Running head: AMERICAN AIRLINE INDUSTRY REVIEW 1

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Running head: AMERICAN AIRLINE INDUSTRY REVIEW

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American Airline Industry Financial Review, 2010


Steve Brindza, Rita Sprouse, and Terra Thompson


Ohio Dominican University










AMERICAN AIRLINE
INDUSTRY REVIEW

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The current financial state of the American airline industry is one of ongoing rebounding
from 2008’s recession
effects.
The information contained in this section was derived from the
income statements and balance sheets located in Appendix I, Table 1.1 and Table 1.2.
A look over
the financial data of the legacy and low
-
cost carriers shows that these airlines have

taken action to
offset the losses which began with the recession in late 2007. Balance sheets and income
statements from 2006 through 2010 (3
rd

quarter only for JetBlue) reveal that Delta endured the
most fluctuations in gains and losses, largely due to
earnings
-
per
-
share (EPS) figures (“Delta Air
Lines,” 2011).


Diluted EPS figures show some terrible figures for Delta over the last five years. The 2006
-
2010 range shows Delta facing losses three years during that span. Southwest did not see EPS
losses d
uring that time, and diluted EPS is lowest for JetBlue each year, but JetBlue has more
consistency in its earnings than Delta. This margin is negative for Delta (in 2009 and 2008) due to
operating income losses of 324,000,000 and 8,314,000,000 in 2009 and

2008 respectively. Delta
bounced back with a 7% gain in 2010.


Gross Profit Margins provide a better financial explanation of the airlines’ strengths and
revenues. JetBlue numbers increase over the five
-
year span, rising from 40% in 2006 to 66% in
2010.

Only 2007, the year of the Feb. tarmac incident, did JetBlue have a relatively low GPM.
That year it was 39%, the lowest within its range. Southwest also saw 2007 as a year of reduced
profit margins, with the airline only achieving 46%; the next three
years the profit margins were in
the 60 percentile.


Pre
-
tax comparisons show the advantage the two primary low
-
cost carriers (Southwest and
JetBlue) experienced over two of the legacy lines (United Airlines and Delta Airlines). A
Morningstar (citation) c
omparison from 2009 reveals that Delta and United have pre
-
tax Net
AMERICAN AIRLINE
INDUSTRY REVIEW

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Income losses, compared to slight gains for JetBlue and Southwest. Accordingly, United and
Delta had operating income losses that year; Southwest and JetBlue reported operating income
prof
its.


Balance sheet comparisons reveal the positive financial direction that analysts speculated.
Delta’s total liabilities were reduced in 2010 from 43,294,000,000 to 42,291,000,000.
Southwest’s increased, and JetBlue’s decreased. Delta’s total assets
decreased from
43,539,000,000 to 43,188,000,000 in 2010 (“Delta Air Lines,” 2011). JetBlue tends to be a more
conservative firm in terms of total liabilities; it doesn’t have the growth trend that Delta saw over
the last five years. In 2006, Delta’s tota
l liabilities were 33,215,000,000: 10 billion less than in
2010. Over that same five
-
year period, JetBlue only saw an increase of 1.2 billion in new
liabilities. Southwest also has kept its total liabilities under control, with two of the last five year
s
seeing a reduction in liabilities.


The airlines total equity is a number worth checking. This figure shows that Delta went
from a loss in 2006 of 13,593,000,000 to a 10,113,000,000 dollar amount in 2007. But this
amazing turnaround was impacted by the

recession, and in 2008, Delta’s total equity stood at
874,000,000. The recession further hit the firm in 2009, reducing total equity to 245,000,000.
The 2010 forecasted rebound occurred and helped Delta get up to the 897,000,000 total equity
figure. So
uthwest’s total equity figures over the five
-
year period reflect much higher stability/less
volatility. The tough market in 2008 knocked Southwest down from 6,941,000,000 to
4,953,000,000 (“Southwest Airlines,” 2011); however, Southwest was able to reboun
d to
5,466,000,000 in 2009. The 2010 overall market improvement took Southwest back up to
6,237,000,000, which is just slightly below Southwest’s 2006 figures.


