTran Airways. The agreement
started following the acquisition of AirTran.

Incidents and accidents

Southwest Airlines has never had any passengers on board die as a result of
a crash. Southwest Airlines incidents include 2 deaths (1 non-passenger
death on the ground, 1 passenger homicide in the air) and 8 accidents
(including 2 aircraft hull losses). The airline was considered amongst the 10
safest in the world in 2012.

Southwest Airlines Reports Record Fourth Quarter and Full

Year Profit; 41st Consecutive Year of Profitability

Record fourth quarter net income, excluding special items*, of $236

million, or $.33 per diluted share, compared to fourth quarter 2012 net
income, excluding special items, of $65 million, or $.09 per diluted
share. This exceeded the First Call consensus estimate of $.29 per
diluted share.
Record fourth quarter net income of $212 million, or $.30 per diluted
share, which included $24 million (net) of unfavorable special items,
compared to net income of $78 million, or $.11 per diluted share, in
fourth quarter 2012, which included $13 million (net) of favorable
special items.

Record full year net income, excluding special items, of $805 million, or
$1.12 per diluted share, compared to full year 2012 net income,
excluding special items, of $417 million, or $.56 per diluted share.

Record full year net income of $754 million, or $1.05 per diluted share,
which included $51 million (net) of unfavorable special items,
compared to net income of $421 million, or $.56 per diluted share, in
full year 2012, which included $4 million (net) of favorable special
items.

Return on invested capital* (before taxes and excluding special items)

for full year 2013 of 13.1 percent, as compared to 7.2 percent for full
year 2012.

Source: Wikipedia.

Southwests Fuel Hedging:

Since 1998, Southwest has saved an estimated USD3.5 billion from its extensive fuel-hedging
program, which is equivalent to 83% of the carrier's profits over the past nine years.
Southwest has derivative contracts in place for nearly 85% of 4Q08 estimated fuel consumption
at an average crude-equivalent price of approximately USD62 per barrel (compared to
approximately 90% at approximately USD51 per barrel for 4Q07). Based on this derivative
position and current market prices, Southwest currently anticipates 4Q08 economic fuel costs per
gallon to fall in the USD2.00 range, compared to USD1.72 per gallon in 4Q07.
Southwest Fuel Hedging Programme: as at Sep-08
Period
Percentage Hedged
4Q06 Approximately 85%
4Q07 Approximately 90%
1Q08 Over 70%
2Q08 Approximately 70%

Price/barrel
USD43
USD51
USD51
USD51

3Q08
4Q08
2009
2010
2011
2012
2013

Approximately 80%
USD61
Approximately 85%
USD62
Over 75%
USD73
Approximately 50%
USD90
Approximately 40%
USD93
Over 35%
USD90
Has "begun building a modest position"

Source: Centre for Asia Pacific Aviation & Southwest Airlines

Southwest reported its first quarterly net loss, of USD120 million, in 17 years
in 3Q08, and the largest quarter loss in the airline's history, with the airline
taking a huge hit on the relative value of its hedge contracts, until recently
the envy of the rest of the airline industry. The airline reported an operating
profit, but was pushed into the red by USD238 million in accounting charges
that reflected the decreased value of the fuel derivative contracts and other
hedging impacts.
Several other US carriers, including United Airlines, US Airways and
Northwest Airlines, also reported significant 3Q08 accounting losses from
fuel hedging positions.
Source: http://centreforaviation.com/analysis/southwest-airlinesfuel-hedging-position-benefits-disappearing-3970

Airline alliance as an option:

An airline alliance is an agreement between two or more airlines to
cooperate on a substantial level. The three largest passenger airline alliances
are Star Alliance, Oneworld, and SkyTeam. Alliances also form between cargo
airlines, such as that of WOW Alliance, SkyTeam Cargo, and ANA/UPS
Alliance. Alliances provide a network of connectivity and convenience for
international passengers and international packages. Alliances also provide
convenient marketing branding to facilitate travelers making inter-airline
codeshare connections within countries. This branding goes as far as to even
include unified aircraft liveries among member airlines
With an estimated savings to date of about approximately $3 Billion,
Southwest aim to be a No. 1 Airlines in the United States is not a distant
dream. The Airline is expanding its wings to launch itself into International
Services. The companys decision to fly over international waters is fairly
risky considering the competition it would have to survive. As it is observed
above, Airline alliances are the safest way to launch themselves into the

international market as Airline companies can leverage their risk of losing

money over competition.
It is also understood that the fuel hedges are slowly losing its values. The
overall savings of $3 Billion are dated to 2008-09. As on date, the company
is able to establish its dominance in the domestic market by allowing its
customers the lowest of airfares through those savings it gathered among all
the years before. The company is now looking for alternative sources of
revenue to continue being the Nations cheapest Airlines.

