Two Ways to Fly South: Lan Airlines and Southwest Airlines

9-707-414R E V : M A R C H 1 5 , 2 0 1 0

________________________________________________________________________________________________________________ Professors Ramon Casadesus-Masanell, Tarun Khanna, Jorge Tarziján (Pontificia Universidad Católica de Chile), and Research Associate Jordan Mitchell prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006, 2008, 2009, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R A M O N C A S A D E S U S - M A S A N E L L

T A R U N K H A N N A

J O R G E T A R Z I J Á N

J O R D A N M I T C H E L L

Two Ways to Fly South: Lan Airlines and Southwest Airlines

Prologue

This case describes how two different airlines have achieved competitive advantage and sustained profitability in their respective markets: Lan Airlines in Chile and other parts of South America, and Southwest Airlines in the United States.

Lan Airlines (Lan) Background1

Lan was the main provider of domestic and international passenger and cargo air services in Chile and one of the leading full-service airlines in Latin America. It served destinations to several Latin American countries, the United States, Europe, and the South Pacific (Australia and New Zealand). Lan provided cargo service to its 56 passenger destinations and to more than 15 additional international freighter destinations. The company also offered courier, handling, and logistics services.2

In 2005, Lan posted revenues of $2.5 billion, of which 58.3% was from passenger revenues, 36.3% from cargo operations, and the remaining 5.4% from other activities. The company’s net income in 2005 was $146.6 million, 10.4% lower than in 2004. At year-end

Southwest Airlines (Southwest) Background27

Based on the number of originating domestic passengers boarded on scheduled domestic departures, Southwest was the largest carrier in the United States as of the end of 2005. The company provided point-to-point, low-fare service and served 374 nonstop city pairs in the United States only.

In 2005, the company enjoyed a 16% rise from the previous year in revenues, to $7.6 billion. Ninety-six percent of the company’s revenues were derived from passenger services. The remaining revenues were split between freight and other services. Since its inception as Air Southwest (later Southwest) in 1967, the company had posted profits every year. In 2005, net income grew by 75.1% to $548 million. Market capitalization was $13.2 billion at the close of 2005. (Exhibit 1B shows

Do Not

Cop

y or

Pos

t

This document is authorized for educator review use only by Wilbert Zevallos, until April 2016. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860

707-414 Two Ways to Fly South: Lan Airlines and Southwest Airlines

2

2005, Lan’s market capitalization was more than US$2 billion. The company was one of the few airlines rated as investment-grade (it was rated as BBB- by Fitch Ratings). (Exhibit 1A shows the company’s financial statements and operating revenues by activity and by geographic location.) History3

Established in 1929 by the Chilean government as Lan Chile S.A., the airline expanded with its first international route to Buenos Aires, Argentina, in 1946. It commenced service to the United States in 1958 and to Europe in 1970. Lan was wholly owned by the government until 1989, when 51% of the company’s stock was sold to a combination of national investors and SAS (Scandinavian Airlines System). In 1994, the government fully divested itself of the airline, and 98.7% of the company’s stock was purchased by two independently held companies: Cueto Group and Piñera Group. Subsequently, the airline offered shares on the Santiago and New York stock exchanges (the latter in the form of American Depositary Receipts, or ADRs). In the 1990s, the company expanded its passenger business to Peru, Ecuador, and the Dominican Republic, and its cargo operations to Brazil and Mexico, among others. The company introduced e-tickets in 1997 through its website. It joined the oneworld alliance in 2000 and made flight and service agreements with other carriers such as American Airlines, Iberia, and Qantas. To reflect its increasing international footprint, the company changed its corporate name and logo from Lan Chile to just “Lan.” In 2005, the company launched Lan as a domestic carrier within Argentina to service national routes. Operational Approach4

Lan’s approach was to integrate the planning and scheduling of the cargo business with passenger routes. Lan sought to maximize cargo in passenger planes by

the company’s financial statements.) History28

Rollin King and Herb Kelleher formed Air Southwest in 1967. They changed the name to Southwest Airlines in 1971 with the intention of creating a very different airline. The original idea was to offer the lowest possible fares on direct short-haul routes. The company made its maiden voyage in 1971 and six years later hit the five-million passenger mark. It was listed on the New York Stock Exchange as “LUV” to signify its early days at Love Field, the small Dallas-based airport where the operation began. To promote the idea of the “Love Airline,” the company referred to drinks served on-board as “love potions” and employed an all-female attendant staff wearing “hot pants” and boots. In 1979, the company offered self-ticketing machines to speed up service. Throughout the 1980s, it expanded rapidly by adding new routes. In 1990, Southwest was designated a “major” airline after hitting a billion dollars in sales. By the mid-1990s, the company introduced ticketless travel across its entire system. While the company did not have any official alliances, in 2005 it implemented its first “code-sharing” agreement with ATA (American Trans Air) to complement routes that the other did not serve. Some observers believed that Southwest would look at expanding its route network internationally.29 Operational Approach30

Southwest’s strategy hinged on making air travel as affordable and convenient as traveling by car or train. The company had the lowest cost per mile of any U.S. airline and believed this was due to its use of a single type Do

Not C

opy

or P

ost


Two Ways to Fly South: Lan Airlines and Southwest Airlines 707-414

3

working with aircraft manufacturers Boeing and Airbus to configure Lan’s aircraft to allow for maximum cargo weight and space in the belly of passenger aircrafts. Lan was able to adjust the passenger/cargo load of each aircraft and the routes in less than 24 hours, depending on the demand for each service and on each pair of cities. On any given domestic or international route, passenger and cargo demand were not perfectly correlated, that is, demand for passenger and cargo transport could follow different paths and peaks.

Lan targeted turnaround times of 45 minutes for domestic routes and between one and two hours for international routes, depending on the size of the plane, the distance traveled, and the scheduled service. Fares

Lan’s fare structure consisted of three levels: economy, business, and first class. With approximately 10 different fare rates, Lan adjusted its fares using revenue management models, which involved the statistical analysis of pricing and demand based on factors such as date, length of stay, Saturday night stay-over, and cancellation rights. The company frequently promoted major routes in economy class during off-season to stimulate bookings. Even though Lan did not employ a “low-cost” philosophy, all of its rates were competitive with those of other airlines. For example, a search on Lan.com for a trip from New York to Santiago, Chile, for two weeks in October 2006 produced a price of $889,5 whereas Delta’s rate was $923.6 For the same trip, Lan offered a business-class ticket for $7,000 and a first-class ticket for $10,379. Cost Structure

Lan aimed to maintain a low-cost structure through high use of its aircraft. The most

of aircraft (Boeing 737s), its point-to-point route structure, and its hardworking and productive employees (see the section of this case titled “Leadership and Human Resources” for information on employee incentive plans).

Inspired by studying pit crews at the Indianapolis 500, Southwest had an average turnaround time of 24 minutes, which was 30 minutes faster than other U.S.-based airlines. A contributing factor to the quick turnaround time was that flight attendants were expected to clean the aircraft interior after each flight. One observer believed that it was the ability of Southwest’s employees to coordinate activities like departure preparation that gave it an advantage over other airlines.31 Fares

Southwest offered unrestricted and restricted fares. All fares corresponded to the same class: economy. Fares were determined using revenue management models. The highest-price, one-way, unrestricted walkup fare in 2005 was $299 for any flight in the Southwest stable.32 Many restricted flights were much cheaper and depended on the location and timing. Cost Structure33

In 2005, Southwest had a total cost of 7.94 cents per available seat miles (ASM), which Do

Not C

opy

or P

ost



4

relevant cost measure for Lan was cost per ATM (available ton miles) because it took into account the availability of both passengers and cargo (measured in tons as opposed to seats). In 2005, Lan had a total cost of 62.4 cents per ATM.7 Lan did not use cost per available seat miles (ASM) as a corporate cost measure because ASM excluded the cargo business.

