Introduction
The financial statement analysis is prepared to discuss the financial condition of three U.S. airlines and their position in the market. The data is obtained from annual reports of American Airlines Group, Inc. (AAL), Delta Airlines (DAL), and United Airlines (UAL) for the last five years. The financial analysis includes balance sheet analysis, income statement analysis, ratio analysis, and DuPont analysis. Moreover, the analysis also includes a comparison of ratio values of the selected airlines with industry averages of the last five years.
Balance Sheet Analysis
The consolidated balance sheet of AAL indicated a slight declining trend in the company’s total assets in 2011-2012. However, there was a significant increase in its total assets in 2014 as compared to 2013 (see Table 1). The main reason for the increase in total assets was the increase in credit sales due to the increased demand for air travel in 2014. The equity of AAL increased in 2014 that represented the net effect of the increase in its total assets. Another main reason for the increase in total equity was the decline in total liabilities of the company in 2014 (American Airline Group, Inc., 2015). Moreover, the increased revenue had a positive effect on the shareholders’ equity of the airline in 2014. A company must generate high revenue and return on investment for shareholders.
DAL balance sheet data indicated that there was a gradual increase in the company’s total assets in the past five years. The consistent effort of the management put a direct impact on the total assets of DAL in 2010-2014. However, the accounts payable of the airline was increased in 2012-2014 due to the purchase of inventories in that period (Delta Airline, 2015). Also, the total equity of DAL increased significantly in 2013 as the company paid off a significant amount of non-current liabilities in that year (see Table 2). The growth trend in total assets 2012-2014 indicated that the airline had managed its financial position efficiently, and despite intense competition in the industry, it took advantage of the opportunity due to the increase in the demand by focusing on its services.
The balance sheet data of UAL indicated that its assets declined substantially due to the decrease in cash and cash equivalent (see Table 3). The total liabilities of UAL increased significantly due to the increase in Other Liabilities. The company incurred Other Liabilities for repair and maintenance of aircraft to maintain high productivity and efficiency (United Airlines, 2015). The total equity of UAL decreased in 2014 as compared to 2013 due to the decline in its cash and cash equivalent.
Income Statement Analysis
The five-year data of income statement of AAL indicated that the airline incurred loss in four years including 2010, 2011, 2012, and 2013 due to low revenue from sales to mainline passengers (American Airline Group, Inc., 2015). The main reason for the decline in the growth of the airline industry was the recent financial crisis that hurt the business of airlines operating in the US. However, AAL revived its position in 2014 and began to generate strong revenue from mainline passengers (see Table 4). Moreover, AAL reduced its total expenses to a great extent and achieved a profit at the year-end. However, operating income contributed a lot to the company’s increased net profit in 2014.
DAL had better performance in the past five years as it increased its mainline passenger revenue, operating profit, and net profit consistently (see Table 5). The total operating expense of the airline declined in 2014 as the company focused on attaining economies of scale. Also, DAL reported a decrease in its total operating expense in 2014 that resulted in an increase in net profit at the year-end (Delta Airline, 2015).
There was a high fluctuation in the net income of UAL that indicated a loss in 2012, but the airline was able to improve its profitability in 2013-2014 due to its consistency in generating potential revenue from mainline passengers (see Table 6). The major contribution to the decreased in net profit in 2014 for the airline was the decrease in total revenue (United Airlines, 2015). Also, there was a high decline in total operating expenses of the airline that put contributed substantially to ensure stability in profits for the year 2014.
Ratio Analysis
The ratio analysis is undertaken with the help of calculating the profitability, liquidity, and leverage ratios for the three selected airlines in the past five years. The analysis covers the financial performance of airlines in the preceding years and shows the strategies adopted by these airlines to manage their financial positions. The analysis could be beneficial for predicting the future of the three U.S. airlines operating in a highly competitive environment. The ratio analysis is based on the financial data of these three airlines. Also, the values of different ratios of these airlines are compared with industry averages of the past five years.
Profitability ratios
The values of profitability ratios of AAL increased in 2014 due to the overall industry growth during 2013-15. The value of ROA and net profit margin eventually improved in 2014 that increased to a high extent (American Airline Group, Inc., 2015). The reason for the increase in this value of the ratio was the company’s ability to generate high revenue in 2014. The positive value of ROE indicated that AAL used its equity efficiently to generate high revenue (see Table 11). The shareholders of any company would be interested in getting a high return on their investment. In this way, AAL was successful to please its shareholders.
The analysis of the profitability trend values indicated that DAL had high fluctuations in the value of ROA in the five years as it increased significantly in 2013, and declined in 2014. It improved strongly in 2015 (see Table 12). A fluctuation was also noted in the value of ROE as the company’s total revenue changed in the last five years (Delta Airline, 2015). Although the change was also noticed in the net profit margin of DAL, the effect of increased revenue was low on the net profit margin as compared to ROA and ROE.
