Looking to the futureBrought to you by: Power to the Point Consulting

Agenda•Key issues •Problem statement •Industry analysis •Internal analysis •Alternatives •Recommendation •Implementation with timeline •Financial analysis of recommendation •Risk & Contingencies

!2 !2

Key Issues

• Rising operating costs: labour, fuel, etc.

• Labour productivity

• Efficiency of aircraft

• Maintaining southwest culture in new markets

• No prior knowledge/corporate experience in international markets

• Integrating culture into AirTran

!3 !3

Problem Statement

• In an ever-competitive market, how will Southwest Airlines maintain its competitive advantage while growing in international markets and fostering its culture within AirTran employees?

!4 !4

Recommendations!

• Remove domestic flight path redundancies between Southwest and AirTran, create an international sub-brand using AirTran’s name, and introduce a profit sharing program tied to productivity measures.

!5 !5

Industry/Competitive Analysis

• Lowered barriers to entry

• Greater buyer power due to price transparency

• High supplier power: Boeing & Airbus

• Medium/low substitute services

• Industry Rivalry

!6

Internal & Financial Analysis

Resources!

• Tangible resource: Financial Strength

• Intangible resources: Strong culture (Herb Kelleher, servant-leadership)

• Human resource: Excellent hiring practice (enthusiastic & extraverted)

Capabilities!

• Customer service: “perfectly outrageous”

• Operational efficiency

• Borrowing capacity

!7

Net debt≈0=high borrowing capacity

!8 !8

Net DebtM

illion

s of

dol

lars

(900)

(400)

100

600

1,100

1,600

2,100

2,600

1987 2000 2012

Southwest JetBlue

!9

1. Acquire JetBlue

!9

• Southwest has shown desire to grow internationally

1. Acquire JetBlue

!10 !10

International penetration

!11!11

• Southwest has shown desire to grow internationally

1. Acquire JetBlue

International penetration

Revenues

Domestic and international competition

!12 !12

2. Complete Integration of AirTran

• 75% of organizational change programs fail

• Export processes, culture will follow

2. Full Integration

!14!14 !14

• AirTran will be the international arm

• Eliminate redundancies of destinations and staff

2. Full Integration

!15!15 !15

!16

2. Full IntegrationComputer booking and reward system must be merged

!

!17

2. Full Integration

Sell remaining Boeing 717s to reduce training costs

!18!18 !18

3. Stock Based Incentives

• Incentive program will address productivity decreases in ASM

!

• Met targets will be rewarded with stock options

-turnaround time: 15 minute target

-customer service: >1% of guests complained

!19!19 !19

Decision CriteriaEmployee

ProductivityAircraft

EfficiencyBrand Value

Market Growth

Customer Satisfaction Financial

Purchase JetBlue

Messy with unions !

—++ O D+

I +

More options, better

connectivity— —

Create Sub-brand out of

AirTran

+ implementation

process++ O D+

I +

loyalty program — ,

merge bookings

+

+

Stock Based Incentive Program

+++ +++

turn-around

D O I O + +

!20

Recommendation

• Integrate Computers systems

-Integrate Booking System

-Integrate Points Systems

• AirTran Sub-brand

-Reduce staffing in overlapping destinations

-Integrate Operational Efficiencies

• Introduce Incentive Plan

!21!21 !21

Implementation plan (timeline)

Departments

Operations Integrate  Computers  Systems  -­‐  Amadeus  Altea  IT Integrate  Booking  System

Integrate  Points  systems

SWAOperations Introduce  Incentive  Plan  

HR Moniter  Incentive  PlanSpread  Best  practices  based  on  Incentive  plan  results

AirTranHR Reduce  redundant  destinations

Operations Train  remaining  AirTran  Staff  to  integrate  operational  efficienciesIntroduce  Incentive  Plan  -­‐  AirTran

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8  +  Beyond

!22 !22

Financial Analysis for Recommendation

Total Cost / ASM

4.5

5.125

5.75

6.375

7

2004 2005 2006 2007 2008 2009 2010 2011 2012

Southwest Industry Average for LCC JetBlue

Slowly SouthWest is losing its Low Cost Competitive Advantage

!24

Wages as % of Total CostW

ages

/ To

tal C

ost (

%)

16

21.5

27

32.5

38

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Southwest Industry Average

Wage expense as a portion of total costs is 35% higher than the industry average

!25

ASM (‘000s)/EmployeeAS

M (‘

000s

)

1600

2100

2600

3100

3600

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

SouthWest Industry Average

$573 M

$573 M

Productivity or ASM/Employee has decreased versus industry since 2008.

!26

0%

30%

60%

90%

120%

2013 2014 2015 2016

Net Income % increase with productivity boost

Regaining recent productivity loss results in massive Net Income Gains.

!27

Net Income Margin

0%

1.5%

3%

4.5%

6%

'13 '14 '15 '16

without productivity boost with productivity boost

With productivity boost, Net Income margins will slowly reach previous levels

!28

• Loss of domestic AirTran customers to other competitors

• Better turnaround time and customer service does not equal projected increase in productivity

and Contingencies

!29 !29

Power to the Point

!30!30 !30

Recommended Solution

Added Value• Reduced redundancies $573 M• Incentive based program to

increase productivity (conservative est. over 4 yrs)

Timeline Key Points• SWA (Incentive Plan)≈15 mo. • Increased productivity = $$$ • AirTran (Redundancy

Reduction)≈24 mo. • No dilution of Southwest culture

• Improved synergy between AirTran & Southwest

Thank you!

!31 !31

!32

Appendices

Caribbean

Mexico LocationsAruba,

ArubaCabo San Lucas/Los Nassau,

BahamasCancun, MexicoBermuda

, Mexico

City, Montego Bay, Punta

Cana, San Juan,

Caribbean Locations

Mexico Locations

Latin AmericaOranjesta

d, ArubaCancun, Mexico

San Jose, Costa Nassau,

BahamasLiberia, Costa Christ

Church, Bugota,

ColumbiaLa Romana,

Medellin, ColumbiaPuerto

Plata, Lima, PeruPunta

Cana/Samana, Dominica

!!Santiago

de los !

Santo Domingo, Grand Cayman, Kingston, JamaicaMontego

Bay, St. David’s Island,

!!Aguadilla,

Puerto !!Ponce,

Puerto !

San Juan, Puerto Vieux Fort, Saint Providenciales, Port-au-

Prince,

AirTran International Destinations:JetBlue International Destinations:!

5 yr sales growth rate 1.1222

Tax rate 0.3854

FY 2012 est. 2013 est. 2014 est. 2015 est. 2016For the period ending 12/31/2012

Revenue % Sales Values 17088 19176 21519 24149 27100Revenue with PS 19415 21997 24866 28056

Operating Expenses 0.9528 16282 18271 20504 23009 25821

Operating Income 806 905 1016 1140 1279

Interest Expense 0.0074 126 142 159 179 201

Pretax Income 0.0401 685 769 863 968 1087Income Tax Expense 264 296 333 373 419

Net Income Current 421 473 530 595 668

NI Margin 2.46 2.46 2.46 2.46 2.46Net Income w Productivity Boost

664 912 1168 1432

Net Income Margin w Productivity Boost 3.42% 4.15% 4.70% 5.10%

Pro-Forma Analysis