The four largest cost items were fuel (27.2% of operating costs), wages and benefits (15.7%), commissions to agents (14.6%), and other rentals and landing fees (12.8%).8

Like all airlines, Lan had to confront rising fuel costs, which had increased 15.9% compound annual growth rate (CAGR) from 2001 to 2005.9 For example, Lan paid 91 cents per gallon in 2001, 84 cents per gallon in 2002, 99 cents per gallon in 2003, $1.35 per gallon in 2004, and $1.91 per gallon in 2005.10 (Exhibit 2A shows Lan’s key operating statistics.) The increased cost of fuel contributed to 22% of the rise in cost in Lan’s ATM from 2004 to 2005.11 The airline combated rising fuel prices in two ways: by seeking greater fuel efficiency through an updated fleet and by engaging in financial hedging instruments (derivatives) for jet fuel. The company estimated that a one-cent increase or decrease in jet fuel costs would signify a positive or negative swing of $2.7 million for 2006.12 Routes and Alliances13

As of the end of 2005, Lan flew to 56 destinations: 15 in Chile, 32 in other Latin American countries, 3 in the United States, 2 in Europe, and 4 in the South Pacific. Through its alliances, it flew to 54 additional destinations.

Lan had a number of hub locations in South America: Santiago (Chile), Lima (Peru), Quito (Ecuador), and Buenos Aires (Argentina). Referred to as “local hubs,” these South American locations distributed the “local” demand to Lan’s “international hubs”

represented a 2.2% increase over 2004. Other major U.S. airlines had the following operating costs per ASM in 2005: United Airlines, 10.59 cents,34 American Airlines, 10.50 cents,35 and Delta, 11.60 cents.36 Other low-cost U.S. carriers had the following costs per ASM: JetBlue, 6.98 cents,37 AirTran, 9.35 cents,38 and Frontier, 9.06 cents.39

Southwest’s two major cost components were its salaries, wages, and benefits, accounting for 36% of sales, and its fuel, accounting for 18% of sales.40 Even though all airlines were confronted with rising jet fuel costs, the company was often credited with hedging fuel costs by managing financial instruments better than many other airlines. The company was involved in more than 400 “over-the-counter” financial derivatives for jet fuel and was hedging more than 70% of its anticipated fuel consumption for 2006.41 As a result of its hedging, Southwest paid 68 cents per gallon in 2002, 72 cents per gallon in 2003, 83 cents per gallon in 2004 and $1.03 per gallon in 2005.42 (Exhibit 2B shows Southwest’s key operational measures.) Routes and Alliances43

Southwest flew to 61 cities across 31 states. Historically, the company had focused on high-frequency, short-haul flights, but had expanded recently to include medium- to long-haul flights. As of 2005, average flights were 1.7 hours and 607 miles. Approximately 79% of Southwest’s passengers flew nonstop. Examples of short-haul flights were: 29 round-trips per weekday Dallas to Houston Hobby, 19 round-trips per weekday Phoenix to Las Vegas, and 22 round-trips per weekday Los Angeles International to Oakland. Common long-haul services included Baltimore to Los Do

Not C

opy

or P

ost



5

such as Miami, Los Angeles, New York, Frankfurt, Madrid, and Sydney. From these “international hubs,” the company distributed its passengers and cargo to different locations around the world through its alliance network. Lan also provided direct service between “local hubs” (e.g., from Santiago to Lima).

In both the passenger and cargo businesses, Lan had several agreements and alliances. For example, in 2002, LanCargo and Lufthansa Cargo signed an agreement to operate jointly between Europe and Latin America. Through this agreement, the two airlines allocated space to each other between Latin America and Europe. In passenger services, Lan belonged to the oneworld alliance (jointly with American Airlines, Aer Lingus, British Airways, Cathay Pacific, Finnair, Iberia, and Qantas). Additionally, the company signed agreements with AeroMexico and Mexicana in 2004 and with Korea Airlines and JAL in 2005 to strengthen its presence in the Asia-Pacific market. The Cargo Business14

Lan’s cargo business made up 36.3% of revenues in 2005. The company provided cargo for a wide variety of customers, including other international air carriers, freight-forwarding companies, and individual customers. During 2005, LanCargo solidified its competitive position as international courier companies like FedEx and UPS reduced operations and/or exited from many Latin American markets.

Lan carried cargo in four ways: in the bellies of passenger aircraft, in the company’s dedicated cargo planes, in belly space purchased from other airlines, and in short- and medium-term charter planes.

The company’s international cargo operations were headquartered in Miami. In Europe, the company operated two gateways: Madrid and Frankfurt. In Latin America,

Angeles, Phoenix to Tampa Bay, Las Vegas to Nashville, and Houston to Oakland. Besides the major airports, the company serviced secondary or downtown airports because these were less congested and were often more convenient and cheaper for passengers.

Southwest did not have any official alliances with other airlines, but did participate in certain code-sharing activities with the U.S.-based low-cost airline, ATA. Under the code-sharing agreement, Southwest and ATA were able to exchange passengers on certain flights. The Cargo Business44

SouthwestCargo accounted for 1.8% of revenues in 2005. The business was divided between cargo shipments and U.S. Postal Freight. Under cargo, Southwest offered different services such as the Next Flight Guaranteed and the RUSH Priority service, which promised a 24- to 48-hour delivery time (depending on location) or 100% refund. The company had 67 drop-off points around the United States, of which 39 had cooler facilities for perishables. The U.S. Postal Service split its mail between a combination of commercial and freight carriers. Do

Not C

opy

or P

ost



6

LanCargo operated in Brazil, Chile, Ecuador, Mexico, and Peru. The company maintained refrigerated warehouses in Chile and the United States. The cargo service included tracking of shipments via the Internet and storage warehouses at points throughout the region. Lan’s system guaranteed a specific delivery time based on the itinerary of Lan’s passenger operations.

To enable its return flights to generate income, Lan transported different products each way. For example, on the southbound route (from the United States to South America), Lan transported products such as cellular phones, computers, spare parts for machinery, and vehicles; on the northbound routes (principally, from South America to the United States and Europe), Lan carried products such as salmon, seafood, fresh fruits, flowers, wine, and vegetables. Lan’s primary export markets were located on the Pacific coast of the United States; imports were destined for Latin America’s east coast. In 2005, the appreciation of local Latin American currencies caused a decrease in exports and an increase in imports. To counter this movement, Lan increased southbound capacity and made rate adjustments to spur northbound shipments.15 Fleet16

Lan had a total of 76 jet aircraft: 67 passenger aircraft17 and 9 dedicated cargo planes. For domestic flights, Lan maintained a fleet consisting of Boeing 737s, Boeing 767s, Airbus A320s, and Airbus A319s. For international passenger or passenger/cargo services, the company primarily used Boeing 767s, Airbus A320s, and Airbus A340s. The average age of the entire fleet was 13 years. (Exhibit 3A shows the composition of Lan’s fleet as of the end of 2005. See Exhibit 4A for a photograph of one of the planes.)

For the short- and medium-haul passenger market, the company was modernizing its fleet through the acquisition and leasing of

Fleet45

As of 2005, Southwest had 445 total Boeing 737 planes made up of three model types (737-300, 737-500, and 737-700). The average age of the planes was 9.1 years. The company leased 93 planes and owned 352 planes. (Exhibit 3B shows more details about Southwest’s fleet.) Some planes in the fleet were christened with a particular name. Examples included the “Lonestar,” the “New Mexico,” and even a plane after Southwest’s cofounder, the “Herbert D. Kelleher.” (See Exhibit 4B for a photograph of a Southwest plane.)

