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Financial Statement Analysis American Airlines (Amr)

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Financial Statement Analysis
American Airlines (AMR)

Abstract
American Airlines (AAs), American Eagle, and American Connection currently provide scheduled service to 250 cities in 40 countries, with an average of over 3,400 daily flights. Together, these carriers operate a fleet of over 700 aircraft and are subsidiaries of the AMR Corporation. Though AMR was founded in 1982, the AAs brand has been a major player in air travel for over three quarters of a century (www.AA.com.). The AMR mission statement is:
"Setting the industry standard for safety and security; providing world-class customer service; creating an open and participative work environment which seeks positive changes, rewards innovation and provides growth, security and opportunity to all employees; and providing consistently superior financial returns for shareholders." (www.AA.com).
An article written by Gaby Logan from USA Today stated: “Despite this government-funded measure, several prominent AAs declared bankruptcy not long after the 9/11 attacks, included US Airways and United Airlines.” As a result of the massive financial losses due to lack of passenger demand, canceled flights and increased expenditures for security, even airlines that did not have prior financial issues were forced to renegotiate labor contracts and lay off high numbers of employees, such as the 7,000 employees laid off by AA.”(Gaby Logan, USA Today article published Nov 2009). US Airways, Delta Airlines and Southwest Airlines, just to a name few, did recover from that financial hardship. However, AMR has cut cost significantly the past 11 years and still has recorded heavy losses in every year with the expectations of 2006 and 2007 (Cullen, Yamaza and Chew, 2010).While AMR is betting heavily on resurgence of supply and demand of commercial air travel as the economy recovers, analysts expect annual losses through 2011. The current strategy of AMR emphasizes long term success (Cullen, Yamaha and Chew, 2010).
AMR a quick view of the Financial Statement
AA is brand known worldwide for the past few years. AMR is burdened by high labor cost, a weak balance sheet, and continuous labor issues. With the recent depression, all American legacy carriers have suffered difficulty in the market environment (global competition). Most were able to achieve cost reduction to bankruptcy, bankruptcy protection or government bailout (i.e GM and Chrysler). AMR similar to other legacy carriers faces increasing competition from high gas price and low cost carriers (Cullen, Yamaza and Chew, 2010). Recent news shows that AMR is on the verge of merger and acquisitions by United Airlines, but was denied by the government. A Ratio Analysis of AMR will give us a clear overview for how long the company will be sustainable or on the verge of a collapse. Ratios are used in much of our daily life. The first grouping, the profitability ratios, allows us to measure the ability of the firm to earn an adequate return on sales, total asset, and invested capital.

Profitability 2003-12 2004-12 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 TTM

Tax Rate % — — — — — — — — — — —

Net Margin % -7.04 -4.08 -4.16 1.02 2.20 -8.71 -7.37 -2.12 -8.25 -7.55 -0.39

Asset Turnover (Average) 0.59 0.64 0.71 0.77 0.79 0.88 0.79 0.88 0.98 1.05 0.98

Return on Assets % -4.12 -2.62 -2.96 0.79 1.75 -7.71 -5.80 -1.86 -8.09 -7.92 -0.38

Financial Leverage (Average) 637.61 — — — 10.75 — — — — — —

Return on Equity % -244.87 — — — 49.15 — — — — — —

Return on Invested Capital % -13.43 — — — -3.08 — — — — — —

By viewing these numbers the tax rate on % is negative, and the net margin on % is -0.39 from the TTM (Trailing Twelve Month) with a negative number from the net margin ratio. This clearly demonstrates that AMR is not selling enough goods or services to pay for the company costs. Assets include plant, machinery, computers and even property, all of which are necessary to run your business. The asset turnover ratio indicates how efficiently these assets generate revenue; although, as with all ratios, they must be properly interpreted to make appropriate recommendations for changes in how one operates a business (Block Hirt, Danielsen 2012). Asset Turnover Average and the Return on Asset for AMR shows respectively on the TTM 0.98 and -0.98 % are good indications that AA could generate sales or low sales revenue. The numbers are frightening numbers for an investors because the numbers show that the company is operate on OPM (other people money) if I could use this term. Financial Leverage Average, Return on Equity %, and Return on Invested Capital % is unknown or negative. The most distressing ratio is the interest coverage ratio that determines how easily a company can pay its outstanding interest. Recent interest coverage ratios in 2009 is -1.50., 2010, .039, 2011 a -1.52 and 2012 from the TTM show a slight increase -3.00 to 0.02. If the interest coverage stays negative, AMR’s credit rating could downgrade and may not be able to continue to paying interest on is debit.
Overall the profitability ratio of AAs doesn’t show any earnings for the past few years. For most of these ratios, a higher value is desirable. A higher value means that the company is doing well and it is good at generating profits, revenues and cash flow. However AMR’s numbers are on the slump; therefore, some aggressive action from management of the company should be taking to turnaround the vapor.

