Industry Background

The terrorist attacks of September 11, 2001 brought about dramatic changes in the United States (U.S.) airline industry both in terms of short-term profitability and in standard operating procedures. In spite of the economy recovering from recession, the industry reported net profits of $5 billion in calendar year 1999 and $3 billion in 2000 (Smallen, 2002). These gains would quickly deteriorate in the months following the attacks as a frightened public cancelled trips, resulting in a 2001 net loss of over $10 billion. While the federal government intervened with a $15 billion bail-out package, one-third of which would be received in cash and the balance as guaranteed loans (Corridore, 2002), the losses continue to mount as airlines face increased security costs and lagging passenger counts.

Investors are wary about the industry as financially strapped companies struggling to stay afloat by reducing the number of flights and value-added services, streamlining operating costs, laying-off thousands of employees, and restructuring debt labor force. Many companies have had to seek loans to meet operational expenses, resulting in the total debt load of the industry surging from $55 billion to $90 billion since 1999, towering nine times over equity. Several airlines have or are on the brink of filing bankruptcy protection. This paper examines the annual statements of three companies from the perspective of an investor and employs financial statement analyses as the basis for a recommendation of the most favorable investment choice.

Company Background

Continental Airlines

Founded in 1934, Continental Airlines (Hawaiian) is the fifth largest U.S. airline, operating in its New York, Houston and Cleveland hubs. Expressjet is Continental's primary subsidiary, running mostly regional flights. Continental also operates in Europe, Canada, Mexico,