Case study: Southwest Airlines and United Airlines

Résumé du document

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.

Extraits

[...] Conclusion The most difficult period for the companies has really been between 2001 and 2002, it means just after September 11. As a result of the loss in passengers, company's net income get down by -52%. However, the company did well to go back to profitability during the next years. Southwest's managed very well to compensate the increase of fuel by an increase of passengers. We can thus say that the company did very well at matching its expenses with its revenues. As a result, net income per share increased by from 2003 to 2007. [...]

[...] We have to keep in mind that southwest has been the most profitable airline company since 1973. So even if the margin is low, the company never lost money. Return on Asset (Net Income / Assets) Definition It is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.[15] Results Southwest is more profitable than United. It is earning more money on less investment. [...]

[...] The period from 2002 to 2005 corresponds to the period of bankruptcy when United Airlines was under courts protection. Late 2005, United get out of courts protection. As a result, the company made profits in 2006 (32 millions). We also notice that from 2006 to 2007 the net income increased by 1156% millions to $402 millions). It is really a huge turnaround and shows that the company is back on the good way. We are now going to see where these results come from. [...]

[...] United and Southwest have a good margin to improve their results. These ratios can be explained by the fact that on the one hand United used a lot of money for its restructuration, 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. [...]

[...] However, many airlines did not react how they should have to. They did not think that September 11 will have such an impact on the long term. What happened is that they cut capacity and trimmed costs but quickly reversed those moves when the economy showed signs of a rebound in 2002. Consequently, they were stuck in a situation even worse than ever. As an example, airline revenues fell 20% to 30% from level of the past 25 years. Instead of bouncing back during an economic recovery, as most of airline executives clearly hope would happen, revenues remained depressed. [...]