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United Airlines and Southwest Airlines (2008)

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  1. United Airlines
    1. Financial Structure
    2. Introduction to the key ratios of United Airlines
  2. Southwest Airlines
    1. Financial Structure
    2. Introduction to the key ratios of Southwest Airlines

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.

[...] United Airlines is one of what we call the legacy airlines which means it was established before the American deregulation act. This act which has opened the sky's routes has enabled new entrants to get in the market. And because they did not have to be focused on human resources or values, they concentrated on costs. That is how companies like Southwest built their strategy: on low-costs. For all those reasons, both companies are hardly comparable. Moreover, the bankruptcy of United Airlines makes it difficult for a matching analysis. [...]


[...] It only shows that UA is using its cash to pay the stocks and so its capacity to reimburse its short term liabilities is slowed down by it. Still as it is close to we could say that it is not that bad for the company. Cash Ratio ((Cash + Short Term Securities)/Current Liabilities) (2007) (1259+2295) / 7979 = 0.45 (2006) (3832+312) / 7945 = 0.52 between 2005 and 2007 (2005) (1761+77) / 5234 = 0.35 The cash ratio shows the ability of the company to use the cash to pay the short term debts. [...]


[...] Introduction to the key ratios of United Airlines In the following part, I will expose you the key financial ratios of the company based on three major categories: Liquidity ratios Asset productivity Financial leverage and profitability For all ratios in the report, I will give the last three years' results. For more information, please refer to the spreadsheet in the appendix. This will be the same thing concerning the Southwest part. It shows all the results and figures from 2003 to 2007, as well as the full table of ratios I will be using. [...]

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