Income Statement Analysis of AMR
Income statement is presented by nature or by function. Nature is the most popular form of income statement preparation, and it facilitates the intermediate balance before the net income figures. The calculation of the intermediate balance is a useful tool for financial statement analysis, particularly to prepare comparative analyses and company performance (Baker Income Statement by nature and performance 2008). See AMR Income Statement on link below: http://quotes.morningstar.com/stock/AAmrq/s?t=AAMRQ.
The Income Statement shows gross revenue. Those numbers are included before any amounts received for goods and services over a period of time. AMR’s gross revenue for TTM is 24,912 billion compared to the industry average of 17,088 billion for Southwest Airlines and 22, 460 billion for US Airways (yahoofinace.com). AMR’s sales are higher than its competitor because AMR is the world largest airline with available seat-miles running neck in neck with Delta (DAL) and united (UAL) in the U.S (Cordlle and Higgins 2013) (aa.com). A gross profit margin measures the profit a company makes from its cost of goods sold. AMR’s posted a 12,997 billion gross profit and has been on the rise for the past 5 years compared to its competitor US Airways 1,959 and Delta (DAL) 8,438 gross profit. One of the frightening numbers from the income statement of AMR is the net operating income. AMR’s net operating income of TTM is (1,889). EHowmoney.com define a negative operating income: “occurs when a company’s operating expenses exceed its income from goods and services. This is usually a bad indicator for business.” Other competitor like US Airways also show a negative operating income: however Delta (DAL) shows a positive number the last statement 623,000 million. Overall the airlines industry does not show any solid numbers on the operating income section, however, Southwest Airlines numbers have trippled the past few years from $59 billion to $98 billion (A Karp, ATW.com). A negative operating income may be caused by: rising production cost, small profit margins, or poor management. AMR displays some improvement of EPS (earning per share) from a negative (4.29) on 2011, (7.89) on 2012, and (0.29) from the recent TTM. AMR has shown improvement, but still is negative on the most recent TTM.
The Balance Sheet of AMR
The balance sheet indicates what a firm owns and how those assets are financed in the form of liability or ownership interest (Block, Hirt, Danielson, 2012). The balance sheet contains a listing of a company’s assets, liabilities, and shareholder equity. Assets are resources controlled by a company that present a future economic value to the business (Houston chronicle 2011). A close look of AMR’s balance sheet shows that the total cash on the company portfolio is 3,892 billion. This is a decrease from the past few years with total cash usually way over 4 billion. Cash is a company’s most liquid asset because it can readily be used to finance the company’s operating activities. A company can use cash to accomplish a variety of goals. For example, cash can be used to acquire additional assets or to pay off some of the company’s existing obligations. Furthermore, cash can be used to pay salaries or to expand the business. Cash distributions affect the amount of money owners have invested in the business because less cash means a reduction in shareholders ’equity. AMR’s cash flows show a (7,987). This is the highest decline of the past 3 years. The industry average, specially Delta and Southwest Airlines, have higher cash flows than AMR respectively shown 8.3 billion and Southwest Airlines shows a staggering numbers on total 1.2 billion (Yahoofinancial.com). Southwest was the only carrier to have positive numbers. The total assets of AMR are 23.5 billion. Delta numbers are almost double AMR’s with a 43.5 billion and Southwest has a stunning 18.6 billion in total assets. On the contrary, AMR’s total liabilities are higher than the industries average. AMR total liabilities are 31,497 billion compared to Delta which shows a 9.8 billion on the balance sheet. Southwest Airlines shows 9.6 billion which is almost half of its current asset. Additionally, AMR has posted a negative in the stockholder equity section on the balance sheet (7,987). This is a very bad number from an investor point the view when compared to the most attractive number Southwest shows,4.9 billion. See industry analysis below Cash Flow
The cash flow statement is a measure of a how a company uses its cash. The cash flow statement differs from these other financial statements because it acts as a kind of corporate checkbook that reconciles the balance sheet and income statement. The cash flow statement records the company's cash transactions, both the inflows and outflows, during the given period (www.Merrilledge.com). AMR’s cash flow has shown some improving numbers. However these improvements have been from the operating activities. These flows are related to your principal line of business and include the cash receipts from sales or performance of services, payroll and other payments to employees, payments to suppliers and contractors, rent payments, payments for utilities, and tax payments. In contrast to Southwest Airlines (LUV) shows a healthy 40 billion dollars and an industry average 10-12 billion (www.nasdaq.com). Further down on the cash flow statement is negative number of the net cash flow for investor (3,956). These are capitalized as assets on the balance sheet. Investing activities also include investments that are not part of your normal line of business. These cash flows could also include purchases of property, plant and equipment, proceeds from the sale of property, plant and equipment, purchases of stock or other securities other than cash equivalents, and proceeds from the sale or redemption of investments (www.Merrilledge.com). Southwest Airlines and US Airways show some positive numbers of 985,000 million and 2.2 billion, but the average in the industry is negative or break even at best. The last columns on of the cash flow, is cash flow from financing activities: these flows relate to the businesses debt or equity financing. They include proceeds from loans, notes, and other debt instruments, installment payments on loans or other repayment of debts, cash received from the issuance of stock or equity in the business, and dividend payments, purchases of treasury stock, or returns of capital (www.Merrilledge.com). AMR has posted a TTM of (3,956) and these numbers clearly show AMR is a distress companies.
SWOT Analysis A review of the strength, weakness, opportunities and threats of AMR is required to understand the how and why? America Airlines like other legacy carriers faces increasing competitive pressure from low-cost carriers. Furthermore, AAs is burdened by high labor cost and perpetual union issues:
Strength
• Brand Recognition- AAs is one of the oldest in the industry
• Largest global airline- in terms of passenger traffic AAs is the largest global airline. (www.onlineinform.com)
• AA Advantages Program- AAs have over 50 million enrollment on the A Advantage Program, the highest proportion and redeemable seating capacity on legacy carriers ( AAs,2005)
• Major Presence on the business world- AAs has major presence on the business by covering some strategic airport locations like Dallas, Miami, Chicago and New York. AMR also well-established in Europe like (i,e London, Berlin and Paris)
Weaknesses
• Labor and Union Issues- AAs is burdened with labor issues for the past few years. The highest paid airline industry see graph below:
• Flight Attendant Compensation by Carrier (2010)
• Airline Salary Hours/Month Hours/Year Salary/Hour
• American $49,776 43.0 516 $ 96.47 100%
• Continental $49,061 46.7 560.4 $87.55 90.8%
• United $40.129 41.7 500.4 $80.2 83.2%
• Southwest $53,027 63.1 757.2 $70.03 72.6%
• US Air $39,716 47.5 570 $69.68 72.2%
• Delta $36,409 48.6 582.7 $62.49 64.8%
• AirTran $29,706 58.8 705.6 $42.10 43.6%
• JetBlue $33,014 73.4 880.8 $37.48 38.9%
• Frontier $31,217 96 .4 1156.8 $26.99 28.0

