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Us Airways Inc

Essay by   •  December 16, 2013  •  Case Study  •  3,108 Words (13 Pages)  •  965 Views

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US Airways Inc

Table of Content

The Executive Summary 3

Part I Introduction 4

Industry Characteristics 4

Impact of fuel on profitability 5

Stock Prices of US Airways 5

Graphical representation of share prices between 2006 - 2011 6

Part II Terminal Value Determination 7

Snapshot of finacial performance 2011 7

Terminal Value of US Airways 7

Part III Position of US Airways to Corporate Distress 9

US Airways: Acquisition or Take overs 10

Targets for US Airways Inc 11

Conclusions 12

References 13

Executive Summary

The aviation industry is unique unlike other industries. Profitability of airlines is influenced by a number of factors. US Airways is the company that will illustrate determination of profitability and terminal valuation. US Airways is a company that operates 3,100 scheduled passenger flights across America, Europe and Asia. The company is a member of Star Alliance which has a membership of 27 airlines operating in 189 countries. There are a number of factors that influence profitability of US Airways. For instance, the fluctuation of crude oil significantly affects US Airways. In the same case, fixed obligations and cost of financing and fluctuations of interest rates negatively affect US Airways profitability. Another factor is the fluctuation of foreign exchange. Labor strikes and threat of sabotage at times influence profitability negatively. Just to mention, fuel costs consist of significant operation cost. For instance, in 2009 crude oil cost stood at 23.8% compared to 35.8% in 2011. Considering $100 invested in US Airways shares in 2006 displays significant fluctuations which are unimpressive by 2011. However, the potential of the company is high. It is worth noting that that in 2011, operational revenues rose by 11.8% while yields increased by 10.1% I comparison with the 2010 figures. Fluctuations of crude oil prices were such that in 2010 a barrel averaged at $80 compared to $127 in May 2011 and $108 in December 2011. On the other hand, terminal valuation of the company indicate that although in 2011 the operating revenues stood at $13,055 million, by 2020 it will stand at $35,624.86 million. Net income was $71 million but a year-by-year projected growth of 10.1% makes it possible for net income to stand at $193.74 million by year end of 2020. There are other indicators of terminal value that make US Airways a highly profitable company. Therefore, US Airways can handle comfortably corporate distress. Ideally, US Airways cannot be a subject of takeover. Instead, it should shop for companies to acquire. In this case, American Airlines is the best target. This is because the company is facing bankruptcy threat. The other regional and small operators include AirStar Executive Airline, Alaska Airlines and Amerijet International Airline are significant targets of acquisition.

Introduction

US Airways is a firm that operates in the aviation industry in the US. The company boosts of being the fifth largest airline operator in the US. It offers both passenger and cargo services. The performance of the firm is of interest of many stakeholders. Ideally, the company offers 3,100 flights daily across US, Canada, North and South America, Europe and Asian Continent. It is important to mention that the headquarters of US Airways are located in 111 west Rio Salado Parkway, Tempe, Arizona. The airline is a member of Star Alliance which has additional 27 members connecting 1290 destinations across the world in 189 countries (United States Securities and Exchange Commission, 2012, p.7).

Industry characteristics

The aviation industry is very unique. The dynamism of and availability of crude oil contributes significantly to the profitability of an airline. The industry too is characterized by high operations costs. The cost of financing and impact of fluctuations of interest rates too are normally prohibitive (Mcguigan, Moyer & Harris, 2011 p.212). Moreover, requirements for fixed obligations and availability of financiers influence profitability significantly. The impact of fluctuation of foreign exchange is magnificent. For example, Jetlink a Kenyan operator was grounded five months now due to held up monies in South Sudan due to exchange rate fluctuations. Labor relations and potential of negotiated huge wages and threats of sabotage by striking employees and influence of profitability is huge (Kaps, Hamilton, & Bliss, 2012, p.50). The US Airways as measured by Domestic Revenue Passenger Miles ("DRMs") and Available Seat Miles ("ASMs") is the fifth largest operator in the US (United States Securities and Exchange Commission, 2012, p.17).

Impact of fuel prices on profitability

Fuel is a significant cost in determining profitability of airlines. Ideally, from the table below in 2009 operating costs traceable to fuel stood at 23.8% while in 2011 that cost rose to 35.8% implying a 12% appreciation of price with just two years. This is a threat to US Airways profitability in the long term. Regrettably, the issue of variability of global fuel prices is beyond the control of US Airways. Thus, cost discipline on other areas while increasing diversification and increasing operating revenues.

Year Gallons Average price per gallon Aircraft Fuel Expense ($bn) % of Total operating expense

2011 1,095 3.11 3.400 35.8%

2010 1,073 2.24 2.403 28.6%

2009 1,063 1.74 1.863 23.8%

Stock prices of US Airways

The stock prices of US Airways are not impressive. Unfortunately, the company has never declared dividends in cash or in kind since 1990. The company is actually not planning to declare dividends in 2011 or 2012. This is due to debt agreements and provisions of secured loans it is servicing which restrict declaration of dividends and repurchase of stocks. It is expected that in future the Board of Directors are the ones who have power to declare dividends after agreeing on practicality and studying Delaware law amongst other factors.

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