Southwest airlines’ primary business function is the transportation of cargo and passengers. The airline has made use of sustainable and efficient strategic management principles which have given the company good performance records, despite the recession, terrorist threats, and the high fuel prices that shook the airline industry. These were achieved through the company’s main principle of low operational costs, high cash flows, and low borrowing from domestic and international markets (Southwest airlines, 2010). These principles are the products of the strategic management plans laid down by their finance office.
All internal and international financial decisions and management plans are directed by the office of finance and chief financial officer (Forbes, 2011). This office is headed by Laura Wright H. who is the senior vice president at southwest airlines and a member of the planning committee and has served in this position since July 2004 (Forbes, 2011). Before this, Laura Wright served as the vice president for finance and the treasurer of the company from June 2001 to July 2004 (Forbes, 2011). This post had been preceded by the post of treasurer from the year1998 to 2001, assistant treasurer from 1995 to 1998, and as the director of corporate finance from 1990 to 1995 (Forbes, 2011). Laura has been with southwest airlines for over two decades, following her employment in 1988 as the director of corporate taxation. This implies that as the vice president in charge of finance, she has a wealth of experience in corporate finance, international financial markets and is familiar with the managerial principles and vision of the company.
Strategic financial management plans have been associated with the ability of the low-cost carrier to enjoy increased profit margins during the turbulent global financial crisis. One of the financial strategies used to maintain the airline in the international financial market is position logic, where the airline successfully linked its resources together to reinforce activity systems (Southwest Airlines, 2011). Southwest’s management plans of finances involved the use of readily available resources, like the purchase of a single type of plane, the use of less popular airports and gates to increase their market position against competition. This strategy has defined the airline as a model of a low-cost airline.
The finance office has also been very innovative in the creation of financial management tools, which reduced risks to the airline within the domestic and international markets. The finance office had discovered that by 2007, the largest expenditure apart from salaries was fuel cost. To maintain its leverage as a low-cost carrier, the airline finance team adopted financial and derivative instruments in the famous 10-K report (Brooks & Chance, 2010). Under Laura Wright, the company has been using this financial instrument for its long and short-term financial plans. The company uses fuel derivatives to reduce its fuel costs against market fluctuations like the credit crunch. Southwest Airlines’ financial plan makes use of a combination of financial instruments like purchased call options, fixed price swap agreements, and collar structures, which protect over 70% of its expected fuel requirements (Brooks & Chance, 2010). This percentage is about the price of oil per barrel and any refinery margins. The company had placed fuel derivative contracts, for 55% of expected fuel consumption at $51 per barrel for the year 2009, a further 30% for 2010 at the rate of $63 per barrel. For 2011, the company invested in fuel derivative contracts at over 15% at the price of $64 and over 15% at $63 for 2012 (Brooks & Chance, 2010). This financial plan cushioned the company from the high fuel prices of 2008, which had shot to $140 per barrel (Brooks & Chance, 2010). This price was three times what the company had paid for fuel through its fuel derivative plan. Fuel derivative plans are also referred to as fuel hedging, a concept southwest Airlines has effectively used to reduce the financial risk it would face in the current volatile global financial markets (Southwest Airlines, 2011).
The company has also laid down several risk management strategies that enable it to manage international financial market risks like interest rate, credit and financing, and liquidity risks. To handle these risks, the airline has adopted a capitalization conservative strategy that allows it to grow steadily within the American market. This capital conservative strategy prevents it from seeking resources outside America, and which are readily available in the local market (Brooks & Chance, 2010). To cushion its profit fluctuating interest rates of banks and lending institutions, the airline maintains modest financial leverage and strong business. These are designed to allow it to grow steadily and profitably without huge lending margins. Moreover, this strategy has allowed the company to enjoy their ‘A’ credit rating with S&P and a high ‘Baa1’ with a moody rating for unsecured fixed-rate debt (Brooks & Chance, 2010). The company maintains a very low debt ratio and uses market-sensitive instruments like interest rate swaps to avoid solvency and bankruptcy. They also make use of the redemption of floating-rate debts to maintain their high credit rating (Southwest Airlines, 2011). Lastly, the company has aggressively invested in high money markets, certificates of deposit, and grade commercial paper to reduce the risks of international financial markets.
References
Brooks, R. and Chance, D.M. (2010). Introduction to Derivatives and Risk Management (9th Ed.). NY: Cengage learning.
Forbes.com (2011). Laura H. Wright: Senior Vice President, Finance and Chief Financial Officer. Web.
Southwest airlines (2010). The Mission of Southwest Airlines. Southwest.com. Web.
Southwest Airlines (2011). 2010 Financial Statistics. Southwest.com. Web.