Question

1. Assess the significant trends for Southwest Airlines profitability. Discuss how the net profit margin affects return on assets, and how the depreciation of assets affects the profitability ratios.
2. Discuss whether Southwest airlines would be considered a good investment.

Answer 1

Many business leaders make the mistake of believing that cost is the main factor when it comes to setting the price for their product or service. A common practice, for example, is to just take your cost and add a certain percent on top of that. Simple enough, right? But by doing this, you could be leaving significant profit on the table. Why?

The truth is that cost and price are unrelated. The market sets the price; it's what your customers will pay for the value you provide. But price is also a strategic tool you can deploy to either maximize your profits or drive the growth of your business by gaining market share. Even if you are the low-cost provider in your market, that doesn't mean you should also be the lowest priced provider.

Think about Southwest Airlines. They were founded on the notion of being the low-cost provider in their industry. They keep the frills to a minimum and only fly routes where they can ensure they can attract the number of passengers they need to fill up their airplanes.  

As a customer, you can definitely pay less by flying Southwest than other airlines--but usually only if you book far in advance and are willing to fly during non-peak hours and days. By offering lower process during those flights, Southwest is ensuring that they get a full flight. But for last-minute bookings, or even on routes that are in high demand, you might find that Southwest charges just about what every other airline does. They understand how to set their prices strategically to help them maximize their profits at all times.

And it's amazingly effective. When you think about how often the airlines seem to run into financial difficulty, consider the fact that Southwest has been profitable for 45 years in a row. That's not a typo.

What Southwest does as good as anyone is to combine being the low-cost provider with setting their prices in a way that they both ensure full flights and that they are always making money on those flights.

That's the kind of flexibility you have when you understand how cost and price are unrelated. If you are trying to rapidly grow the market for your product or service, for example, you might be willing to make less margin by setting lower prices because your goal is to grab as much of the market as you can. In either case, ensuringpredictable profits or driving growth, lower costs can be used as a tool and it deserves a conscious choice as to which you use.

As discussed the above conditions the Southwest airlines make the best Investment in the present Economy.