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.