The profitability of UAL increased in the last five years as indicated by its profit margin, ROE, and ROA values (see Table 13). The main reason for the increase in the value of ROA in 2015 was the increased demand for the US airline industry during 2013-2015 (United Airlines, 2015). Although the values of profitability ratios were lower than its peers, UAL managed to achieve a competitive advantage in 2014-2015.
Liquidity ratios
The liquidity position of AAL improved in 2013 as indicated by the values of quick and current ratios that increased in 2013. However, the liquidity position began to weaken in 2014, and AAL was unable to improve in 2015. The major reason for the weak liquidity position was borrowing additional debt as compared to the increase in the total assets of the airline to generate more revenue in the selected period (see Table 11). The purpose of new borrowings was to gain a competitive advantage by increasing its profitability in the future (American Airline Group, Inc., 2015).
DAL’s liquidity position was stable during 2011-2015. The values of current and quick ratios of the airline slightly changed during 2011-2015 that indicated that it was able to control its liquidity position efficiently (see Table 12). However, the reduced values of current and quick ratios of the airline in the past five years indicated that the airline incurred new current liabilities to manage its operations and generate high sales (Delta Airline, 2015). The plan to increase the company’s revenue was based on the analysis of the external environment and opportunities as the demand for passenger flights increased significantly in the United States.
The liquidity position of UAL declined persistently in 2011-2015 as the company borrowed short-term and long-term debt to increase its total revenues in the future (see Table 13). The continuous decrease in the current and the quick ratio of DAL indicates that the management was not efficient in acquiring potential assets. Assets are more required in business as compared to debt to generate potential income in the long run. UAL focused on purchasing spare parts and accessories to improve the aircraft that helped it to gain a competitive advantage in 2012 but did not pay attention to pay off its obligations efficiently.
Leverage ratios
The leverage position of AAL was weak during 2011-2013 as indicated by a debt to equity ratio that had low values in that period. However, the leverage position of AAL improved in 2014 (see Table 11). The reason for the improved debt to equity ratio value was the increase in total equity of the company in 2013-14(American Airline Group, Inc., 2015). The interest coverage ratio values of AAL were high during 2012-15 as compared to 2011 that had a negative value.
The leverage position of DAL remained strong in 2013 and 2014. The debt to equity ratio value of the airline was negative in 2011 and 2012. However, DAL succeeded in improving its position in 2013 and continued in the next year. The position declined to a small extent in 2015 due to the increase in long-term borrowings that had a positive impact on the company’s profitability position in 2014-2015 (see Table 12). The values of interest coverage of DAL consistently improved during2011-2015 which indicated a strong leverage position of the company (Delta Airline, 2015).
The leverage position of UAL improved in 2012 as indicated by the value of the debt to equity ratio. However, the value of the debt to equity ratio decreased after 2012 due to the increase in the company’s debt as it borrowed significant funds to improve the capability of the company to generate more revenue (see Table 13). The values of interest coverage ratio of UAL increased after 2012 due to the significant change in the EBIT of the company (United Airlines, 2015).
DuPont Analysis
DuPont analysis is a tool to determine the return on equity (ROE) of a company in a particular period. DuPont analysis is used to identify the real return on capital employed by a company in a specific period. The three components of DuPont analysis are profit margin, ROA, and equity multiplier that is used to determine the ROE of three major airlines operating in the US. Moreover, the changes in ROE (determined through DuPont) are analyzed based on the financial information of the past five years.
DuPont’s analysis of AAL indicated that the company’s Return on Equity (ROE) fluctuated slightly in the past five years (see Table 7). The isolate causation for the increase in ROE was the increase in the total assets of the company in the period. The major component in the causation was the total sales of the company that were used to increase its total revenue. The increasing demand for airline services was another reason for the increase in the total revenue of AAL (American Airline Group, Inc., 2015). On the other hand, the ROE of DAL was not consistent in 2010-2014, and the main causation was equity multiplier that changed during this period. The main component of the causation of high fluctuation was the changes in equity as potential assets of the airline were financed through equity from 2013 (see Table 8). However, the ROE of UAL increased at a slow rate in 2012-2014. The ROE of UAL was negative in 2010 and 2011 due to the weak financial position of the airline. The major causation for the slow growth of UAL’s ROE as compared to the peer companies was the increase in assets turnover of the company. The main component of the increase was sales (see Table 9).
Benchmark Comparisons
Benchmark refers to the average of a key performance indicator of all companies in an industry. The comparison of the benchmark is essential for determining the financial position of a company within the industry. Ratio analysis is a technique that is used for comparison of a company with the industry average. The benchmark comparison helps in analyzing the liquidity and profitability ratio values of airlines and comparing them to the average values of all airlines in this industry.