In 2005, Southwest added 33 new 737-700 planes and retired five 737-200 planes. The change in fleet composition increased the company’s net available seat mile (ASM) by Do

Not C

opy

or P

ost



7

new Airbus aircrafts that would gradually replace the Boeing 737s. Airbus’s A319 and A320 served Lan’s domestic and Latin American routes. For medium- and long-haul routes, Lan used the Boeing 767, and for ultra- long-haul routes, the company used the Airbus 340, one of the few aircrafts capable of traveling from Santiago to Auckland, New Zealand, nonstop. The Airbus 340 was used 16 hours per day, while the Boeing 737 (for shorter flights) was used an average of 6.1 hours per day. For strictly cargo, the company relied heavily on the Boeing 767-300F. The company’s freighters flew an average of almost 17 hours daily. Distribution and Sales18

In 2005, indirect sales through travel agents accounted for 67% of passenger tickets. The company participated in all major Global Distribution Systems—Sabre, Amadeus, Galileo, and Worldspan. For access to these systems, Lan paid fees based on the number of reservations per system.

The other 33% of sales were handled through direct channels, such as Lan’s own ticket offices, call centers, and the company’s websites. Lan focused on enhancing direct- sales channels and was in the process of reducing standard commissions to travel agents (Lan paid up to 8% to agents). Internet sales increased 87% in 2005 and accounted for 6.2% of passenger sales. Electronic tickets—through all sales channels—were available for 97% of Lan’s routes and accounted for 80% of all tickets sold in 2005.

In the cargo business, the company was part of GF-X, one of the largest transaction platforms in the airfreight industry, which enabled customers to make their reservations directly and electronically with 24-hour access availability.

Lan employed an advanced yield management system that adjusted prices in real time depending on demand, time to

10.8%. On average, the company’s fleet flew 12 hours per day.46 The company had firm orders with Boeing for 33 737-700 aircrafts in 2006, 29 in 2007, and 6 in 2008. Southwest also had options to purchase more than 250 planes from 2006 to 2008. The company could choose to have off-the-balance-sheet leasing agreements. However, with these agreements, Southwest would still be responsible for all maintenance, insurance, expenses, and risk of loss for each leased airplane. Distribution and Sales47

Of Southwest’s passenger revenues, 65% were generated through its website. More than 93% of the customer base opted for ticketless travel. In addition to its Internet site, the company had six reservation centers, of which three were leased and three were owned. The reservation centers took incoming calls from 1-800-IFLYSWA. The remaining passenger revenues came via third-party travel agents. However, since December 2003, Southwest had not paid any commissions to travel agents. Southwest dealt solely with the Sabre computer reservation system.48

Southwest used a revenue management system (also referred to as yield management), which compared historical travel patterns and recent bookings to assess supply and demand. The system then tracked the demand of each flight and adjusted the restricted fares accordingly. Southwest’s revenue manage-ment team also carefully reviewed the output, evaluating it against other factors, such as one-time international sporting events, which occur rarely and unpredictably. Do

Not C

opy

or P

ost



8

departure, stay restrictions, and anticipation in reservations, among other parameters. Marketing and Branding19

Lan promoted the concepts of punctuality, service, alliances, and route network, and stressed service to major destinations such as Miami, New York, Frankfurt, Madrid, Rio de Janeiro, Sao Paulo, Buenos Aires, and Sydney. In 2005, the company spent $19.5 million on advertising, using a combination of television, print, radio, and direct marketing.

In early 2004, the company changed its branding strategy, launching the new brand “Lan” for both passenger and cargo operations. The “Lan” name applied to all international services that were previously operated by local brands such as “LanChile,” “LanPeru,” “LanEcuador,” and “LanDominicana.” The company changed its logo and aircraft painting to homogenize the new corporate image. For domestic flights, the company operated with the LanExpress logo. To encourage customer loyalty, the company operated a frequent-flyer program called LanPass; members could earn points for any flights within the oneworld network to be applied toward future air travel with Lan. LanPass also allowed the company to generate targeted promotions to different customer segments listed in the company’s database. Flight Experience

Lan sought to deliver high-quality service in both the passenger and cargo businesses. Nearly all planes had a business and economy class, and most flights featured multilingual television shows or in-flight movies. In-flight magazines In and InPremiere were published monthly and were available on all flights. Lan offered complimentary meals, snacks, or

Marketing and Branding

Since the company’s inception, its marketing had revolved around promoting a fun and cheap way to fly. Heralded for its wacky sense of humor and off-beat consumer messages, Southwest used taglines such as the infamous “Love Airline,” “A symbol of freedom,” and “You are now free to move about the country.”49 The company spent $173 million on advertising in 2005, concentrating on billboard, magazine, and other promotional activities.50

The company had two types of frequent- flyer reward programs. The first was the Award Ticket, which offered passengers one free round-trip to any destination after flying 16 one-way or 8 round-trips. The second was the Companion Pass, which was given to passengers who flew more than 50 round-trips or 100 one-way trips within a 12-month period. The passenger could then invite another person to travel with him or her for free.51 Flight Experience

Many observers believed that Southwest’s in-flight experience was one of the features that set it apart from other airlines. For example, in the early days in-flight staff hosted contests between passengers for the largest holes in their socks.52 Southwest’s management encouraged in-flight attendants to sing out announcements or to add humor Do

Not C

opy

or P

ost



9

beverages on nearly every flight over one hour. All flight attendants were dressed in formal blue suits with neckties for men and silk scarves for women.20

The company’s passenger services had been recognized by several industry players. Accolades included the “Best airline in South America” by the official Airline Guide; the “Best Latin American airline” by Global Finance Magazine; one of the 10 best airlines in the world by the German magazine Reise & Preise; and the best A-340 operator in the world by Airbus. In addition, the 7,500-square-foot VIP lounge at the Comodoro Arturo Merino Benítez International Airport in Chile was ranked as one of the top 10 VIP lounges in the world by Forbes magazine, and Latin Trade magazine chose it as the “Best Airline Lounge” in Latin America.21

Along with the greater proliferation of e-tickets, the company promoted the use of its Internet check-in services to reduce airport waiting times and streamline the boarding process. All passengers were assigned seats through the check-in desk or through the Internet.

For domestic flights, Lan allowed carry-on luggage of up to 17.6 pounds (8 kilos) and checked baggage of up to 44 pounds for economy class and up to 88 pounds for first class. On international flights, the company allowed two pieces of luggage of up to 50 pounds each.22 Beyond the weight restrictions, Lan charged extra tariffs depending on the location. Operations, Safety, Training, and Maintenance23

Lan provided all its own ground services and handling of passenger and cargo at all Chilean airports. The company also provided services to most of the principal foreign

wherever possible by saying things such as, “Can the people in the back calm down a little?” during flight turbulence or by making irreverent comments like, “Please make sure all carry-on items are crammed in the tiny space under the seat in front of you, leaving absolutely no room for your feet.”53 On commuter routes, frequent Southwest fliers were often addressed by the in-flight staff on a first-name basis.54

Southwest did not offer any meals and distributed only small packets of honey-roasted peanuts and Wheat thins (called “Love bites”). The company did not assign seats, instead allowing passengers to choose their seats based on first arrival.55 The airline did not show television programs or movies during the flight. The company offered two complimentary magazines, Spirit and SkyMall. The latter contained items available for sale onboard such as barbecue kits and novelty golf-club covers.56 While the days of “hostesses” wearing hot pants had long since passed, Southwest’s in-flight staff was adorned casually in khakis, white running shoes, and a Southwest shirt.57

