Research Paper on American Airlines

Introduction

The working capital analysis is a measure applied when finding out the ability of a company to meet its short-term financial obligations and the time the company takes to convert its short-term assets into cash. Working capital information is useful in determining whether the business organization require a more long-term source of finance to pay its current operations or it needs to change its excess cash into long term investment portfolio (Ross, Westerfield & Jordan, 2008). The formula for calculating working capital is the difference between current assets and current liabilities.

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AAL does not have enough funds to meet its short-term financial obligation from 2013 to 2017. This is because it has a negative working capital. Therefore, it faces some difficulties in paying its short credits due to insufficient funds as there is a higher total current liability than total current assets.

Delta Airline also has more current liabilities than current assets. This shows that it has a negative working capital (Weensven, 2007). It, therefore, faces challenges in meeting its short-term obligations using the available current assets.

United Continental Holding also has a negative working capital as other American airlines. This shows that it is incapable of meeting its financial obligations when they fall due. The current liabilities of this company cover its current assets an indication that it has fewer current assets than current liabilities.

The same observation is seen in Southwest Airline which also seems to have more current liabilities than currents assets. It, therefore, shows that the company has a negative working capital. On the contrary, Alaska Airline has a positive working capital from 2013 to 2014 and afterword it begins to experience a negative working capital at the end of every financial year.

Working Capital Management of American Airlines

American Airlines does not correctly manage their current assets. These airlines do not keep excess cash, too many inventories, and debtors as compared to current liabilities. These make all of the airlines to have negative working capital. Proper management of working capital ensures that the company has a good liquidity position that indicates that the company does not either hold too much cash or inventories at the end of every financial year. Working capital management is responsible for ensuring that the company can easily access funds to finance its short-term operations and also provide that the assets are invested in a viable investment project. American Airlines achieve theses by creating a balance between assets and liabilities. Americans Airlines must ensure that they have sufficient cash to meet their short-term financial obligations such as fueling, maintenance and others (Weensven, 2007). When the airlines have insufficient cash, they sell part of their current assets to generate more cash. American airlines also ensure that they do not keep excess cash without investing it in long term assets to create more income. These airlines achieve these through investing in short term sources of finance, in highly liquid securities or creating a credit reserve or getting access to financing such as commercial paper. These require proper management of different functions such as granting credits to different customers, proper inventory management and collecting credits within a shorter period to increase the cash flow.

Cash Conversion Cycle

This is a measure that indicates the time the business organization takes to change goods into cash. It is used in measuring the number of days a company decides to convert inventories into liquid cash (Miglo, 2016). It is also called net operating cycle or cash cycle. It is calculated to determine the number of days a single dollar is held up in the sales process before it becomes cash. It considers the number of hours or days the organization expects to dispose of its inventories, the time required to collect debts or receivables and may short term financial obligations. Therefore, it is used in measuring the efficiency of a company (Moyer and Kretlow, 2008). The decrease in the cash conversion cycle is a perfect sign as it shows that the company takes a few days or hours to convert its inventories into cash and also pay its creditors without incurring any penalties.

AAL has a cash conversion cycle higher than the industrial average. This shows that it takes more days to convert its inventories into cash than the average range. It takes 11 days to turn all its stocks into cash and this day seems very many because it makes the company gain more time without having sufficient money to meet other financial obligations. There has been an increase in the cash conversion cycle, and this is an indication that the efficiency of the company is becoming poor annually (Weensven, 2007). This also shows that AAL does not receive its account receivable within the required time and therefore it cannot even pay its creditors as it expects due to lack of sufficient cash.

On the contrary to Delta Airline, its CCC is lower than the average industrial figure which ranges from 9 and above. This shows that it operates above the average figure meaning that it is more efficient than AAL (Miglo, 2016). It takes a few days to convert its inventories into sales revenues and finally into cash. At the same time, it is capable of paying its creditors at the right time without attracting any penalties as it can receive money within a shorter time from its debtors or account receivable.

United Continental Holding has a vast cash conversion cycle and indication that it takes several days to convert its inventories into cash and at the same time, it does not collect its account receivable within its expectation. This makes it have insufficient cash to pay its creditors (United Airlines, 2008). Under this condition, it performs poor than AAL because it takes 29 .24 days to convert inventories into cash, change account receivable into cash and also to pay its creditors. It, therefore, has the potential to pay creditors after incurring additional interest and penalties which reduces the amount of cash it has at its disposal (Wang, 2019).

