Financial Analysis of Selected Airlines

A BRIEF ANALYSIS OF SELECTED AIRLINEЎЇS PROSPECTS

Table of Contents:

1. Introduction 3

2. Trends and Strategies in the Airline Industry: a Brief Overview 3

3. Airline Profiles 5

3.1 Southwest Airlines 5

3.2 United Airlines 5

3.3 American Airlines 5

4. The Impact of Acquisitions and Mergers 6

4.1 United Airlines/USAir 6

4.2 American Airlines/Trans World Airlines 7

4.3 Southwest Airlines/ATA 7

5. The Impact of Bankruptcy Proceedings on Untied Airlines 8

6. Effect of United Airlines Chapter 11 Proceedings on Other Airlines 9

7. External Factors Affecting the Airline Industry 9

7.1 Effects of September 11 on the Airline Industry 9

7.2 Effects of the Iraq War on the Airline Industry 10

7.3 Effects of SARS on the Airline Industry 10

7.4 The Impact of Oil Prices 11

7.4.1 Fuel Hedging 11

7.4.2 Jet Fuel Hedging Strategies 12

7.4.3 Airline Stock Prices Fall Due to Record Fuel Prices 13

8. Conclusion 13

1. Introduction

This analysis focuses on the US airline industry and its companiesЎЇ stocks during the last decade. Specifically, this analysis gives attention to two so-called legacy airlines which include UAL Corporation, holding company for United Air Lines, Inc. (ÐŽoUnited AirlinesÐŽ±), AMR Corp., holding company of inter alia American Airlines, Inc. (ÐŽoAmerican AirlinesÐŽ±), and a low cost carrier, Southwest Airlines Co. ("Southwest Airlines"). These three airlines were chosen in particular as they each have very unique strategies on how they compete in this extremely competitive industry.

2. Trends and Strategies in the Airline Industry: a Brief Overview

Hurt by poor profits and scarred from likely terrorist attacks against the US due to the US involvement in the Iraq war, the airline industry finds itself on a bumpy course. In an effort to head off a drop in the number of passengers and rising costs for security , companies laid off staff and trimmed services. In an already intensely competitive market, the ÐŽoinevitableÐŽ± industry wide shakedown will have far-reaching effects on the industry's trend towards expanding domestic and international services.

International traffic is intricate for US Airlines. Many airlines are still partly owned by their respective nations, and treaties between nations determine which airlines can land where. To get around national laws and regulatory problems, US airlines have formed global alliances such as Star (United Airlines and Lufthansa) , Oneworld (American Airlines and British Airways) , and SkyTeam (Delta Air Lines, Air France, and AeroMЁ¦xico) . Through such alliances, airlines benefit from each other's resources, which include additional routes and marketing strategies as well as code-sharing agreements, without incurring the high costs of expansion. The costs involved with increased security precautions and route changes will force the airlines to examine their agreements. For customers, airline alliances offer broader frequent flier programs, streamlined travel, and simplified systems for purchasing tickets, but those benefits may do little to allay passenger concerns regarding safety. Even as airlines stake out their positions in the global market, they are not immune to domestic competition. Regional airlines have gained new ground with the development of newer, smaller jets that are faster than turboprop (propeller) planes and have greater ranges. The new regional jets have also made operating in previously underserved markets more cost-efficient. Recognizing their potential, major US carriers Delta Air Lines (which owns regional carriers Delta Express, Atlantic Southeast, and Comair) and American Airlines (with its AMR Eagle) have sought to control all or part of the upstart regional airlines.

To confront such difficulties, major carriers were hoping to merge, such as United Airlines and US Airways. Yet, they were repudiated by regulators scrutinizing competition issues. As the world's airlines struggle to rise above regulators and each other in efforts to grow bigger and better, they are finding themselves in additional struggle on other fronts. Airport capacity, route structures, weather, technology, and, most significantly, rising fuel and labor costs have cut into airline profits. Carriers have sought refuge in higher prices, primarily for business customers, who during the thriving economic times of the late 1990s were willing to pay more in exchange for better services and, even more important, for scheduling freedom. The move worked until corporate belt-tightening became the norm in 2000 and 2001, and companies began to reevaluate their travel budgets. This slow-down of the US economy is echoed in a decrease of United Airlines and American Airlines share prices in that period (see Exhibit 1.2) as these Airlines traditionally cater to the business traveler . Increasingly, business travelers are looking to various alternatives to high ticket prices: using software to streamline travel expenses, scouring the internet for cheaper fares that leisure travelers enjoy, and relying increasingly on video and teleconferencing technologies. The results have left airlines struggling to come up with ways of attracting more premium passengers.

Exacerbating that struggle further were the tragedies at the World Trade Center in New York and the Pentagon in Washington, DC, where two American Airlines jets and two United Airlines jets were hijacked and crashed as part of apparent terrorist attacks in 2001. The catastrophe led to a first-time shutdown of all US air traffic by the Federal Aviation Administration (FAA). The shutdown not only halted all domestic traffic, it prevented all international traffic from entering the US. Effects from the shutdown were nearly instantaneous. Midway Airlines decided to permanently halt its operations, but later resumed limited operations with the help of $10 million in federal aid, only to go away for good. Of the major