To facilitate check-in and reduce customer lines, Southwest had implemented its Rapid Check-In self-service kiosks in all airports. The Rapid Check-In service included a baggage check, a gate reader, and Internet check-in.58

The company allowed one piece of carry-on luggage under 22 pounds and one personal item such as a purse or laptop. For check-in, Southwest permitted three pieces of baggage up to 50 pounds each, charging for bags over the weight threshold.59 Operations, Safety, Training, and Maintenance60

Southwest leased all of its passenger facilities at each of the airports. The company had four main maintenance centers located at Dallas Love Field, Houston Hobby, Phoenix Sky Harbor, and Chicago Midway. At each Do

Not C

opy

or P

ost



10

airlines that operated at Santiago, Chile’s main airport, Arturo Merino Benitez. Lan contracted ground services to foreign airport service companies at most of the international airports. Since 2004, Lan had owned and operated two ground-handling companies for passenger and cargo services in Ecuador, which provided the bulk of Lan’s service needs within Ecuador. Lan performed all ground training in its centers in Chile, Argentina, Ecuador, and Peru. In 2004, the company signed an agreement with the Canadian flight-training company, CAE, to operate a joint-venture training facility with three full flight simulators.

The company’s main maintenance facilities were certified by a number of different aviation authorities (FAA, JAA, DGAC, and others), and flight operations were in accordance with ISO 9001-2000 standards. Other Services24

Lan generated revenues from a variety of other services. In 2005, the company garnered $23.8 million from aircraft leases, $18.8 million from ground services, $15.6 million from duty-free in-flight sales, $39.9 million from logistics and courier businesses (called LanCourier), and $10.7 from storage and customs brokerage operations (called LanLogistics). The remaining $26.4 million came from sales to third parties by Amadeus Chile CRS (computer reservation system), aircraft maintenance services to third parties, security, tour operations, and other activities. Leadership and Human Resources25

Lan was governed by a nine-person board of directors. The senior management team was composed of 10 people and was led by Enrique Cueto Plaza, who had held the post since 1994. Cueto was a member of the Cueto Group, a controlling shareholder of Lan.

airport, Southwest performed most of the maintenance itself except for major component inspections or repairs, which were contracted out to third parties. The company performed all of its pilot training at a dedicated facility at Love Field, which included seven Boeing 737 simulators.

Southwest was required to be certified for all aspects of maintenance and operations under the Federal Aviation Administration. In addition, the company had to meet the guidelines set out by other U.S. agencies such as the Occupational Safety and Health Administration and the Food and Drug Administration. Other Services61

Apart from freight (described above under “The Cargo Business”), Southwest was engaged in programs with a company-sponsored Chase® Bank Visa card, whereby Southwest was entitled to commissions from financial institutions. Revenues from these activities totaled $172 million in 2005. Leadership and Human Resources

Southwest had been led from 1971 to 2001 by cofounder Herb Kelleher. Kelleher was renowned for his unorthodox approach, which included arm-wrestling with an advertising executive to settle litigation, impersonating Elvis in front of Southwest’s employees, and appearing in the maintenance hangar in a purple boa and woman’s dress to settle a Do

Not C

opy

or P

ost



11

As of December 31, 2005, Lan had a total of 15,099 employees. The company had a performance-related pay structure for administrative, management, and flight personnel, including performance-based bonuses and pay scales. For example, counter, technical, and administrative employees’ pay scales were linked to skills like foreign- language proficiency. While the company did not offer stock options to its employees, approximately 90% of the employees were eligible to receive performance-related bonuses based on individual, team, and overall company results.

Unions represented the majority of Lan’s employees. Lan staggered union expiration contracts to avoid having to renegotiate terms with all groups at the same time. Most contracts were negotiated for a period of four years (a limit under Chilean law). Competition and Operating Context26

Lan’s competitors in Chile were Sky Airline and Aerolineas del Sur (which began service in 2004). Lan competed against Aerolineas Argentinas, AeroMexico, Avianca, COPA, TACA, TAM, and Varig for routes within Latin America. For international routes outside of the region, the company competed against major carriers such as American Airlines, Delta Airlines, Air Canada, Iberia, Air France, and Lufthansa for traffic entering and exiting Chile. (For more information on selected Lan competitors, see Exhibit 5. Exibit 6 shows share prices for Lan. Exhibit 7 shows key facts about Lan’s country of origin—Chile.)

performance challenge to the maintenance crew.62 Many observers believed that Kelleher set the tone for Southwest’s offbeat image.

As of 2005, the company was led by 50-year old Gary Kelly, CEO, and 60-year old Colleen Barrett, president and COO. Kelly—previously the CFO—was the company’s second CEO since Kelleher retired in 2001.

Southwest had 31,729 employees as of December 2005. While the company’s relationship with its employees had been historically strong due to its policy of no furloughing and its fun culture, Southwest had been embroiled in a two-year battle with its flight-attendant union from 2002 to 2004, resulting in a 31% pay hike over the existing contract.63 However, the company typically had longer-term pilot contracts than other major airlines. The company offered profit-sharing mechanisms and stock-option plans to its employees. Competition and Operating Context64

Southwest competed against all major U.S. airlines, including United Airlines, U.S. Airways, Delta, Northwest, and Continental. After September 11, 2001, a number of smaller low-cost carriers such as AirTran, JetBlue, and Frontier emerged with a similar no-frills approach. (See Exhibit 5 for Southwest’s competitor information. Exhibit 6 shows share prices for Southwest. Exhibit 7 shows key facts about the United States.)

Do Not

Cop

y or

Pos

t


707-

414

-1

2-

Exh

ibit

1A

Lan

Pro

fit a

nd L

oss

Stat

emen

t E

xhib

it 1

BSo

uthw

est P

rofi

t and

Los

s St

atem

ent

Lan

P&L

Sout

hwes

t P&

LIn

US

$ m

illio

ns (y

ear e

ndin

g D

ec. 3

1)20

0320

0420

05In

US

$ m

illio

ns (y

ear e

ndin

g D

ec. 3

1)20

0320

0420

05

OP

ER

ATI

NG

RE

VE

NU

ES

:O

PE

RA

TIN

G R

EV

EN

UE

S:

P

asse

nger

918.

4

1,

169.

0

1,46

0.6

P

asse

nger

5,74

16,

280

7,27

9

Car

go60

2.0

799.

7

91

0.5

Frei

ght

9411

713

3

Oth

er11

8.4

124.

2

13

5.3

Oth

er10

213

317

2To

tal o

pera

ting

reve

nues

1,63

8.8

2,

092.

9

2,50

6.4

To

tal o

pera

ting

reve

nues

5,93

76,

530

7,58

4

OP

ER

ATI

NG

EXP

EN

SE

S:

OP

ER

ATI

NG

EXP

EN

SE

S:

W

ages

and

ben

efits

240.

9

29

2.8

371.

6

S

alar

ies,

wag

es, a

nd b

enef

its2,

224

2,44

32,

702

Airc

raft

fuel

259.

6

41

4.5

642.

7

Fu

el a

nd o

il83

01,

000

1,34

2 C

omm

issi

ons

to a

gent

s22

4.0

291.

7

34

5.4

Mai

nten

ance

mat

eria

ls a

nd re

pairs

430

457

430

Dep

reci

atio

n an

d am

ortiz

atio

n72

.6

77.4

80

.5

Airc

raft

rent

als

183

179

163

Pas

seng

er s

ervic

es36

.2

45.0

53

.2

Land

ing

fees

and

oth

er re

ntal

s37

240

845

4 A

ircra

ft re

ntal

s13

9.1

132.

