Southwest Airlines has clear sights on its ROIC targets after a strong 2Q2014 performance

Southwest Airlines believes it has forged a clear path to reach its 15% target for return on invested capital (ROIC) for FY2014 after seeing those targets slip away for the past two years. Its ROIC for the 12 months ending in Jun-2014 was 17% versus 8.5% the year prior.

The airline's favourable return performance was driven by a particularly strong 2Q2014 as Southwest benefitted from its significant domestic presence. American, Delta and United all recorded their strongest revenue performance in the US domestic market, so it is not surprising that Southwest, with roughly 99% of its seat deployed in the domestic space, enjoyed particular revenue strength during the quarter.

But limited opportunities for expansion remain in the mature US market, which is why Southwest is attempting to spread its brand to near-international destinations in full force. At the same time the airline is taking a conservative approach to balance sheet management even as it ensures it offers competitive shareholder rewards.