American Airlines

1.Long haul carrier

2. Established in 1920 as the first American airline
giant by aquiring more than 80 airlines
3. Nine airliners competing on routes operated by
American Airlines
4. Operated two regional airlines

Financial Theory
P/E increases as earnings grow
P/E decreases as cost of equity increases
ROE is based on Dupont (Earnings/Equity)
If ROE<Cost of Equity, P/B decreases

Delta Airlines
1.Long haul carrier

2. Founded as the worlds first crop-

3. Established domestic network by

acquisitions
4. Entered international markets in

Delta Airlines

carrier

as the worlds first crop-dusting service

ed domestic network by regional carrier

nternational markets in 1991

Sky West Airlines

1. Regional carrier
2. Established in 1972 it operates 108 aircrafts from
six hubs
3. 70% of flights were jointly coded with Delta and
United Airlines
4. Good relationship with non-unionized workforce

Southwest Airlines
1. Hybrid carrier
2. Founded in 1971, now operates 344 aircrafts to 57
destinations
3. Focus is on frequent flights to conveniently located and
less congested airports
4. Waiting time is low & operates only 1 type of aircraft

Airline Industry
Price-to-book value
2
P/B trend
declining
Price/Earning
Negative
P/E trend
decling
ROE
12%
ROE trend
declining
Cost of equity capital
12.50%

Revenue growth
Earnings Growth
Predicted ROE

2001
NA
Loss
NA

Delta
Price-to-book value
P/B trend
Price/Earning
P/E trend
ROE
ROE trend
Cost of equity capital
Net Operating Margin
Net Operating Margin trend
American
2002
8%
Profit
8.50%

a
NA
NA
NA
NA
17%
declining
12.50%
6%
declining

American
Price-to-book value
P/B trend
Price/Earning
P/E trend
ROE
ROE trend
Cost of equity capital
Net Operating Margin
Net Operating Margin trend

NA
NA
NA
NA
12%
declining
12.50%
5%
declining

Delta
2001
NA
Loss
NA

2002
NA
Moderate Increase
13%

2002
>30%
32%
23%

Skywest
Price-to-book value
P/B trend
Price/Earning
P/E trend
ROE
ROE trend
Cost of equity capital
Net Operating Margin
Net Operating Margin trend
Skywest
2003
>30%
22%
23%

est
NA
NA
NA
NA
18%
declining
12.50%
9%
declining

2001
11%
19%
17%

Southwest
Price-to-book value
P/B trend
Price/Earning
P/E trend
ROE
ROE trend
Cost of equity capital
Net Operating Margin
Net Operating Margin trend
Southwest
2002
12%
24%
18%

NA
NA
NA
NA
21%
increasing
12.50%
11%
increasing

ROE
P/E
P/B

American
Low
Low
Low
ROE<CEC, P/B<1

7.5
6.8
16.8
26.8

Delta
Average
Low
Low-to-average
P/B~1

0.8
1.2
3.1
4.9

Southwest
High
High
High
Sustained Growth

American
Delta
Skywest
Southwest

Skywest
High
High
High
P/B>>1

High competition for

High competition for
Flexible, non-union la
Serves larger air carr

igh competition for routes, low historical ROE, low PE as earnings growth not over CEC, PB <1 since ROE < CEC
igh competition for routes, average historical ROE, ROE > CEC, so PB >1, low PE
lexible, non-union labour, low cost strategy sustainable, high PB, high PE due to presumably sustainable long-te
erves larger air carriers who can also compete directly, depends on Delta/United for business ~ maybe earnings

PB <1 since ROE < CEC

mably sustainable long-term earnings growth

siness ~ maybe earnings not as sustainable, high ROE, ROE > CEC = PB much greater than one, PE is high also

than one, PE is high also, but limited sustainability

Trend
Rising

P/E

P/B

ROE

High

High

High

High

Low

Low

Low

High

High

Low

Low

Low

Recovering

Falling

Takeover/Bankruptcy

Interpretation
Expectations of high earnings growth relative to recent earnings(high P/E)
Earnings growth will increase the asset base (high P/B)
Both will contribute to rising ROE
The firm will recover from recently lower earnings (high P/E)
Will not exibit growth in asset base (low P/B)
Will not show high returns (low ROE)
The firm will not grow earnings beyond current levels (low P/E)
High earnings expected on current investments (high P/B and high ROE)
New investments returns will be low
The firm will experience earnings growth (high P/E)
Will not exibit growth in asset base (low P/B)
Below average returns are expected (low ROE)