4

14

8.2

Dep

reci

atio

n an

d am

ortiz

atio

n38

443

146

9 A

ircra

ft m

aint

enan

ce97

.9

120.

8

13

2.2

Oth

er o

pera

ting

expe

nses

1,03

11,

058

1,20

4 O

ther

rent

als

and

land

ing

fees

258.

5

28

7.8

301.

5

To

tal o

pera

ting

expe

nses

5,45

45,

976

6,76

4 O

ther

ope

ratin

g ex

pens

es19

8.3

258.

3

28

9.5

To

tal o

pera

ting

expe

nses

1,52

7.1

1,

920.

7

2,36

4.7

O

PE

RA

TIN

G IN

CO

ME

483

554

820

OP

ER

ATI

NG

INC

OM

E11

1.7

172.

1

14

1.6

OTH

ER

EXP

EN

SE

S (I

NC

OM

E):

O

THE

R E

XPE

NS

ES

:In

tere

st e

xpen

se91

8812

2

Inte

rest

inco

me

6.3

10

.8

12.4

C

apita

lized

inte

rest

-33

-39

-39

In

tere

st e

xpen

se(3

9.4)

(36.

5)

(3

9.2)

Inte

rest

inco

me

-24

-21

-47

M

isc-

net

24.1

45

.2

58.2

O

ther

(gai

ns) l

osse

s, n

et-2

59-3

7-9

0To

tal o

ther

exp

ense

(9.0

)

19.5

31

.5

Tota

l oth

er e

xpen

ses

(inco

me)

-225

65-5

4

IN

CO

ME

BE

FOR

E M

INO

RIT

Y IN

TER

ES

T10

2.8

191.

6

17

3.1

INC

OM

E B

EFO

RE

INC

OM

E T

AXE

S70

848

987

4M

INO

RIT

Y IN

TER

ES

T(0

.9)

0.

2

1.8

P

RO

VIS

ION

FO

R IN

CO

ME

TA

XES

266

176

326

INC

OM

E B

EFO

RE

INC

OM

E T

AXE

S10

1.9

191.

8

17

4.9

NE

T IN

CO

ME

442

313

548

INC

OM

E T

AXE

S(1

8.3)

(28.

3)

(2

8.3)

NE

T IN

CO

ME

83.6

16

3.6

146.

6

N

ET

INC

OM

E P

ER

SH

AR

E, B

AS

IC0.

56

0.40

0.

70

NE

T IN

CO

ME

PE

R S

HA

RE

, DIL

UTE

D0.

54

0.38

0.

67

Sou

rce:

Lan

Ann

ual R

epor

t, w

ww

.sec

.gov

, 20-

F, D

ecem

ber 3

1, 2

005,

p. F

-5.

S

ourc

e: S

outh

wes

t Airl

ines

, Ann

ual R

epor

t, 10

-K, w

ww

.sec

.gov

, Dec

embe

r 31,

200

5, p

. 29.

Do Not

Cop

y or

Pos

t


707-

414

-1

3-

Exh

ibit

1A

(con

tin

ued

)L

an B

alan

ce S

heet

E

xhib

it 1

B (c

onti

nu

ed)

Sout

hwes

t Bal

ance

She

et

Lan

Airli

nes

Sout

hwes

t Airl

ines

in m

illion

s (U

S$)

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

Asse

tsC

ash

& Eq

uiva

lent

s73

.6

159.

2

21

8.7

304.

5

16

0.3

2,27

9.9

1,

815.

4

1,86

5.0

1,

305.

0

2,53

1.0

R

ecei

vabl

es N

et16

7.6

164.

8

18

3.7

202.

3

33

9.7

71.3

17

4.4

132.

0

24

8.0

258.

0

In

vent

orie

s33

.8

35.3

33

.3

35.3

37

.5

70.6

86

.0

93.0

13

7.0

150.

0

To

tal C

urre

nt A

sset

s33

6.1

415.

4

48

6.0

590.

6

58

3.1

2,52

0.2

2,

232.

0

2,31

3.0

2,

172.

0

3,62

0.0

Pr

oper

ty, P

lant

& E

quip

men

t - G

ross

1,19

3.2

1,

287.

0

1,32

7.6

1,

353.

4

1,70

7.3

8,

901.

7

9,45

5.7

10

,550

.0

11

,921

.0

12

,915

.0

Ac

cum

ulat

ed D

epre

ciat

ion

205.

8

26

1.7

319.

5

37

4.8

446.

7

2,

456.

2

2,81

0.2

3,

107.

0

3,19

8.0

3,

488.

0

Prop

erty

, Pla

nt &

Equ

ipm

ent -

Net

987.

4

1,

025.

3

1,00

8.1

97

8.6

1,26

0.6

6,

445.

5

6,64

5.5

7,

443.

0

8,72

3.0

9,

427.

0

Oth

er A

sset

s86

.7

125.

1

12

2.5

246.

7

29

3.6

31.4

76

.3

122.

0

44

2.0

1,17

1.0

To

tal A

sset

s1,

437.

3

1,58

3.7

1,

626.

4

1,82

8.8

2,

160.

3

8,99

7.1

8,

953.

8

9,87

8.0

11

,337

.0

14

,218

.0

Liab

ilitie

sAc

coun

ts P

ayab

le14

2.9

158.

1

17

2.2

224.

0

23

7.8

504.

8

36

2.0

405.

0

42

0.0

524.

0

ST

Deb

t & C

urre

nt P

ortio

n D

ue L

T D

ebt

83.4

76

.5

79.1

85

.8

99.3

51

4.6

130.

5

20

6.0

146.

0

60

1.0

Accr

ued

Payr

oll

23.5

5.

8

7.7

9.

0

12.2

23

0.2

166.

9

23

5.0

209.

0

27

7.0

Tota

l Cur

rent

Lia

bilit

ies

422.

7

45

8.7

505.

7

58

1.7

689.

0

2,

239.

2

1,43

3.8

1,

723.

0

2,14

2.0

3,

848.

0

Long

Ter

m D

ebt

630.

5

61

2.0

558.

9

50

9.4

525.

5

1,

327.

2

1,55

2.8

1,

332.

0

1,70

0.0

1,

394.

0

Tota

l Lia

bilit

ies

1,14

6.1

1,

271.

2

1,27

0.1

1,

390.

5

1,65

0.6

4,

983.

1

4,53

2.1

4,

826.

0

5,81

3.0

7,

543.

0

Shar

ehol

ders

' Equ

ity

N

on-E

quity

Res

erve

s-

0.

1

0.2

0.

2

0.2

-

-

-

-

-

M

inor

ity In

tere

st2.

2

3.9

4.

1

3.7

3.

4

-

-

-

-

-

Pref

erre

d St

ock

-

-

-

-

-

-

-

-

-

-

Com

mon

Equ

ity28

9.0

308.

5

35

2.1

434.

4

50

6.1

4,01

4.1

4,

421.

6

5,05

2.0

5,

524.

0

6,67

5.0

To

tal L

iabi

litie

s &

Shar

ehol

ders

' Equ

ity1,

437.

3

1,58

3.7

1,

626.

4

1,82

8.8

2,

160.

3

8,99

7.1

8,

953.

8

9,87

8.0

11

,337

.0

14

,218

.0

Com

mon

Sha

res

Out

stan

ding

318.

9

31

8.9

318.

9

31

8.9

318.

9

76

6.8

776.

7

78

9.4

785.

0

80

1.6

Sou

rce:

T

hom

son

One

Dat

abas

e.