• Inability to Compete on Internationals Flights. More often when I make an attempt to book a flight overseas AAs flight are always the highest compare to Air Canada or Air France

Opportunity
• Presence at most airports. AAs are one carrier you will find on any airport in the US and most major airport around the world. AAs monopolies the Caribbean market such country as Haiti and Dominican Republic, AA offer more flight accommodations than other carriers
• More international destinations on popular routes. Most of the key vacation place all over the world AAs have a flight or more than one flight going toward that destination, for example Barbados, Aruba, Punta Canna and Labadie etc..
• AA should emphasis on spending wises pending on fleet, earning loyalty, strengthening the global network, building workplace community and flying profitability.
Threats
• High Fuel Price. AAs should try to adapt the Southwest Airline approach by having a better deal on fuel cost, AA spent 30.4% of operating expenses spent on fuel only (AAs, 2005). An attempt to monitor that cost could be very helpful.
• Labor and Union Issues. Labor issue has been a heavy load carry by the carrier.
• CEO and Management Bonuses. AAs bonuses are the lowest in the industry. The CEO still has a healthy salary averaging 12 million dollars on bonuses and base salary. The other corporate employees make around 30 million dollars all together.
• Government Intervention. AAs is on the company so called “Too big to fall” in case the company kept losing money and the merger and acquisitions been denied. The only hope for AA is a government intervention or bail out.
• High unemployment and inflation keeps travelers from flying
Unemployment is affecting the airline industry. Although unemployment in the United States is relatively low compare to the rest of the world, the airline industries unemployment has been more volatile. (Bureau of Economic, 2008)
Recommendation
AAs must address its high costs, improve its international offerings, and find a solution to competitive threats posed by low-cost carriers. To further reduce costs, AA’s should explore maintenance outsourcing and continue taking initiatives toward greater fuel efficiency. We recommend that AA avoid excessive concessions to the flight attendants union, citing that AA flight attendants are among the best paid in the industry. In addition, AA should consider on reducing executives bonuses. To address the domestic treats posed by low cost carriers, we will suggest for AAs make an attempt to compete and upgrade the following services; offer light lunch, free headset make adjustment to fill up the local flight.
Conclusion
AA’s strength lies in being the world’s largest airline provide it with a huge customer base that is familiar with the airline. Customer retention and utilization represent the primary advantage that AAs enjoys and needs to utilize to protect its position as well as build upon. The company’s corporate vision statement its objectives are to: o Set industry standard for safety and security o Provide superior customer services o Produce return to stakeholders and shareholders by increasing business and thus revenues opportunities for vendors and allies firm o Further solidify the brand name or image as a premier carrier o Increase creative ticketing, promotions vacation packages and associate are to distance the company from low fare carrier and thus minimize their effects o Capitalize upon inherent advantage Even though the numbers on AA’s financial statements do not appear too attractive, the company has room for improvement. Partnering with low cost carriers and outsourcing some of the mechanic and maintenance positions could improve the company’s position dramatically. As a CEO of American Airlines, I will insist on fiscal discipline and looking for any comparative advantages for improvement. I will conduct surveys to accommodate my customer base and attract new customers with some attractive deal. I will compete internationally in the Asian market and force them to adjust their price or win customers. I could borrow money against the company to avoid a bailout; this word is scary to attract new investors.

