IS 615-104 – MANAGERIAL ACCOUNTING

Financial Accounting Project

Date: 3rd

May 2014

Participants

Tejas Agarwal (#2)

Nancy Gupta (#8)

Karan Weller (#36)

Kanchi Patel (#44)

2 | P a g e

Table of Contents

1 Introduction……………………………………………………………………..3

1.1 American Airlines………………………………………………………….3

1.1.1 Company Profile………………………………………………...........3

1.1.2 Stock Info……………………………………………………………..4

1.2 Delta Airlines………………………………………………………………4

1.2.1 Company Profile……………………………………………………...4

1.2.2 Stock Info……………………………………………………………..5

2 Vertical Analysis………………………………………………………………..6

2.1 Income Statement Comparison…………………………………………….6

2.2 Balance Sheet Comparison…………………………………………………7

3 Horizontal Analysis……………………………………………………………..8

3.1 Income Statement Comparison…………………………………………….9

3.2 Balance Sheet Comparison………………………………………………..10

4 Ratio Analysis…………………………………………………………………10

4.1 Liquidity Ratio……………………………………………………………10

4.2 Profitability Ratio…………………………………………………………11

4.3 Solvency Ratio……………………………………………………………13

5 Bibliography…………………………………………………………………...15

3 | P a g e

1. Introduction

1.1 American Airlines Group Inc.

1.1.1 Company Profile:

AMR knows America's spacious skies -- and lots of others. Its main subsidiary is American

Airlines, one of the largest airlines in the world. Together with sister company American Eagle

and a regional carrier that operates as AmericanConnection under contract, American Airlines

serves more than 339 destinations in 50+ countries in the Americas, Europe, and Asia/Pacific.

The overall fleet exceeds 880 aircraft; American Airlines operates about 600 jets. The carrier

extends its geographic reach through code-sharing arrangements and is part of the oneworld

Alliance, along with British Airways, Cathay Pacific, Iberia, Qantas, and others. The company

grew even bigger by merging with US Airways in late 2013.

1.1.2 Stock Info:

American Airlines Group Inc. (AAL)

37.22 0.55(1.50%) After Hours : 37.20 0.02 (0.05%) Prev Close: 36.67

Open: 36.58

Bid: 37.11 x 1000

Ask: 37.22 x 4900

1y Target Est: 46.31

Beta: 3.85

Earnings Date: Jul 14 - Jul 18

(Est.)

Day's Range: 36.31 - 37.31

52wk Range: 15.28 - 39.88

Volume: 7,800,951

Avg Vol (3m): 10,036,800

Market Cap: 26.81B

P/E (ttm): N/A

EPS (ttm): -3.60

Div & Yield: N/A (N/A)

4 | P a g e

1.2 Delta Airlines, Inc.

1.2.1 Company Profile:

Just as a delta is a symbol for change in math, Delta Air Lines symbolizes the changing

mathematics of the airline industry. Delta became one of the world's largest airlines by traffic

after its $2.8 billion acquisition of Northwest Airlines in 2008. Through its regional carriers

(including subsidiary Comair), the company serves about 320 destinations in more than 60

countries, and it operates a mainline fleet of 700-plus aircraft, as well as maintenance, repair, and

overhaul (MRO) and cargo operations. Delta is a founding member of the SkyTeam marketing

and code-sharing alliance (airlines extend their networks by selling tickets on one another's

flights), which includes carriers Air France, KLM, and Alitalia.

5 | P a g e

1.2.2 Stock Info:

Delta Air Lines Inc. (DAL)

38.24 0.61(1.62%) After Hours : 38.19 0.05 (0.13%) Prev Close: 37.63

Open: 37.80

Bid: 37.82 x 100

Ask: 38.30 x 900

1y Target Est: 45.47

Beta: 0.98

Earnings Date: Jul 21 - Jul 25

(Est.)

Day's Range: 37.31 - 38.26

52wk Range: 16.94 - 38.82

Volume: 10,518,652

Avg Vol (3m): 11,903,200

Market Cap: 32.27B

P/E (ttm): 3.05

EPS (ttm): 12.54

Div & Yield: 0.24 (0.60%)

6 | P a g e

2. Vertical Analysis

Vertical analysis, also called common-size analysis, is a technique that expresses each financial

statement item as a percentage of a base amount. It helps in comparing the performance and

financial position of two businesses of different size. American Airlines (NYSE: AAMRQ) and

Delta Airlines (NYSE: DAL) draw frequent comparisons, as two are most major U.S. airlines.