Partnership or Acquisition as an option:

Southwest had several successful partnerships earlier with many airlines.
Though the synergy has worked fairly well, it had ended pretty much all its
partnerships. Southwest is very rigid when it comes to the principles of its
operations. Profits and Financial valuations does not alone drive its
management to make the decision. The companys core values, its
philosophy to provide the best service to its customers at low fare and from
Point-to-Point travel with no stops. To find a company that embraces this
philosophy and allows itself to adapt to the southwest culture is difficult.
The 2011 AirTran acquisition, the biggest in Southwest's history, further
accelerated the process of expansion, bringing the company a large position
in the Atlanta domestic market and also short-haul international destinations
in
the
Caribbean
and
Mexico.
The integration with AirTran supports management's plan to achieve $400
million of net synergies in 2013. Higher fares and synergy benefits from the
AirTran integration have supported Southwest's revenue growth by 2.3%
year over year to $4.1 billion in Q1 2013. The carrier's passenger traffic has
also increased marginally due to support from the AirTran integration.
There are about 70 domestic passenger Airline companies in the US. Airlines
ranging from a service within a state to service across at least 40 states.
How can one find the most suitable partner to acquire or run a joint venture
with?

The strategy:
Southwest is able to make profit only for two reasons
1) Its ability to keep its fuel cost low and offer lower airfares than
competitors.
2) Owning an entire fleet of Boeing 737s
The first reason is fairly accountable only for the limited time period. The
second reason saved Southwest enormous amount of money since its

operations. The most expensive cost any airline company has to go through
on a daily basis is Maintenance, Several major airlines lose a lot of money
due to that. Southwests Strategy to own an entire fleet of Boeing 737
emerged from the same reason. If all the planes are similar the maintenance
cost will be the lowest. It can demand low prices from the manufacturer for
spares and annual maintenance. It need not hire new engineers nor spend
too much on training and development programs or new equipment.
In order to establish a potential partnership, Southwest should not divert
from its profitmaking standpoint. It should search for a partner which can fuel
its international expansion and also at the same time own the same Boeing
737 flights to keep the costs low. If the company is nearing to bankruptcy,
its an advantage as Southwest can own these companies at a throwaway
price. All it has to do is rebrand and operate on existing licenses of various
international routes

Alaska Airlines
Seattle suburb of SeaTac, Washington. The first service as Alaska Airlines was
in 1944 but the airline origins date back to McGee Airways formed in 1932. It
now has service to more than 100 destinations in the contiguous United
States, Canada, Mexico, and four Hawaiian Islands. Alaska Airlines carries
more passengers between Alaska and the contiguous United States than any
other airline.

Classified as a major carrier, it is the seventh-largest US airline in passenger

traffic. Alaska currently operates its largest hub at SeattleTacoma
International Airport.

Alaska Airlines' sister carrier, Horizon Air, is closely integrated into Alaska's
operations, with Alaska and Horizon sharing many routes. Both airlines are
owned by Alaska Air Group. In 2014, J. D. Power and Associates ranked
Alaska Airlines highest in customer satisfaction of traditional airlines for the
seventh consecutive year.
Alaska Airlines is not part of any of the three major airline alliances.
However, it has codeshare agreements with some members of Oneworld,
such as British Airways, LAN Airlines and American Airlines, and with some
SkyTeam members, including Air France, Korean Air and Delta Air Lines.In

2011, Alaska Airlines' parent company, Alaska Air Group, replaced AMR
Corporation in the Dow Jones Transportation Average.
In October 2012, Alaska placed the largest order in its history when it
ordered a total of 50 Boeing 737s in a deal worth US$5 billion at list prices.
The order consists of 20 Boeing 737 MAX 8s, 17 Boeing 737 MAX 9s and 13
Boeing 737-900ERs

Destinations:
Alaska's route system spans more than 92 cities in the United States,
Canada, and Mexico. Some of the locations served in the carrier's namesake
state include Prudhoe Bay, Anchorage, Adak, Cordova, Juneau, Kodiak,
Kotzebue, King Salmon, Nome and Sitka, several of which are inaccessible by
road. The airline began scheduled operations to the Russian Far East in 1991
following the breakup of the Soviet Union, but suspended the service in 1998
following the 1998 Russian financial crisis.
Alaska has historically been one of the largest carriers on the West Coast of
the United States as well as to and within the state of Alaska, with strong
presences in Seattle and Portland, and serving three major airports in the
San Francisco Bay Area and all five airports in the Los Angeles metropolitan
area.
In May 2011, SkyWest Airlines began operating six of Alaska Airlines' West
Coast routes. They are operating five CRJ-700s purchased from Horizon Air
under a capacity purchase agreement. This means that SkyWest would own
and operate the aircraft, while Alaska Airlines would be responsible for
marketing and selling tickets for the flights. The CRJ-700s are operating on
routes that would not be feasible to operate with Horizon's Bombardier
Q400s nor with Alaska's Boeing 737s.