References
Capozzi, J. M. A spirit of greatness: stories from the employees of AAs.
Block Hirt, Danielsen, Foundations of Financial Management 2012
Baker Income Statement by nature and performance 2008 www.nasdaq.com A Karp, ATW.com
AmericanAirlines.com
http://quotes.morningstar.com/stock/AAmrq/s?t=AAMRQ www.yahoofinances.com Cullen, Yamaza and Chew, Strategic Report 2010 http://www.AA.com/AAdvantage/AAdvantageHomeAccess.do? AnchorLocation
2010 Annual Report & 10-K for DAL/UAUA/LUV/AMR/JBLU www.onlineinform.com Bureau of Economic, 2008

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...SOUTHWEST AIRLINES CO. 2013 ANNUAL REPORT TO SHAREHOLDERS To our Shareholders: Our goals for 2013 were ambitious. We wanted to stay on track with our five Strategic Initiatives described below. We wanted to maintain our strong Brand, unique Culture, and award-winning Customer Service. We wanted to sustain our strong ontime performance and baggage handling. Finally, we wanted to improve our cost performance, achieve our profit requirement, and return value to our Shareholders. Just like in 2011 and 2012, an enormous amount was accomplished in 2013. As a result, we produced stellar results. Our 2013 net income was a record $754 million, or $1.05 per diluted share, including special items (primarily noncash, mark-to-market, and other items required for a portion of the Company’s fuel hedge portfolio, as well as costs associated with the acquisition and integration of AirTran). Excluding special items1, our 2013 profits were also a record, increasing 93 percent year-over-year to $805 million, or $1.12 per diluted share. Our annual pre-tax return on invested capital, excluding special items (ROIC), was 13.1 percent, nearly doubling 2012’s performance. Total operating revenues were a record $17.7 billion, boosted by strong yields and an 80.1 percent load factor. Through the combination of stable fuel prices and rigorous cost control efforts, we met our goal to improve our cost performance. Despite a roller coaster economy, we achieved record earnings; and, while just short of......

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...SOUTHWEST AIRLINES CO. 2011 ANNUAL REPORT TO SHAREHOLDERS To our Shareholders: The year 2011 was historic for Southwest Airlines. We celebrated our 40th anniversary of providing low-fare, high quality commercial air service. We launched an all new, industry-leading, frequent flyer program in March. We opened three new cities: Greenville-Spartanburg, South Carolina; Charleston, South Carolina; and Newark, New Jersey. We closed our acquisition of AirTran Airways on May 2, growing our fleet by 140 aircraft, and extending our route network domestically and to the Caribbean and Mexico. In December, we unveiled our fleet modernization plans, which include an agreement with Boeing to serve as the launch customer of the 737 MAX aircraft. And, our operations improved in 2011, closing out the year with our highest December ontime performance in 15 years. Moreover, we reported our 39th consecutive annual profit in a year that endured a $1.7 billion year-over-year increase in combined economic fuel costs. Our 2011 net income was $178 million, or $.23 per diluted share, including special items (primarily noncash, mark-to-market, and other items required for a portion of the Company’s fuel hedge portfolio, as well as costs associated with the acquisition and integration of AirTran). Excluding special items, our 2011 profit was $330 million, or $.43 per diluted share. Our financial position remains strong. Our cash and short-term investments were $3.1 billion, as of December 31, 2011, in...

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