Both airlines operate an extensive international and domestic network around the globe.

2.1 - Income Statement Comparison

Currency in Millions of US

Dollars

American Airlines Delta Airlines

Dec-12 Dec-13 Dec-12 Dec-13

Restated Restated

Dollars % Dollars % Difference

in % Dollars % Dollars % Difference

in %

TOTAL

REVENUES 24855 100 26743 100 36670 100 37773 100

COST OF GOODS

SOLD 19744 79.44 19805 74.06 -5.38 29323 79.96 29466 78.01 -1.96

GROSS PROFIT 5111 20.56 6938 25.94 5.38 7347 20.04 8307 21.99 1.96

OTHER

OPERATING

EXPENSES,

TOTAL

4577 18.41 4980 18.62 0.21 4747 12.95 4781 12.66 -0.29

NET INTEREST

EXPENSE -606 -2.44 -836 -3.13 -0.69 -1005 -2.74 -852 -2.26 0.49

NET INCOME -1876 -7.55 -1834 -6.86 0.69 1009 2.75 10540 27.90 25.15

Delta Airlines total revenue, as per Dec-13 is US$37 billion, which in comparison to American

Airlines is approximately US$10 billion more. Although both airlines recorded a percentage

decrease in cost of goods sold with respect to income statement but there was a steady increase

in gross profit margin when comparing the percentage difference for year 2012-2013.

Comparing the other operating expenses of both the airlines there was an increase of 0.21% seen

in American Airlines whereas Delta Airlines recorded a percentage decline of 0.29% in the

operating expense on the other hand the Net Interest Expense was completely vice-versa

comparing to the other operating expense where American Airlines recorded a percentage

7 | P a g e

decline of 0.69% and Delta Airlines recorded percentage increase of 0.49% in the Net Interest

Expense.

Looking at the Net income of both Airlines, even though there was a percentage decline in

American Airlines Net income they tried to reduce the decline by 0.69% whereas there is a

positive growth in Net income of Delta Airlines, which increased to 25.15% from 2012 to 2013.

2.2 - Balance Sheet Comparison

Currency in

Millions of US

Dollars

American Airlines Delta Airlines

Dec-12 Dec-13 Dec-12 Dec-13

Amount % Amount % Difference Amount % Amount % Difference

Assets

TOTAL

CURRENT

ASSETS 7072 30.08 14323 33.88 3.80 8272 18.57 9651 18.47 -0.10

NET

PROPERTY

PLANT AND

EQUIPMENT 12692 53.99 18182 43.01 -10.98 20460 45.93 21473 41.10 -4.83

GOODWILL 0 0.00 4086 9.66 9.66 9794 21.98 9794 18.74 -3.24

OTHER

INTANGIBLES 869 3.70 2311 5.47 1.77 4679 10.50 4658 8.91 -1.59

OTHER LONG

TERM ASSET 2877 12.24 3376 7.99 -4.25 1131 2.54 1575 3.01 0.48

TOTAL

ASSETS 23510 100% 42278 100% 44550 100% 52252 100%

LIABILITIES & EQUITY

TOTAL

CURRENT

LIABILITIES 9453 40.21 13806 32.66 -7.55 13270 29.79 14152 27.08 -2.70

TOTAL LONG

TERM

LIABILITIES 22044 93.76 31203 73.80 -19.96 33411 75.00 0 0.00 -75.00

TOTAL

LIABILITIES 31497 133.97 45009 106.46 -27.51 46681 104.78 40609 77.72 -27.07

TOTAL

EQUITY -7987 -33.97 -2731 -6.46 27.51 -2131 -4.78 11643 22.28 27.07

TOTAL

LIABILITIES

AND EQUITY 23510 100% 42278 100% 44550 100% 52252 100%

American Airlines Group Inc. may have more financial risk than Delta Airlines. It remains one

of the most highly leveraged, despite its Debt to Total Capital ratio shrinking to 115.26% over

8 | P a g e

the last fiscal year. Although debt as a percent of total capital decreased at Delta Air Lines Inc.

over the last fiscal year, it is still in-line with the Airlines industry's norm. Delta Airlines

inventory levels, relative to its Cost of Goods Sold, are typical for the industry and have shown a

consistent decrease during the last 2 years. This implies that management of Delta Airlines is

becoming more efficient. Additionally, even though there are not enough liquid assets to satisfy

current obligations considering both the airlines but Operating Profits are more than adequate to

service the debt.

