In 1998, the US airlines carried a record 551 million passengers . At that time, the whole industry was in pretty good shape. Unfortunately, many things have changed since then. The 2001 terrorist attack on the twin towers has marked a turnaround in the industry and especially in the United States. From that time, people have avoided flying and the new restrictions have made travel even more difficult. As a result, thousands employees were laid off, many airlines filed for bankruptcy, and the Congress had to pass a $15 billion bailout package in order to limit losses.
What is the situation of the US airlines industry today? Is it doing well or is it still going on a downturn?
In order to try to answer these questions, we will analyze the financial statements of two well known US airlines: Southwest Airlines and United Airlines. Both companies have faced very different experiences. On one hand, Southwest, which is one of the main US low cost companies, has been the most profitable airline company since 1973 . On the other hand, United Airlines which is part of the four major "legacy" US airlines, filed for bankruptcy in 2002.
We are thus going to analyze both companies' income statements, balance sheets, cash flows and financial ratios over the past five years. We will also try to explain a little more in detail the external events that may have impacted the financial positions of Southwest and United. We will see that September 11th 2001 is not the only factor that caused trouble to the whole industry.
Southwest Airlines is a major domestic airline that provides primarily shorthaul, high-frequency, point-to-point, low-fare services. Southwest Airlines was incorporated in Texas and commenced customer services on June 18, 1971 with three Boeing 737 aircrafts serving three Texas cities - Dallas, Houston and San Antonio. But as of December 31, 2007, Southwest operated 520 Boeing 737 aircrafts connecting more than 80 cities. Southwest has the lowest operating costs structure in the domestic airlines industry and consistently offers the lowest and simplest fares.
UAL Corporation operates as the holding company for United Airlines that provides transportation of persons, property and mail. It also engages in travel distribution and customer loyalty e-commerce activities. The company operates 1,600 daily departures to approximately 110 destinations in 23 countries and 2 US countries. Its operating aircraft fleet totals 460 jet aircrafts, of which 255 are owned and 205 are leased. It primarily operates in North America, the Pacific, the Atlantic and Latin America. The company was incorporated under the laws of the state of Delaware in 1968. UAL is headquartered in Elk Grove Township, Illinois. UAL, United, and 26 of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code in December 2002.
[...] Iraq war A short time after September 11, the start of the Iraq war put the airlines industry in still a worst economic turmoil. What happened is that many airlines began moving to a second phase of risk management. It involved other cutbacks in capacity. US airlines were the most affected by this event, causing for instance capacity reductions of around 10% or more. Also, North Atlantic and Pacific traffic levels decreased by up to 30-40%. United was thus much more impacted than Southwest. [...]
[...] Southwest Airlines was incorporated in Texas and commenced customer services on June with three Boeing 737 aircrafts serving three Texas cities - Dallas, Houston and San Antonio. But as of December Southwest operated 520 Boeing 737 aircrafts connecting more than 80 cities. Southwest has the lowest operating costs structure in the domestic airlines industry and consistently offers the lowest and simplest fares. Overview of Southwest's financial statements The income statement Definition income statement is a financial statement that measures a company's financial performance (how much revenue and profit a company has generated) over a specific accounting period. [...]
[...] United Airlines Company's presentation UAL Corporation operates as the holding company for United Airlines that provides transportation of persons, property and mail. It also engages in travel distribution and customer loyalty e-commerce activities. The company operates 1,600 daily departures to approximately 110 destinations in 23 countries and 2 US countries. Its operating aircraft fleet totals 460 jet aircrafts, of which 255 are owned and 205 are leased. It primarily operates in North America, the Pacific, the Atlantic and Latin America. [...]
[...] These ratios can be explained by the fact that on one hand United used a lot of money for its restructuration, and on the other hand, Southwest invested a lot during the past years (short term investments). Financial leverage Definition It is used to get an idea of the company's methods of financing or to measure its ability to meet financial obligations.[11] Debt ratio (Total Liabilities / Total Assets) Definition It indicates what proportion of debt a company has relative to its assets. [...]
[...] We can thus make the assumption that Southwest invested a lot of money between 2005 and 2006. The company also has to pay more employees. We are thus going to analyze the company's statement of cash flows. Cash Flows Definition statement of cash flows shows the amount of cash generated and used by a company in a given period. Cash flow can be used as an indication of a company's financial strength, it is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. [...]
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