United Airlines and Southwest Airlines

Résumé du document

Nowadays flying has become a must do in our lives. Some of us use it everyday as a business way of travelling, and some others for vacation, or to visit friends or relatives. Whatsoever the purpose, there are no fastest ways of traveling around, but also no safest ones.

But in the economic context of today, and due to the event of September 11, airline companies have now to face a brand new way of thinking from the consumers point of view, but also from the governments point of view. Moreover, the crash of the planes into the twin towers has proved that terrorists are determined enough to act on such a scale of destruction. All these elements combined together have put some firms into deep trouble.

Moreover, regarding the US market, the deregulation act dated 1978 pushed open doors for new entrants. Companies such as Southwest used that advantage to settle down and focus on the cost efficiency, whereas the major ones concentrated more on routes and consumers. Finally, most of them went bankrupt and used article 11, which allows companies, whether organized as a corporation or in a partnership, to reorganize them.

In order to illustrate our saying, we are going to study two American companies, United Airlines and Southwest Airlines, and see how they have run their management during the last five years. They have both two different strategies and this report will be the occasion to know about them.

Because we cannot assume anything from a corporate point of view without figures, this report will stress the financial results of both of them, thanks to the key ratios of the industry. Thus, the first part of the report will be dedicated to United Airlines. Then, we will see Southwest Airlines. And finally, we will go over the conclusion of the study. Moreover, we will also point out the key aspects of the market in order to have a study linked with the environment of the airlines industry.

The balance sheet is used to summarize what the assets, liabilities and equities of a company are at a definite point in time. Among all the different financial statements you will have in the annual report of a company, the balance sheet is the only one representing the financial status of it at a given date, and not over a period of time.

By analyzing UA (United Airlines), we can see that assets were standing at $24.220 in 2007. It had decreased by 4.5% when compared to 2006. But we also know that between 2003 and 2007, those assets increased by 10.2%. Assets are what a company owns, or what could be turned into cash at different points in time (within a year or not). So we can assume that the company made acquisitions, which were planes, as the fleet needs to be changed on a regular basis. This is particularly true because new planes consume less fuel. And due to the price increase of per fuel barrel, investing in new planes is a practical investment.

Extraits

[...] That is why expenses have remained quite stable. But still over the last years UA had two main objectives to keep the firm going. It was increasing the revenues and decreases the expense in order to get back to profits. We know that the fuel expenses could not be controlled but the firm did try to leverage on wages. But UA is a particular company has the capital is owns at 55% by the employees[1]. Moreover in 2002 labor costs were still the biggest expense of airline companies. [...]

[...] Basically it is a way of figuring out what generate an asset. In other words, for each dollar invested, how much an asset does give you back: higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.”[4] Considering that we could assume that Southwest Airlines should have a high asset turnover because it is a low cost company. But these ratios tell us the contrary which means they could make bigger efforts to improve what their assets are worth. [...]

[...] In other words it gives the amount of debt-load a company has to face. In 2005 and 2005 the ratio was good as there were twice as much debt than assets. So the company could cover its But it increase in 2007 of It means that SA is not as much able as before to cover its debts. The ratio is not urging the firm to act but still it has to remain careful on it. If it was going up again next year the management should find a way to contain the debts. [...]

[...] It is a huge come back for UA. Now in order to explain such a result let us take a look at the operating revenues and expenses. Operating revenues continually went up between 2003 and 2007, standing finally at $ 20.143 in 2007. It is equal for the given period to an increase of This can be explained by the constant increase in ticket selling, which is the main revenue of an airline company. Basically we can observe since a few years that flying has become more and more popular among the populations and so the company has benefited from it. [...]

[...] Bibliography Sites internet - www.airlines.org (http://www.airlines.org/products/AirlineHandbookCh2.htm) (http://www.airlines.org/products/AirlineHandbookCh3.htm) - www.en.wikipedia.org (http://en.wikipedia.org/wiki/JetBlue_Airways) - www.united.com/ir - www.southwest.com (www.southwest.com/about_swa/financials/investors_relations_index.html) - www.investopedia.com (http://www.investopedia.com/features/industryhandbook/airline.asp) (http://www.investopedia.com/terms/a/assetturnover.asp) (http://www.investopedia.com/terms/p/plowbackratio.asp) - www.portfolio.com (http://www.portfolio.com/news-markets/national- news/portfolio/2008/06/04/Airlines-Struggle-With-Fuel-Costs) - www.usatoday.com (http://www.usatoday.com/travel/columnist/grossman/2008-05-12-higher-oil- prices_N.htm) - www.slate.com (http://www.slate.com/id/2069362/) - www.dummies.com (http://www.dummies.com/WileyCDA/DummiesArticle/Asset-Productivity-Ratios- for-Investment-Analysis.id-5928.html) - www.nytimes.com (http://www.nytimes.com/packages/khtml/2004/09/29/business/20040929_AIRLI NES_GRAPHIC.html) (http://www.nytimes.com/2008/07/25/business/25air.html?scp=5&sq=%22southw est+airlines%22&st=nyt) (http://www.nytimes.com/2004/06/18/business/18air.html?ex=1224129600&en=c 529518a82e0dd1d&ei=5070) Articles GROSS.D (August 13, 2002) ESOP's Fable: United's employees own most of the airline. So why are they helping to kill it? , slate.com Available on: http://www.slate.com/id/2069362/ GROSSMAN.D (May 2008). Could higher fuel prices actually help U.S. airlines? , usatoday.com Available on: http://www.usatoday.com/travel/columnist/grossman/2008-05- 12-higher-oil-prices_N.htm Appendix United Airlines results Southwest Airlines results GROSS.D (August 13, 2002) - United's employees own most of the airline. So why are they helping to kill it? - ESOP's Fable, slate.com. [...]