The profitability of the US airline industry indicated that it increased at a low rate in the period from 2011 to 2015 (The airline industry needs IT (and PR) help, 2017). In the same way, AAL reported an increase in its profit margin in 2013-14. DAL net profit margin was lower than the industry’s average profitability in 2014. The main reason for this was the declined market share of DAL in 2014. However, it revived its profitability position in 2015. Similarly, UAL did not manage to achieve the target of industry profitability average in 2014. The overall ratio analysis indicated that AAL took advantage of the increased demand for passenger flights in the US, but DAL and UAL did not perform as expected to benefit in the same way. The main problem was the inefficiency of management and lack of capital due to high losses in the past four years.
The value of the industry’s current ratio was 32.9 in 2015 (see table 10). ALL and UAL had current ratio values close to this average. However, DAL proved to be a weak performer as its current ratio value was less than the industry average in 2015. The debt management of AAL, DAL, and UAL was effective as most of their operations were financed by equity rather than debt. The main reason for a high industry average of liquidity ratios was the weak management of low-cost airlines as they financed their assets through long-term debts (Qineqt, 2015).
The overall comparison of the three companies with industry averages showed that AAL dominated the market during 2011-2015. On the other hand, UAL had a weak position in terms of its profit margin, and DAL was also inefficient in managing its current and quick ratios during this period. However, it must be understood that these benchmarks were based on the ratio values of all airlines operating in the US airline industry including low-cost airlines that took high advantage of the overall growth of the industry.
Current News
Current Events Affecting the Industry
The newly elected government of the United States has imposed an immigration ban on people coming from seven Muslim countries. The new immigration policy is likely to affect the capital management of airline companies as the confidence level of foreign investors has declined (Negroni, 2017). The policy will put an adverse impact on US airlines’ total revenues in the future due to the decrease in the number of passengers.
Events Affecting Top Companies
DAL is facing mismanagement issues due to the lack of an advanced database system. The airline does not have an effective IT system that can control the overall operations of the business (The airline industry needs IT (and PR) help, 2017). However, there is a need for a reliable database system in other airlines too, but DAL is currently facing challenges of mismanagement and declining revenues due to the lack of an effective IT system.
Industry Trends and Outlook
Attractiveness
The most attractive factors of the US airline industry are related to the growth of its revenue and equity. The asset management of the US airline industry has improved, and companies are providing extra facilities to increase the number of passengers. The selected companies consider the trend of using private cars for small distance traveling and they are already making efforts to engage new passengers by providing value-added services and competitive pricing on different routes. Although there is a requirement of advanced technology in operation management, airlines have the potential to increase their profitability by lowering the cost of services. The high competition in the US airline industry provides opportunities for new entrants to gain a competitive advantage by offering low-cost services to passengers.
Internal or External Factors
The competition is high in the US airline industry. Therefore, airlines are forced to offer additional facilities to passengers to gain a competitive advantage. The net effect of increasing competition hurts the revenue growth of the industry. The changing trend of the market is also a dominant factor affecting the cost of business. The demand is high and the supply is limited. Therefore, companies operating in the US airline industry face a high risk of investments. Although changes in the immigration policy are likely to adversely affect the business of the airline industry, local passengers and international passengers are expected to continue using services of US airlines.
Conclusion
The US airline industry reported healthy growth in 2013-2016. The industry reported an outstanding performance in 2014-2015 as its revenue increased significantly. The ratio analysis of three major competitors indicated that they contributed substantially to the overall revenue and equity position of the industry in the past five years. The overall analysis of financial statements concluded that the selected major companies have the potential to reduce investment risks and increase their return. However, there are many external factors including political, social, and economic, etc. that could hurt the growth of the US airline industry in the future.
References
American Airline Group, Inc. (2015). American Airline- annual report. Web.
Delta Airline. (2015). Delta Airline – annual report. Web.
Negroni, C. (2017). Trump immigration ban makes U.S. airlines less secure. Web.
Qineqt. (2015). Airline industry. Web.
The airline industry needs IT (and PR) help. (2017). Web.
The US Airline Industry Analysis.(2016) New York: Market Line.
United Airlines. (2015). United Airlines – annual report. Web.
Appendices
Table 1 AAL Balance Sheet (in $millions)
Table 2 Delta Balance Sheet (in $millions)
Table 3UAL Balance Sheet (in $millions)
Table 4 AAL Income Statement (in $millions)
Table 5 Delta Income Statement (in $millions)
Table 6 UAL Income Statement (in $millions)
Table 7 AAL DuPont
Table 8 Delta DuPont
Table 9 UAL DuPont
Table 10 Industry Average Ratios
Table 11 AAL Ratios
Table 12 Delta Ratios
Table 13 UAL Ratios