Do Not

Cop

y or

Pos

t


707-

414

-1

4-

Exh

ibit

1A

/1B

(con

tin

ued

)

L

an

S

outh

wes

t

Yea

r 20

0320

0420

05

2003

2004

2005

Chi

le

294.

1 33

2.9

428.

6

--

--

--

Nor

th A

mer

ica

831.

8 1,

099.

9 1,

195.

0

5,93

7.0

6,53

0.0

7,58

4.0

Sou

th A

mer

ica

(exc

ludi

ng C

hile

) 34

2.2

458.

6 61

9.9

--

--

--

E

urop

e 13

4.2

146.

1 15

8.5

--

--

--

P

acifi

c 36

.5

55.4

10

4.3

--

--

--

T

ota

l 1,

638.

8 2,

092.

9 2,

506.

4

5,93

7.0

6,53

0.0

7,58

4.0

Sour

ce:

Lan

Ann

ual

Rep

ort,

20-F

, ww

w.s

ec.g

ov, D

ecem

ber

31, 2

005,

p. F

-35;

Sou

thw

est A

irlin

es, A

nnu

al R

epor

t, w

ww

.sec

.gov

, Dec

embe

r 31

, 200

5.

Not

e:

Rev

enue

s fo

r L

an h

ave

been

take

n d

irec

tly

from

the

P&

L. N

orth

Am

eric

a fo

r So

uth

wes

t is

the

U.S

. onl

y.

Do Not

Cop

y or

Pos

t


707-

414

-1

5-

Exh

ibit

2A

Lan

’s O

pera

ting

Sta

tist

ics

Exh

ibit

2B

Sout

hwes

t’s O

pera

ting

Sta

tist

ics

La

n So

uthw

est

20

03

2004

20

05

Ave

rage

20

03

2004

20

05

Ave

rage

PA

SSEN

GER

BU

SIN

ESS

ASM

s - A

vaila

ble

Seat

Mile

s (m

illio

ns)

Inte

rnat

iona

l

9,0

13.2

1

0,80

5.0

12,

443.

5

1

0,75

3.9

Dom

estic

2,3

72.8

2,3

35.4

2,2

75.1

2,3

27.7

7

1,79

0.4

76,

861.

3

8

5,17

2.8

77,

941.

5 To

tal

11,

385.

9

1

3,14

0.4

14,

718.

6

1

3,08

1.6

71,

790.

4

7

6,86

1.3

85,

172.

8

7

7,94

1.5

RPM

s - R

even

ue P

asse

nger

Mile

s (m

illio

ns)

Inte

rnat

iona

l

6,3

82.4

7,8

42.0

9,3

41.0

7,8

55.1

D

omes

tic

1

,491

.0

1

,556

.5

1

,527

.3

1

,524

.9

47,

943.

1

5

3,41

8.4

60,

223.

1

5

3,86

1.5

Tota

l

7,8

73.4

9,3

98.4

1

0,86

8.3

9

,380

.0

47,

943.

1

5

3,41

8.4

60,

223.

1

5

3,86

1.5

Pass

enge

rs (t

hous

ands

)

In

tern

atio

nal

3

,143

.5

4

,114

.6

5

,495

.8

4

,251

.3

Dom

estic

2,3

65.6

2,4

64.4

2,4

71.1

2,4

33.7

6

5,67

3.9

70,

902.

8

7

7,69

3.9

71,

423.

5 To

tal

5

,509

.1

6

,578

.9

7

,966

.9

6

,685

.0

65,

673.

9

7

0,90

2.8

77,

693.

9

7

1,42

3.5

To

tal P

asse

nger

Yie

ld (U

S$ c

ents

)

11.

7

12.

4

13.

4

12.

5

12.

0

11.

8

12.

1

11.

9 To

tal P

asse

nger

Loa

d Fa

ctor

(%)

69.1

%71

.5%

73.8

%71

.5%

66.8

%69

.5%

70.7

%69

.0%

Ave

rage

Rev

enue

/ Pa

ssen

ger

1

66.7

1

177

.69

1

83.3

3

175

.91

87.

42

88.

57

93.

68

89.

89

C

AR

GO

BU

SIN

ESS

ATM

(car

go) -

Ava

ilabl

e To

n M

iles

(car

go)*

(mill

ions

)

In

tern

atio

nal

1737

.920

13.8

2204

.719

85.4

Dom

estic

32

.629

.730

.731

.0 n

ot a

vail.

n

ot a

vail.

n

ot a

vail.

Tota

l 17

70.5

2043

.522

35.3

2016

.5 n

ot a

vail.

n

ot a

vail.

n

ot a

vail.

RTM

(car

go) –

Rev

enue

Ton

Mile

s (c

argo

) (m

illio

ns)

Inte

rnat

iona

l

1,1

66.1

1,3

83.5

1,4

66.1

1,3

38.5

D

omes

tic

2

1.9

2

0.4

2

0.4

2

0.9

not

ava

il.

not

ava

il.

not

ava

il.

To

tal

1

,188

.0

1

,403

.9

1

,486

.5

1

,359

.5

not

ava

il.

not

ava

il.

not

ava

il.

W

eigh

t of c

argo

car

ried

(tho

usan

ds o

f ton

s)

Inte

rnat

iona

l

3

97.4

4

81.3

5

04.2

4

61.0

D

omes

tic

2

6.8

2

5.1

2

4.8

2

5.6

not

ava

il.

not

ava

il.

not

ava

il.

To

tal

424

.2

506

.3

529

.0

486

.5

not

ava

il.

not

ava

il.

not

ava

il.

Tota

l Car

go Y

ield

(US$

cen

ts)

50.

67

56.

96

61.

25

56.

30

not

ava

il.

not

ava

il.

not

ava

il.

To

tal C

argo

Loa

d Fa

ctor

(%)

67.1

%68

.7%

66.5

%67

.4%

not

ava

il.

not

ava

il.

not

ava

il.

FUEL

CO

ST P

ER G

ALL

ON

(US$

)

0.9

9

1.3

5

1.9

0

1.4

1

0.7

2

0.8

3

1.0

3

0.8

6 EM

PLO

YEES

(ful

l num

bers

)

11,

173

1

3,41

4

15,

099

1

3,22

9

32,

847

3

1,01

1

31,

729

3

1,86

2

Do Not

Cop

y or

Pos

t


707-

414

-1

6-

Exh

ibit

2A

/2B

(con

tin

ued

)

Def

initi

ons

ASM

(Ava

ilabl

e Se

at M

iles)

Th

e nu

mbe

r of s

eats

mad

e av

aila

ble

for s

ale

mul

tiplie

d by

the

mile

s flo

wn.

ATM

(A

vaila

ble

Ton

Mile

s) (c

argo

) Th

e nu

mbe

r of t

ons

of c

apac

ity a

vaila

ble

for t

he tr

ansp

orta

tion

of c

argo

mul

tiplie

d by

the

mile

s flo

wn.

RPM

(Rev

enue

Pas

seng

er M

iles)

Th

e nu

mbe

r of r

even

ue p

asse

nger

s ca

rrie

d m

ultip

lied

by th

e m

iles

flow

n.

RTM

(Rev

enue

Ton

Mile

s) (c

argo

) Th

e nu

mbe

r of r

even

ue to

ns c

arri

ed m

ultip

lied

by th

e m

iles

flow

n.

