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Delta Airlines vs. American Airlines, Coursework Example

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Coursework

Delta Airlines (Delta) has become one of the world’s largest airlines after its acquisition of Northwest Airlines in 2008. The company operates a fleet of over 700 aircrafts through whom it serves about 350 destinations in more than 60 countries. Delta is also a founding member of the SkyTeam Marketing which includes Air France, KLM, and Alitalia (Hoovers, n.d.). The company is one of the leading performers among U.S.-based airlines but its financial analysis reveals that even being a leading player in the airlines industry is not enough as this industry has one of the least favorable economic dynamics among all industries. All the figures used to calculate Delta’s ratios come from the company’s latest 10K report which covers the fiscal year 2012 (Delta Airlines, Inc., 2012).

Delta’s Profitability Ratios

             Operating profit margin ratio calculates the operating efficiency of an organization. As far as Delta’s operating profit margin is concerned, it improved slightly from 5.62 percent in 2011 to 5.93 percent in 2012. Even though this profit margin may not qualify as impressive one in some other industries, it is reasonable given the competitive nature of the airlines industry. This ratio also shows Delta has slightly improved from 2011 to 2012, by eliminating some of the waste in its operating expenditures. Net profit margin calculates the overall profitability of the company. In other words, it tells us the return on each dollar worth of sales. Delta’s net profit margin improved from 2.43 percent in 2011 to 2.75 percent in 2012 which again demonstrates that 2012 has been a productive year in terms of financial performance.

Return-on-Assets (ROA) measures the efficiency with which company uses its assets to generate income. Delta’s ROA improve from 1.97 percent in 2011 to 2.26 percent in 2012. It is possible that the company might have sold less-productive assets which helped improve the average return on the remaining assets or may be the company has been able to achieve better average occupancy rates on its commercial flights. The company’s asset turnover ratio also improved slightly from 80.82 percent in 2011 to 82.31 percent in 2012. Asset turnover ratio measures the company’s asset utilization rate and the improvement indicates that each dollar worth of asset yielded higher revenue in 2012 as compared to the previous year. Return-on-Equity (ROE) measures the return on each dollar worth of equity. Delta’s ROE could not be calculated because the company had negative shareholders’ equity in both years.

Liquidity Ratios

            Debt-to-Equity ratio measures the proportion of capital that is funded through debt versus equity. Since Delta had negative shareholders’ equity in both years, Debt-to-Equity ratio could not be computed. This fact also demonstrates the high financial leverage of the company. Working capital measures the ability of the company to conduct its day-to-day operations. Delta’s working capital was negative in both 2011 and 2012 at approximately -$5 billion in both years. While this might have been a cause of serious concern in other industries, in airline industry it is a norm and another proof of high financial leverage of the industry’s players. Current ratio also measures the company’s ability to finance its day-to-day operations. Delta’s current ratio slightly improved from 0.61 in 2011 to 0.62 in 2012. In other words, the current ratio almost remained same during the period. A more reliable indicator of short term liquidity is quick ratio which only takes into account the most liquid short term assets. Delta’s quick ratio slightly declined from 0.60 in 2011 to 0.58 in 2012. This occurred due to higher inventory which may be due to company’s expectation of higher sales.

Long-term Risk Ratios

            In addition to short-term liquidity, it is also important to manage long-term risks. One way of measuring long-term risks is Debt-Asset ratio which measures the financial leverage of the company. Delta’s Debt-Asset ratio slightly increased from 1.03 in 2011 to 1.05 in 2012. The company’s profitability has been improving gradually and it may be a beneficial strategy to pay off some of the long-term debt to both lower financial leverage as well as improve profitability due to lower interest payments. But the positive trend over the period was an improvement in times interest earned ratio which measures the company’s ability to fulfill its interest obligations through income alone. Delta’s times interest earned ratio improved from 2.19 in 2011 to 2.68 in 2012. The improvement occurred both due to higher income as well as lower interest expenses which probably means that the company used its cash reserve to pay off some of the debt which also helped lower interest obligations.