3. Horizontal Analysis

Horizontal analysis of financial statements involves comparison of a financial ratio, a

benchmark, or a line item over a number of accounting periods. This method of analysis is also

known as trend analysis. Horizontal analysis allows the assessment of relative changes in

different items over time. It also indicates the behavior of revenues, expenses, and other line

items of financial statements over the course of time.

3.1 - Horizontal Analysis of Income Statements

From the horizontal analysis of American Airlines' and Delta Airlines' Income statement, we can

see that the growth in the sales revenue for both the companies (year-to-year) is almost the same.

However, American Airlines had a growth in its expenses such as the "other operating expenses"

which makes the company less profitable than Delta Airlines. All these figures suggest that Delta

Airlines had better sales than American Airlines and was successful in cutting down on

expenses.

9 | P a g e

Fig: Income Statement Comparison Sheet

3.2 - Horizontal Analysis of Balance

While Analyzing balance sheets of both the companies, we can see that American Airlines has

taken the necessary measures to increase the assets (current assets mainly). The company

reported a huge growth of 111.9 % from 2011 through 2013 in its current assets section.

However, their total equity went on to decrease by about 60% and the total liabilities increased

by 45%. Delta Airlines, on the other hand reported a growth of 24.8% and 20.12% in 'total assets'

and 'total liabilities and equity' respectively. This data suggests that Delta Airlines couldn’t

utilize the funds raised from equity in an efficient way like American Airlines.

10 | P a g e

Fig: Balance Sheet Comparison

4. Ratio Analysis

Ratio analysis expresses the relationship among selected items in financial statement as per 2013

year. In this project, we used ratio to evaluate Liquidity, Profitability and Solvency of American

Airline and Delta Airline.

4.1 - Liquidity Ratio

Measures the short-term ability of a company to pay its maturing debt obligations and

unexpected need of cash.

Current Ratio = Current Assets / Current Liabilities

American Airline

14,323/ 13,806 = 1.037447487

Delta Airline

9,651/ 14,152 = 0.681953081

Since working capital ratio, by definition measures company’s liquidity & short-term debt

paying ability, American Airline is 1.5 times more liquid as compared to Delta Airlines. For

every dollar of current liabilities American Airline has only 1.037 dollar of current assets while it

is .6819 for Delta airlines.

11 | P a g e

Acid Test (Quick) Ratio = (Cash + Short term investment + Net Receivables) / Current

Liabilities

American Airline

(1140+8111+1035+1560)/13806 = 0.8580327

Delta Airline

(2,844+959+1,609)/14,152 = 0.39

Being a measure of short-term immediate liquidity, Acid Test (Quick) Ratio figures can tell us

with more accuracy, American Airline liquidity is four times as of Delta Airline.

Inventory Turnover = Cost of Goods Sold / Average Inventory

American Airline

19805/ 2291 = .78

Delta Airline

29466/ 14733 = 2

It measures the number of times, on average the inventory has been sold out during the period. Here

we can see that American Airline has an average selling time of 466days (365/.78), while that of

Delta Airline is 182 days. Apparently, Delta Airline sells out & renew its inventory 283 days earlier

than American Airline & would have so much less cash tied up in inventory.

4.2 - Profitability Ratios

It measures the income or operating success of a company for a given period of time, in turn

representing its ability to obtain debt & equity financing.

Profit Margin = Net Income / Net Sales

American Airline

-1,834/ 26,743 = -0.068578693

Delta Airline

10,540/ 37773 = 0.27903529

12 | P a g e

With a profit margin of -.068, American Airline has -6.8% of each dollar of sales that result in net

income, while for Delta it is 27.9% . Delta Airline makes more net income as compared to

American Airline.

Asset Turnover = Net Sales / Average assets

American Airline

26,743/ (25,612 + 23,264) / 2 = 0.27348801

Total assets 2013: 25,612

Total assets 2012: 23,264

Delta Airline

37773/(52,252+ 44,550)/2 = 0.506836449

Total Assets 2013:52,252

Total Assets 2012: 44,550

As a measure of how efficiently a company uses its assets to generate sales, Asset Turnover figures

shows that American Airline generated a sales of $27.3 dollar invested in each asset, but Delta

earned 50.68 dollar. Apparently, Delta uses 1.85 of its assets more efficiently than American

Airline to improve sales.