JetBlue has transitioned the recession better than its competitors. JetBlue’s 2006 total equi
ty
AMERICAN AIRLINE
INDUSTRY REVIEW

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figure of 952,000,000 increased moderately pre
-
recession in 2007 to 1,036,000,000 (“JetBlue
Airways,” 2011). Then, during the tough year of 2008, (when Delta dropped most), JetBlue
enabled its total equity figure to reach 1,261,000,000. Years 2009 and

2010 saw increases to
1,539,000,000 and 1,623,000,000 (“JetBlue Airways,” 2011). This steady equity growth reveals
how JetBlue is not as nearly impacted by economic fluctuations. JetBlue’s stability is reflected by
how the airline’s long
-
term debt has b
een fairly stable between 2006 and 2010; the numbers run
between 2006’s 2,626 million and 2010’s 2,880 million.


Delta, however, has seen its long
-
term debt rise from 2006’s 6,509 million to 2009’s 15,665.
It is worth noting that Delta reduced its own
long
-
term debt to 13,179 in 2010 (“Delta Air Lines,”
2011). Like Delta, Southwest has seen its long
-
term debt more than double between 2006 and
2009 (“Southwest Airlines,” 2011); Delta’s debt went from 1,567,000,000 in 2006 to
3,325,000,000 in 2009. The
2010 recovery reduced the long
-
term debt to 2,875 (“Delta Air
Lines,” 2011).


Certainly 2009 was the year of the smaller airlines rebounding the fastest from the
recession’s effects. AirTran’s net income of 135 million was the largest of any airline in 20
09,
and this figure was a record for the firm (McCartney, 2010). In fact, only four American airlines
turned a profit: Southwest, JetBlue, AirTran, Alaska.


The 2009 earnings before income tax (EBIT) figures parallel the quicker
-
than
-
average trend
of the

low
-
cost carriers adjusting for and rebounding from the recession than the two legacy
carriers, Delta and United Airlines. Southwest earned 329 million; Jetblue earned 289 million.
United lost 95 million; Delta, largely impacted, lost 303 million (“Delt
a Air Lines,” 2011).


In 2010, U.S. airlines were admitting they had to cut flights during 2009 to curtail losses.
United Airlines reduced miles flown by 9.7 percent and the legacy carriers averaged 5
-
7%
AMERICAN AIRLINE
INDUSTRY REVIEW

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reductions overall (McCartney, 2010). Southwest cu
t capacity by 5.1% but also saw an increase
in passengers, so the seats filled amount increased nearly 5 percent. Southwest’s refusal to charge
for first and second bags became a noteworthy story of 2009, when most carriers increased
luggage check costs.

Southwest’s strategy, which continued into 2010, was to offset these missed
fees by nabbing other airlines’ customers, who were fed up with incurring charges for one suitcase
or a carry
-
on (McCartney, 2010). These types of cost
-
saving measures demonstrate

how even the
financially strongest entrants must undercut the competition as they enter 2011, promoting any fee
reduction that presently can’t be matched by the competition (Lindsay, 2010).


AMERICAN AIRLINE
INDUSTRY REVIEW

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References


Delta Air Lines Inc. (NASDAQ: DAL) Balance Sheet.

(2011, February 22).
Forbes.com
.
Retrieved from
http://finapps.forbes.com/finapps/jsp/finance/compinfo


/FinancialIndustrial.jsp?tkr=DAL&period=qtr

JetBlue Airways Corporation (NASDAQ: JBLU) Balance Sheet. (2011, February 18).
Forbes.com
. Retrieved
from
http://finapps.forbes.com/finapps/jsp/finance/


compinfo/FinancialIndustrial.jsp?tkr=JBLU&period=qtr

Lindsay, G. (2010, November 29). Why'd you pick that airline to fly on Thanksgiving? We
thought so.
Advertising Age, 81
(42), 1
-
40. Retrieved from Aca
demic Search Complete.

McCartney, S. (2010, January 28). The Money ledger: Tallying 2009 airline profits and losses.
The Wall Street Journal, U.S. Edition Home
. Retrieved from
http://blogs.wsj.com/


middleseat
/2010/01/28/which
-
airlines
-
made
-
lost
-
money
-
las
t
-
year/tab/article/

Southwest Airlines Co. (NASDAQ: DAL) Balance Sheet. (2011, February 18).
Forbes.com
.
Retrieved from
http://finapps.forbes.com/finapps/jsp/finance/


compinfo/FinancialIndustrial.jsp?tkr=LUV&period=qtr