Stock Market Ratios

            Earnings per share (EPS) measures how much each outstanding common stock earned in income. Delta’s EPS improved from 1.02 in 2011 to 1.19 in 2012 which is not surprising given higher income during the later year. Even though the company’s number of outstanding shares also grew, the proportional increase in net income was greater. Price Earnings Ratio calculates how much the investor is paying for each dollar worth of income. Delta’s Price Earnings ratio declined from 13.91 in 2011 to 11.87 in 2012 which is positive news for the prospective shareholders. The decline means new investors can get Delta’s stock cheaper now than they would have in 2011. It also presents an opportunity to the company’s current shareholders to increase their stake. Delta’s dividend payout ratio and dividend yield ratio could not be calculated because the company didn’t pay any dividend in either 2011 or 2012.

American Airlines

            One of Delta’s closest competitors is American Airlines (American) which is a subsidiary of AMR Corporation. American, along with its sister companies American Eagle and AmericanConnection serves more than 250 destinations in over 50 countries. American by itself operates more than 600 jets and is part of the oneworld Alliance whose members include British Airways, Cathay Pacific, Iberia, and Cantas. The company filed for Chapter 11 bankruptcy in November 2011 (Hoovers, n.d.). The data for American’s financial ratios come from the company’s 10K report for the fiscal year 2012 (American Airlines, Inc., 2012).

American vs. Delta

            American and Delta are quite similar in size and the destinations they serve but American has lagged behind Delta in recent years. This fact is also confirmed by the financial analysis of both companies for the fiscal year 2012. While Delta’s profit margin was 5.93 percent in 2012, American’s profit margin was merely 0.17 percent during the same period. It is not easy to guess that the company incurred net loss during the period and its net income ratio indeed shows a net loss of 7.76 percent as opposed to Delta’s 2.75 percent net income ratio. The performance of both companies demonstrate the intensely competitive nature of the airline industry where even size rarely translates to benefits from economies of scale due to low pricing power. Despite doing much better than the competition, Delta still managed to earn net income of only 2.75 percent. American’s ROA was also negative 8.28 percent as opposed to Delta’s positive 2.26 percent. Delta deserves a praise because it achieved a positive return on the asset base which is almost twice as large as American’s. This means American probably experienced diseconomies of scale during 2012 when its large size led to loss of control by the management. One area in which American managed to surprise is Asset Turnover Ratio. American’s asset turnover ratio was 106.71 percent as opposed to Delta’s 82.31 percent during 2012. American might have achieved this through higher average occupancy rates of its jets as compared to Delta. Just like Delta, it was not possible to calculate ROE for American which didn’t only have negative shareholders’ equity but also incurred net loss during the period. It is clear that airline industry is not for the faint-of-the-heart as an investment candidate. The players usually have high financial leverage due to the need of large investments in assets such as jets.

Similarly, it was also not possible to calculate Debt-to-Equity ratio for American, just like Delta. As noted earlier, airlines industry usually incur large levels of both short-term and long-term debt and like Delta, American also had negative working capital in 2011 at approximately $4.9 billion which is quite close to Delta’s. American also did quite similar to Delta in current and quick ratios which means both companies had quite similar short-term liquidity positions. American had a current ratio of 0.59 as opposed to Delta’s 0.62 and quick ratio of 0.54 as opposed to Delta’s 0.58 during the year 2012. What probably forced the company into bankruptcy must have been its inability to earn profit and high levels of long-term debt which negatively affected its operating performance year after year.

Debt-Asset ratio proves what we suspected earlier that the company had quite high levels of long-term debt. American’s Debt-Asset ratio was 1.43 in 2012 as opposed to Delta’s 1.05. In other words, the company was insolvent because its debt obligations significantly exceeded its assets and which may be why it had to seek Chapter 11 bankruptcy in late 2011. It is not possible to calculate American’s price earnings ratio, dividend payout ratio, and dividend yield ratio for the year 2012 because the company incurred net loss and didn’t pay any dividend during the year.

