chapter  7
56 Pages

Assessment of financial statements

Many airlines are experiencing better financial performance than they were a few years ago owing partly to the benefits of consolidation and improved efficiency, as well as the recovering economic situation, of course. In addition, the cargo segment of the industry is expected to enjoy continued improvement in 2014, again as a result of economic recovery. The financial health of an airline is measured by its profitability and liquidity, the composition of its assets, and the maturity of its liabilities. To assess whether any airline is financially solvent, it is critical that we look at certain financial indicators. While it is important to understand the composition and role of financial statements, a thorough and detailed analysis of the statements is required to make them truly valuable. This chapter covers ratio analysis, a common methodology used to analyze financial statements. Ratio analysis employs a multitude of financial calculations to analyze different portions of a company. Financial indices, such as return on investment (ROI), profit margin, debt-to-equity (D/E), and price-to-earnings (P/E), are used not only internally by airlines, but also externally by the investment community. Some of the key terms and ratios for the airline industry, such as cost per available seat mile (CASM) and revenue per revenue passenger mile (RRPM), more commonly known simply as “revenue per passenger mile” (RPM), are also introduced. Using these ratios and other financial analysis techniques, we benchmark selected US and international carriers to help to identify those airlines that are (at the time of writing) in a strong financial position; by dissecting their financial statements, we attempt to understand why they are successful.