Also, Southwest airline also has a reasonable CCC. It is almost equal to that of AAL although it improves Seattle (SmartBrief, 2008) annually. This indicates that it will be better in the future. It is also below the industrial average figure making it perform below the industrial figure.

Alaska Airline also performs below the industrial average (Serling, 2008). This means that it does not convert inventories, account receivable and pay creditors within shorter days than other companies. It takes 11.60 days in 2017, 14.34 days in 2016 and 12.63 days in 2015. This indicates that this company does not have a constant cash conversion cycle but fluctuates annually.

Based on the above analysis, AAL airline does not have the cash conversion cycle as it is expected. It takes more days to change inventories into cash by taking 11.23 days while others take 9.40 days based on the average industrial figure (Chase, Jacobs and Aquilano, 2005). Although it performs better than other airlines in the industry, its cash conversion cycle increases annually while others decrease meaning that it is becoming less efficient annually.

Credit Rating

Is a process of grading a bond through the use of rating services that are capable of showing credit quality (Miglo, 2016) the issuer of abond. Moody's standard is an organization that offers stockholders with a quantitative explanation of fixed income security. Credit rating is essential in determining the risks which can prevent the business organization from meeting its financial obligations. Because the result of the analysis shows that American Airlines does not have very high-quality income securities (Block and Hirt, 2005). Because they offer poor credit rating, these airlines must produce a higher yield. As a result, most of these airlines have low creditworthiness as their current liabilities are higher than their existing assets. The fact that all these companies have a lower rating, it means that they have a higher risk of default.

Capital Structure

AAL has more debt than assets in the ratio of 44% while debt is 56% while its debt to equity ratio is 57.3%. This shows that AAL is more geared than other airlines such as Alaska and United Continental Holding. Delta Airline has a lower debt to asset ratio. The indebtedness of this airline is lower than its total assets; thus, it can use the income generated by its assets to pay its debts. Also, it has a higher debt than equity in the proportion of 53% to 47%. Although it is more geared, its gearing level is lower than that of AAL (Preve & Sarria-Allende, 2010).

On the contrary, United Continental holding uses more than 100% debt in its capital structure. It is, therefore, more geared than all these airlines in the industry. It uses 30% of debt as compared to its assets meaning that it can use assets to pay its debts (Vasigh & Mackay, 2017). Southwest Airline uses only 19% of debt as compared to total assets, and at the same time, it uses both debt and equity in almost the same proportion (49%) to 51%. It is less geared thus does not benefit from the interest tax shield. Finally, Alaska airline also uses more debts than assets in its capital structure (Besley and Brigham 000). Also, it uses 65% of debt in its capital structure when compared to equity capital. This shows that Alaska Airline is more geared than average industrial result.

References

Besley, S. and E. Brigham (2000), Essentials of Managerial Finance, 12th ed. Harcourt College Publishers, the McGraw-Hill Companies.

Block, S. and G. Hirt. (2005). Foundations of Financial Management, 11th Edition.

Moyer, C. McGuigan, J., and W. Kretlow. (2008). Contemporary Financial Management, (10). Cengage Learning.

Ross, S.A., Westerfield, R.W. & Jordan, B.D. (2008). Fundamentals of Corporate Finance (8). McGraw-Hill/Irwin, New York.

Serling, R.J. (2008). Character & Characters: The spirit of Alaska Airlines. Documentary Media, Seattle. SmartBrief (2008). Southwest bolsters cash position with $600 million in loans. SmartBrief, Inc. Retrieved September 30, 2008, from http://www.smartbrief.com/news/ASTA/companyData.jsp?companyId=679&c=s ummary2005

United Airlines (2008). United Airlines reaches agreement in principle to enhanceliquidity by approximately $1.2 Billion. UAL Corporation, Chicago.

Weensven, J.G. (2007). Air Transport: A management perspective (6). Ashgate Publishing.

Chase, R., Jacobs, R., and J Aquilano. (2005). Operations Management for Competitive Advantage, 11th Edition, McGraw-Hill/Irwin.

Miglo, A. (2016). Capital Structure Analysis: Some Examples. Capital Structure in the Modern World, 211-226. doi:10.1007/978-3-319-30713-8_10

Preve, L. A., & Sarria-Allende, V. (2010). Working Capital. Working Capital Management, 14-25. doi:10.1093/acprof:oso/9780199737413.003.0002

Wang, B. (2019). The cash conversion cycle spread. Journal of Financial Economics. doi:10.1016/j.jfineco.2019.02.008

Vasigh, B., Fleming, K., & Mackay, L. (2017). Airline Financial Statements. Foundations of Airline Finance, 137-165. doi:10.4324/9781351158046-6