Conclusion

            Delta and American are close competitors but Delta clearly won the competition in 2012 and deserves praise for being profitable in a highly competitive industry and for showing some significant improvements in 2012 as compared to 2011. But even Delta’s financial ratios cannot hide the fact that airlines industry is not probably the most attractive industry to pick candidates for investment purpose. The industry is marked by players having high financial leverage, low pricing power, and low profit margins. It is apparent from American’s 2012 performance that the company did the right thing by seeking Chapter 11 protection the previous year so that it can start a new chapter.

In order to improve their competitiveness, American Airlines and US Airways have joined hands to become the world’s largest airline and the merger has been recently approved by a judge. The companies are now working on creating a formal restructuring plan that will have to be approved by both the court and the creditors. In addition, the two companies will also need a regulatory approval. Under the deal, AMR’s shareholders will receive 3.5 percent equity stake in the newly formed company.

Appendices

Delta Airlines American Airlines
Profitability Ratios 2012 2011 2012
                 
Operating Profit Margin = Operating Profit = 2175 = 5.93% 1975 = 5.62% 41 = 0.17%
Total Revenue 36670 35115 24825
             
Net Profit Margin = Net Income = 1009 = 2.75% 854 = 2.43% -1926 = -7.76%
Total Revenue 36670 35115 24825
             
Return on Assets (ROA) = Net Income = 1009 = 2.26% 854 = 1.97% -1926 = -8.28%
Total Assets 44550 43449 23264
             
Asset Turnover Ratio = Total Revenue = 36670 = 82.31% 35115 = 80.82% 24825 = 106.71%
Total Assets 44550 43449 23264
               
Return on Equity (ROE) = Net Income = 1009 = N/A 854 = N/A -1926 = N/A
Total Stockholders’ Equity -2131 -1396 -9962

 

Delta Airlines American Airlines
Liquidity Ratios 2012 2011 2012
Debt-to-Equity Ratio = Total Liabilities = 46681 = N/A 44895 = N/A 33226 = N/A
Total Stockholders’ Equity -2131 -1396 -9962
               
Working Capital = Current Assets – Current Liabilities = 8272-13270 = -4998 7729-12701 = -4972 7011-11918 = -4907
             
Current Ratio = Current Assets = 8272 = 0.62 7729 = 0.61 7011 = 0.59
Current Liabilities 13270 12701 11918
             
Quick Ratio = Current Assets – Inventory = 8272-619 = 0.58 7729-168 = 0.60 7011-550 = 0.54
Current Liabilities 13270 12701 11918

 

Delta Airlines American Airlines
Long-term Risk Ratios 2012 2011 2012
Debt-Asset Ratio = Total Liabilities = 46681 = 1.05 44895 = 1.03 33226 = 1.43
Total Assets 44550 43449 23264
             
Times Interest Earned = Income before Interest & Taxes = 2175 = 2.68 1975 = 2.19 41 = 0.062
Interest 812 901 662
Delta Airlines American Airlines
Stock Market Ratios 2012 2011 2012
Earnings Per Share = Net Income = 1009 = 1.19 854 = 1.02 -1926 = N/A
Average Number of Shares Outstanding 845 838 N/A
             
Price Earnings Ratio = Market Price = 14.24 = N/A 14.19 = 13.91 N/A = N/A
Earnings Per Share 1.2 1.02 N/A
             
Dividend Payout Ratio = Dividends Per Share = 0 = 0.00 0 = 0.00 N/A = N/A
Earnings Per Share 1.2 1.02 N/A
             
Dividend Yield Ratio = Dividends Per Share = 0 = 0.00 0 = 0.00 N/A = N/A
Current Market Price 14.24 14.19 N/A

 References

American Airlines, Inc., 2012. Form 10-K, s.l.: s.n.

Delta Airlines, Inc., 2012. Form 10-K, s.l.: s.n.

Hoovers, n.d. AMR Corporation Company Profile. [Online] Available at: http://www.hoovers.com/company-information/cs/company-profile.AMR_Corporation.ea444adcd31a96e6.html
[Accessed 19 April 2013].

Hoovers, n.d. Delta Air Lines, Inc. Company Profile. [Online] Available at: http://www.hoovers.com/company-information/cs/company-profile.Delta_Air_Lines_Inc.74a6998796b3e945.html
[Accessed 19 April 2013].

 

 

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