Tota

l Pas

seng

er Y

ield

Re

venu

e fr

om p

asse

nger

ope

ratio

ns d

ivid

ed b

y RP

Ms

Tota

l Car

go Y

ield

Re

venu

e fr

om c

argo

ope

ratio

ns d

ivid

ed b

y RT

Ms

(car

go)

Tota

l Pas

seng

er L

oad

Fact

or

RPM

s ex

pres

sed

as a

per

cent

age

of A

SMs

Tota

l Car

go L

oad

Fact

or

RTM

s (c

argo

) exp

ress

ed a

s a

perc

enta

ge o

f ATM

s (c

argo

)

Sour

ce:

Lan

inf

orm

atio

n ad

apte

d f

rom

Lan

Air

lines

Ann

ual

Rep

ort,

20-F

, w

ww

.sec

.gov

, D

ecem

ber

31,

2005

, pa

ge 5

7. S

outh

wes

t in

form

atio

n ad

apte

d f

rom

Sou

thw

est

Air

lines

Ann

ual

Rep

ort,

10-K

, w

ww

.sec

.gov

, Dec

embe

r 31

, 200

5, p

age

14.

• W

e na

med

this

figu

re A

TM (c

argo

) to

dist

ingu

ish

it fr

om A

TM to

tal,

whi

ch is

the

mea

sure

in w

hich

Lan

exp

ress

es c

apac

ity

in it

s w

hole

sys

tem

(pas

seng

er a

nd c

argo

).

Do Not

Cop

y or

Pos

t


707-

414

-1

7-

Exh

ibit

3A

Lan

Fle

et, y

ear-

end

200

5 E

xhib

it 3

BSo

uthw

est F

leet

Lan

Sout

hwes

tLe

ased

Ow

ned

Tota

lA

vg. Y

ears

Leas

edO

wne

dTo

tal

Avg

. Yea

rs

Pass

enge

r Fle

etB

oein

g 73

7-20

014

1024

26.6

Boe

ing

737-

300

134

1710

.282

112

194

14.7

Boe

ing

737-

500

916

2514

.7B

oein

g 73

7-70

02

224

226

3.8

Airb

us 3

19-1

005

27

1.6

Airb

us 3

20-2

0011

415

4.8

Airb

us 3

40-3

004

04

5.1

Tota

l Pas

seng

er

Airc

raft

4720

6713

.793

352

445

9.1

Car

go F

leet

Boe

ing

767-

300F

17

84.

4B

oein

g 73

7-20

0F0

11

36To

tal C

argo

Airc

raft

18

98

Tota

l Airc

raft

4828

7613

9335

244

59.

1

Sour

ce:

Com

pile

d b

y ca

sew

rite

rs f

rom

: L

an A

irlin

es,

Ann

ual

Rep

ort,

20-F

, w

ww

.sec

.gov

, D

ecem

ber

31,

2005

, p.

32;

Sou

thw

est

Air

lines

, A

nnua

l R

epor

t, 10

-K,

ww

w.s

ec.g

ov,

Dec

embe

r 31

, 200

5, p

. 8.

Do Not

Cop

y or

Pos

t



18

Exhibit 4A Photograph of Lan Plane

Source: Lan Annual Report, December 31, 2004, p. 2.

Do Not

Cop

y or

Pos

t



19

Exhibit 4B Photograph of Southwest Plane

The “New Mexico” Plane

Source: Southwest website, http://www.southwest.com/about_swa/photos.html, accessed April 10, 2006.

Do Not

Cop

y or

Pos

t


707-

414

-2

0-

Exh

ibit

5L

an a

nd S

outh

wes

t Com

peti

tors

Airl

ine

Hea

dqua

rter

sSa

les

(USD

m

illio

ns)

1-Ye

ar S

ales

G

row

thN

et In

com

e (U

SD

mill

ions

)

Flee

t Siz

eA

llian

ce M

embe

r

Lan

- Sel

ecte

d C

ompe

titor

sV

arig

Por

to A

legr

e, B

razi

l

3

,328

.1

21.5

%-3

2.7

62S

tar

Aer

oMex

ico

Mex

ico

City

, Mex

ico

3,2

20.7

20

.4%

51.2

73S

kyTe

amM

exic

ana

Mex

ico

City

, Mex

ico

6

65.1

no

t ava

il.no

t ava

il.

59S

tar

Cop

a (C

opa

Hol

ding

s)P

anam

a C

ity, P

anam

a

608

.6

52.2

%82

.722

Cod

e-sh

arin

g w

ith

Con

tinen

tal

Sout

hwes

t - S

elec

ted

Com

petit

ors

Maj

or C

arrie

rsU

nite

d (U

AL)

Elk

Gro

ve T

owns

hip,

IL17

,379

.0

6.

0%(2

1,17

6.0)

419

Sta

rA

mer

ican

(AM

R)

Fort

Wor

th, T

X20

,712

.0

11

.1%

(861

.0)

706

One

wor

ldD

elta

Atla

nta,

GA

16,1

91.0

7.9%

(3,8

18.0

)

485

Sky

Team

Low

Cos

t Car

riers

JetB

lue

Fore

st H

ills,

NY

1,70

1.0

34

.4%

(20.

0)

88

Non

eA

irTra

nO

rland

o, F

L1,

450.

5

39.3

%1.

7

103

Non

eFr

ontie

rD

enve

r, C

O99

4.3

19.3

%(1

4.0)

50N

one

Sour

ce:

Com

pile

d b

y ca

sew

rite

rs fr

om: h

ttp:

//

ww

w.h

oove

rs.c

om p

rofi

les;

flee

t siz

es fr

om: h

ttp

://

ww

w.p

lane

-spo

tter

s.ne

t (C

urre

nt F

leet

Det

ails

).

Do Not

Cop

y or

Pos

t


707-

414

-2

1-

Exh

ibit

6

Clo

sin g

sha

re p

rice

La

n So

uthw

est

Pr

ice

(USD

)*

Retu

rn**

Pr

ice

(USD

)*

Retu

rn**

2002

5.

9

13.7

7

2003

2.

77

-53.

05%

1616

.19%

2004

5.

37

93.8

6%16

.16

1.00

%

2005

6.

37

18.6

2%16

.34

1.11

%

Sour

ce:

Blo

ombe

rg L

.P.,

Lan

Air

lines

S.A

. (ht

tp:/

/w

ww

.blo

ombe

rg.c

om/

apps

/qu

ote?

tick

er=

LA

N%

3AC

I): B

loom

berg

L.P

., So

uthw

est A

irlin

es

(htt

p:/

/w

ww

.blo

ombe

rg.c

om/

apps

/qu

ote?

tick

er=

LU

V%

3AU

S), a

cces

sed

Au

gust

3, 2

009.

* C

losi

ng p

rice

adj

uste

d fo

r div

iden

ds a

nd s

plits

.

** R

etur

n ov

er p

revi

ous

year

Do Not

Cop

y or

Pos

t



22

Exhibit 7 2006 Key Facts: Chile and the United States

Chile U.S. Land Area 756,950 sq km 9,631,420 sq km Border Countries Argentina, Bolivia, Peru Canada, Mexico Population 16,134,219 298,444,215 Median age 30.4 years 36.5 years Population growth rate 0.9% 0.9% Literacy 96.2% 99.0% Legal system Based on Spanish law with influences from

France and Austria Federal court system based on English common law. Each state has its own legal system.