Return on assets = Net Income / Average assets

American Airline

(1834) / (23510 + 42278) / 2 = 0.013938712

Delta Airline

10,540 / (52252 + 44550) / 2 = 0.141425255

Ratio measure the overall profitability, American Airline has a return of 1.13% , but Delta Airline

has a return of 14.14%. Delta airline has more return on assets and use more efficiently as compared

to American airline.

13 | P a g e

Earnings per share (EPS) = NI / weighted average common stock holdings

American Airline

(1834)/ 163,046 = 11.12

Delta Airline

10,540/ 849 = 12.41

The portion of a company's profit allocated to each outstanding share of common stock. Earnings

per share serves as an indicator of a company's profitability. Therefore , Delta Airline has higher

EPS 12.41 as compared to American airline 11.12. It is more profitable to buy Delta airline

shares.

Price Earnings Ratio = Market price per share / Earnings per share

American Airline

18.395/ 11.25 = 1.635111111

Delta Airline

20.49 / 12.41 = 1.65108783

The ratio reflects investor’s assessment of company’s future earnings. American Airline stock

sold for 1.63 times the amount that the company earned on each share while Delta Airline stock

sold for only 1.65 times the amount that the company earned on each share. This shows that

Delta Airline stock has high investment rate by the investors.

4.3 - Solvency Ratio

It measures the ability of a company to survive over a long period of time.

Debt to Total Assets = Total Debt / Total Assets

American Airline

45009/ 42278 = 1.064596244

Delta Airline

14,152+26,457 / 52,252 = 0.777175993

14 | P a g e

As a measure of percentage of total assets that creditors provide, American Airline has only

106% of its total assets provided by creditors while 77.77% of Delta Airline of total assets is

creditor’s money. Lower the ratio; more equity buffer is available to the creditors. Delta airline is

a better option to invest as per this analysis.

Times interest earned = Income before income taxes & Interest expense / Interest expense

American Airline

-1,324,000/ 856,000 = -1.546728972

Delta Airline

2527/ -698 = -3.62034384

American airline interest expense is covered .42 times more than that of Delta airline. American

airline manages to control its interest expense .42 times better than delta airlines.

15 | P a g e

5. Bibliography

The new American is arriving. (n.d.). American Airlines. Retrieved May 8, 2014, from

http://www.aa.com/homePage.do

SkyMiles.It's Very Rewarding. . (n.d.). Airline Tickets and Flights to Worldwide Destinations.

Retrieved May 8, 2014, from http://www.delta.com/

. (n.d.). . Retrieved May 8, 2014, from

http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=AAL

Financial Statements for delta air lines inc (DAL). (n.d.). Businessweek.com. Retrieved May 8,

2014, from

http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=DAL&dataset

=incomeStatement&period=A¤cy=native

No Ticker Symbol - Yahoo! Finance. (n.d.). No Ticker Symbol - Yahoo! Finance. Retrieved May

8, 2014, from

http://finance.yahoo.com/q/hp?a=00&b=01&c=2013&d=11&e=31&f=2013&g=m&s=DAL%2C

+&ql=1

Delta Air Lines. (n.d.). , Inc.. Retrieved May 8, 2014, from http://ir.delta.com/stock-and-

financial/sec-filings/default.aspx

. (n.d.). . Retrieved May 8, 2014, from

http://www.sec.gov/Archives/edgar/data/4515/000000451513000022/aa-10kx20121231.htm

Delta Air Lines. (n.d.). , Inc.. Retrieved May 8, 2014, from http://ir.delta.com/shareholder-

resources/stock-information/default.aspx

. (n.d.). . Retrieved May 8, 2014, from http://phx.corporate-

ir.net/phoenix.zhtml?c=117098&p=irol-stockquote

Delta Air Lines, Inc. Company Profile - Yahoo Finance. (n.d.). Delta Air Lines, Inc. Company

Profile - Yahoo Finance. Retrieved May 8, 2014, from http://biz.yahoo.com/ic/10/10448.html

American Airlines Group Inc. Company Profile - Yahoo Finance. (n.d.). American Airlines

Group Inc. Company Profile - Yahoo Finance. Retrieved May 8, 2014, from

http://biz.yahoo.com/ic/10/10021.html