Codeshare agreements
Alaska Airlines does not participate in any major global airline alliances, but
the airline has codeshare agreements with several carriers. However, many
of these airlines are members of global airline alliances. Alaska Airlines'
codeshare partners are as follows:

Aeromexico
Air France
American Airlines
Cathay Pacific

Delta Air Lines

Emirates
Fiji Airways
KLM
Korean Air
LAN
PenAir
Qantas
Ravn Alaska
Singapore Airlines (interline only)

Since 2008, Alaska Airlines flights, as well as Horizon Air flights, have been
part of Oneworld Global Explorer fares.

Current fleet
Alaska Airlines Fleet
Aircraft

Passengers
In
Orders
Service
F E Total

Notes

Boeing 737-400

21

12 132 144

Boeing 737-400C

72

Boeing 737-400F

Cargo

Boeing 737-700

14

12 112 124

Boeing 737-800

61

16

Boeing 737-900

12

16 165 181 Launch customer

Boeing 737-900ER

23

36

16 165 181 To be delivered between 2012 and 2017

Boeing 737 MAX

8

20

TBA

Boeing 737 MAX

9

17

TBA

Total

137

73

72

Freight capacity of 4 freight pallets

Freight capacity of 9.5 freight pallets

141 157 Twenty-eight aircraft are ETOPS147 163 configured

Financials:
Year over year, Alaska Air Group, Inc. has been able to grow revenues from $4.1B
USD to $4.4B USD. Most impressively, the company has been able to reduce the
percentage of sales devoted to cost of goods sold from 80.87% to 80.82%. This was
a driver that led to a bottom line growth from $316.0M USD to $508.0M USD.

Currency in
Millions of US Dollars
Revenues

Dec 31 Dec 31
2010
2011
Restated Restated
3,372.0 3,817.0

Dec 31
Dec 31
2012
2013
Reclassified
4,141.0
4,380.0

Other Revenues

460.0

501.0

516.0

584.0

TOTAL REVENUES
Cost of Goods Sold
GROSS PROFIT
Selling General & Admin Expenses, Total
Depreciation & Amortization, Total
Other Operating Expenses
OTHER OPERATING EXPENSES, TOTAL
OPERATING INCOME
Interest Expense
Interest and Investment Income
NET INTEREST EXPENSE
Other Non-Operating Income (Expenses)
EBT, EXCLUDING UNUSUAL ITEMS
Merger & Restructuring Charges
Gain (Loss) on Sale of Investments
Other Unusual Items, Total
Other Unusual Items
EBT, INCLUDING UNUSUAL ITEMS
Income Tax Expense
Earnings from Continuing Operations
NET INCOME
NET INCOME TO COMMON INCLUDING
EXTRA ITEMS
NET INCOME TO COMMON EXCLUDING
EXTRA ITEMS

3,832.0
2,758.0
1,074.0
154.0
230.0
201.0
585.0
489.0
-102.0
29.0
-73.0
8.0
424.0
-13.0
--5.0
-5.0
406.0
155.0
251.0
251.0

4,318.0
3,086.0
1,232.0
175.0
247.0
292.0
714.0
518.0
-75.0
22.0
-53.0
-5.0
460.0
-39.0
3.0
-30.0
-30.0
394.0
149.0
245.0
245.0

4,657.0
3,349.0
1,308.0
168.0
264.0
306.0
738.0
570.0
-46.0
19.0
-27.0
2.0
545.0
-7.0
-38.0
-38.0
514.0
198.0
316.0
316.0

4,964.0
3,540.0
1,424.0
179.0
270.0
337.0
786.0
638.0
-35.0
18.0
-17.0
185.0
806.0
-2.0
8.0
8.0
816.0
308.0
508.0
508.0

251.0

245.0

316.0

508.0

251.0

245.0

316.0

508.0

As of:

Conclusion:
The marriage between Southwest and Alaskan Airlines would be perfect as
everything that Southwest is looking for is what Alaskan Airlines has got. By
the combined partnership. Alaskan Airlines would gain access to various
passengers who are loyal to Southwest and can establish a codeshare with
Southwest wherever connections are vital. Alaskan Airlines being the second
largest consumer of Boeing 737s, simply will not spend a penny more than
what is Southwest is spending on maintenance. Similarly Southwest can
utilize are the existing codeshare licenses of Alaskan Air to enter into the
international market.