GDP 187.1 billion 12.36 trillion GDP—real growth rate 6.0% 3.5% GDP—per capita 11,300 41,800 Ranking of GDP—per capita 82 of 232 countries (between Libya and

Costa Rica) 6 of 232 countries (between Norway and Ireland)

GDP Composition Agriculture 6.2% 1.0% Industry 46.5% 20.7% Services 47.3% 78.3% Labor force 6.3 million 149.3 million Unemployment rate 8.0% 5.1% Population below poverty line 18.2% 12.0% Inflation rate 3.2% 3.2% Public debt of GDP 8.1% 64.7% Industries Copper, other minerals, foodstuffs, fish

processing, iron and steel, wood and wood products, transport equipment, cement, textiles

Petroleum, steel, motor vehicles, aerospace, telecommunications, chemicals, electronics, food processing, consumer goods, lumber, mining

Exports—partners US 14%, Japan 11.4%, China 9.9%, South Korea 5.5%, Netherlands 5.1%, Brazil 4.3%, Italy 4.1%, Mexico 4%

Canada 23%, Mexico 13.6%, Japan 6.7%, UK 4.4%, China 4.3%

Exports—commodities Copper, fruit, fish products, paper and pulp, chemicals, wine

Agricultural products (soybeans, fruit, corn) 9.2%, industrial supplies (organic chemicals) 26.8%, capital goods (transistors, aircraft, motor vehicle parts, computers, telecommunications equipment) 49.0%, consumer goods (automobiles, medicines) 15.0%

Exports (billions) 38.03 927.5 Approx. 5 year CAGR—Exports 13.3% 3.0% Imports (billions) 30.09 1,727 Approx. 5 year CAGR—Imports 9.3% 6.5% Current account balance (billions) 0.309 -829.1 Imports—commodities Petroleum and petroleum products,

chemicals, electrical and telecommunications equipment, industrial machinery, vehicles, natural gas

Agricultural products 4.9%, industrial supplies (crude oil 8.2%) 32.9%, capital goods (computers, telecommunications equipment, motor vehicle parts, office machines, electric power machinery) 30.4%, consumer goods (automobiles, clothing, medicines, furniture, toys) 31.8%

Imports—partners Argentina 16.8%, US 13.7%, Brazil 11.2%, China 7.5%

Canada 17%, China 13.8%, Mexico 10.3%, Japan 8.7%, Germany 5.2%

Roadways 0.5% are expressways, 19.5% other paved 1% are expressways, 64% are other paved roads, Do Not

Cop

y or

Pos

t



23

Chile U.S. roads, 80% unpaved roads. 35% unpaved roads.

Airports 363 14,893 Airports—with paved runways 72 5,120

Source: CIA World Factbook, http://www.cia.gov, accessed June 24, 2006 (with the exception of Export and Import growth rates, which were estimated based on U.S. Bureau of Census data, http://www.census.gov.

Do Not

Cop

y or

Pos

t



24

Endnotes

1 Lan Airlines, 2005 Annual Report, 20-F, http://www.sec.gov, December 31, 2005, pp. 17–20.

2 Lan offered courier, handling, and logistics services to assist companies in the planning, deployment, and shipment of goods.

3 Lan Airlines, 2005 Annual Report, p. 18.

4 Ibid., pp. 17–18.

5 Lan website, http://www.lan.com, accessed June 29, 2006.

6 Delta website, http:// www.delta.com, accessed June 29, 2006.

7 ATM has been adjusted from the company’s stated ATK, which is the number of tons of capacity available for the transportation of revenue load (passengers and/or cargo) multiplied by the kilometers flown. Cost per ATK from: Lan Airlines, 2005 Annual Report, 20-F, p. 22.

8 Lan Airlines, 2005 Annual Report, p. 50.

9 Ibid., p. 37.

10 Ibid.

11 Ibid., p. 48.

12 Ibid., p. 97.

13 Ibid., pp. 26 and F-8.

14 Ibid., pp. 30–32.

15 Lan Airlines, 2005 Annual Report/Memoria Anual, December 31, 2005, p. 27, http://www.lan.com/files/about_us/lanchile/memoria_2005_comercial.pdf, accessed June 30, 2006.

16 Lan Airlines, 2005 Annual Report, pp. 32–33.

17 Passenger planes are used extensively to ship cargo.

18 Lan Airlines, 2005 Annual Report, pp. 27–28.

19 Ibid.

20 Based on observations during flights taken by casewriters.

21 Lan Airlines, Annual Report, 20-F, www.sec.gov, December 31, 2005, p. 65.

22 “Información sobre Viajes, Equipajes,” Lan website, http://www.lan.com, accessed June 26, 2006.

23 Lan Airlines, 2005 Annual Report, pp. 40, 44.

24 Ibid., p. F-31. Do Not

Cop

y or

Pos

t



25

25 Ibid., pp. 67–72.

26Ibid., pp. 24–26.

27 Southwest Airlines, 2005 Annual Report, 10-K, http://www.sec.gov, December 31, 2005, p. 1.

28 Adapted from James L. Heskett, “Southwest Airlines 2002: An Industry Under Siege,” HBS No. 803-133 (Boston: Harvard Business School Publishing, 2003); Southwest Airlines website, http://www.southwest.com/about_swa/airborne.html, accessed April 9, 2006.

29 Southwest Airlines, 2005 Annual Report, p. 1.

30 Ibid.

31 Jody Hoffer Gittell, The Southwest Airlines Way (New York: McGraw-Hill, 2003), p. 16.


33 Ibid., p. 41.

34 UAL Corp., 2005 Annual Report, 10-K, http://www.sec.gov, December 31, 2005, Part II, Item 6 (no page number in html document).

35 American Airlines Inc., 2005 Annual Report, 10-K, http://www.sec.gov, December 31, 2005, p. 31.

36 Delta, 2005 Annual Report, 10-K, http://www.sec.gov, December 31, 2005, p. 23.

37 JetBlue Airways Corp., 2005 Annual Report, 10-K, http://www.sec.gov, December 31, 2005, p. 27.

38 AirTran Holdings Inc., 2005 Annual Report, 10-K, http://www.sec.gov, December 31, 2005, p. 23.

39 Frontier Airlines Holdings, 2005 Annual Report, 10-K, http://www.sec.gov, March 31, 2006, p. 29.


41 Ibid., p. 23.

42 Ibid., p. 14.

43 Ibid., pp. 1, 3.

44 Southwest Cargo website, http://www.swacargo.com/cargo/cargosvcs.html, accessed June 26, 2006.


46 Heskett, “Southwest Airlines 2002,” p. 6.

47 Southwest Airlines, 2005 Annual Report, p. 8. Do Not

Cop

y or

Pos

t



26

48 “Southwest Airlines and Sabre Airline Solutions Sign a Seven-Year Passenger Reservations Contract,” Business Wire, May 3, 2005.

49 Southwest Airlines website, http://www.southwest.com, accessed April 6, 2006.


51 Ibid., p. 13.

52 James L. Heskett, “Southwest Airlines 2002,” p. 7.

53 Richard McCaffery, “Southwest Airlines' Competitive Edge,” http://www.fool.com/news/foth/2000/foth000928.htm, September 28, 2000, accessed June 29, 2006.


55 As of June 2006, Southwest had announced it would test assigned seats on some routes.

56 Southwest Airlines website, http://www.southwest.com/travel_center/baggage.html, accessed June 26, 2006.

57 Marlene Friesen and Elliot N. Weiss, “Marlene’s Marvelous Adventure: Southwest Airlines,” Darden Business Publishing, University of Virginia, UVA-OM-1152, 2004.


59 Southwest Airlines website, http://www.southwest.com, accessed April 6, 2006.


61 Ibid.


63 Barney Gimbel, “Southwest’s New Flight Plan,” Fortune, May 16, 2005.


Do Not

Cop

y or

Pos

t


Date post:	13-Nov-2023
Category:	Documents
Upload:	ucsm
View:	0 times
Download:	0 times

Two Ways to Fly South: Lan Airlines and Southwest Airlines

Documents