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American Airlines vs. Southwest Airlines

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  1. Financial Definitions
  2. The Financial Analysis
  3. The Liquidity Ratio
  4. Solvency Ratios
  5. Profitability Ratios

The Airline market is facing problems across the years. Before, national companies were leader in their countries, but with the opening of the airline market, the deregulation of the industry and the globalization phenomenon thousand of new airlines have borne. What does it mean? Traditional Airlines companies have now to make the differences with low cost ones in order to keep their competitive advantages and remain references on the global scale. Thanks to this largest offer, people take more and more the airplane. In the US, the commercial aviation has increased importantly since the end of the World War II. Today, in a low fare environment, the main companies have decided to create partnerships with smallest ones, in order to be dominant and to be difficultly competed. (Air France-KLM for instance which is now the leader on the global scale.).

[...] Southwest Airlines / ((16772+14308)/2) = 0,7 American Airlines / ((28571+25175)/2) = 0,9 If the ratio is high it means that the profit margin is low and vice versa. In that case Southwest Airlines has a lower asset turnover ratio than American Airlines It means that Southwest can cover easily its liabilities so that it makes a higher profit margin on its products. (the smaller is better) (Working Capital: Current assets -current liabilities It indicates immediate short term debt paying ability, in other words, the current obligations. [...]


[...] Southwest Airlines - / ((9831+9355)/2) = -0,158 American Airlines - / ((28110+25914)/2) = 0,051 Both companies have ratio under 1. It means that they are both unable to pay their current debt. It means that their liabilities are too high compared with their net cash from operation. However, Southwest seems more able to pay back its debt. (Free cash flow: cash provided by operation capital expenditures dividends paid This ratio indicates the cash available for paying dividends and expanding operation. [...]


[...] Southwest Airlines 11023 / ((279+209)/2) = 45,2 American Airlines / ((1027+811)/2) = 25,9 In this case Southwest Airlines has a better Receivables Turnover Ratio (45,2). It means that it gets paid more quickly than American Airlines (25,9). In fact, a lower ratio means that the company should re- asses its credit policies. (Average Collection Period: 365days / Receivable Turnover Ratio This ratio shows average amount it takes for a business to collect on its accounts receivable?. Southwest Airlines 365 / 45,2 = 8,1 American Airlines 365 / 25,9 = 14,1 This ratio shows us that Southwest Airlines collects the money more rapidly than AA. [...]

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