Air travel helps facilitate business, travel, and rapid transportation of goods and people to locations worldwide. According to the U.S. Department of Transportation (DOT), the airline industry has four basic categories—international, national, regional, and cargo.
Regional flights stay local to one area, and cargo airlines transport goods, not passengers. International flights typically carry more than 130 passengers from one country to another. National flights seat approximately 100 to 150 passengers and fly anywhere in the United States.
During the second quarter of 2021, domestic airlines posted the first profit since COVID-19, generating $1 billion in profit. For the third quarter of 2021, profits nearly tripled to $2.7 billion.
Key Takeaways
- The airline industry is competitive and highly seasonal.
- Profits can also be affected by energy prices and economic downturns, which are unpredictable.
- Investors use certain financial indicators to analyze airline companies such as short-term liquidity, profitability, and long-term solvency.
- Key financial metrics analyzed by investors are the quick ratio, ROA, and the debt-to-capitalization ratio.
Analyzing Airline Companies
Competition is fierce among airline companies. The airline industry is highly seasonal, and profit can be affected by fluctuations in energy prices or economic downturns. Investors can't necessarily predict environmental or market factors when assessing the future health of an airline company, but they do use certain financial indicators to analyze the stability of airline companies.
These metrics include short-term liquidity, profitability, and long-term solvency. Key financial metrics commonly considered by market analysts or investors are the quick ratio, return on assets (ROA), and the debt-to-capitalization ratio.
Quick Ratio
Analysts use the quick ratio to measure an airline’s short-term liquidity and cash flow. Essentially, the quick ratio reveals whether a company can cover all of its short-term debt obligations with its liquid assets defined as cash or quick assets. Quick assets can be rapidly converted to cash quickly in an amount comparable to their present book value.
The quick ratio formula for calculation divides a company’s liquid assets by its current liabilities. This metric is an indicator of the overall financial strength or weakness of a company. If a company cannot meet its short-term debt obligations with readily available liquid assets, it could be liable to bankruptcy.
This financial ratio is particularly useful for analyzing airline companies because they are capital-intensive and have significant amounts of debt. The higher the quick ratio, the better. Any value below one is considered disadvantageous. Other metrics in addition to the quick ratio include the current ratio and the working capital ratio.
Return on Assets (ROA)
Return on assets measures profitability, indicating the per dollar profits a company earns on its assets. Because an airline company’s primary assets, its planes, generate the bulk of its revenues, this metric is a particularly appropriate profitability measure.
The formula used to calculate ROA divides net income by the company's total assets. The resulting value is expressed as a percentage. Because airline companies own substantial assets, even a relatively low ROA represents significant absolute profits. Alternative profitability ratios investors may consider are the operating profit margin and the earnings before interest, taxes, depreciation, and amortization (EBITDA) margin.
Debt-to-Capitalization Ratio
The total debt-to-capitalization ratio is a vital metric for analyzing airline companies because it adequately evaluates the debt position and overall financial soundness of companies with significant capital expenditures. For analysts and investors, this financial metric evaluates companies within an industry that often must withstand extended economic or market downturns and resulting periods of revenue losses or diminished profit margins.
The debt-to-capitalization ratio is calculated as total debt divided by total available capital. Analysts and investors typically prefer to see ratios that are lower than one as they are indicative of an overall lower level of financial risk. Alternative ratios for evaluating long-term financial solvency include the total-debt-to-total-equity ratio and the total-debt-to-total-assets ratio.
In addition to these key financial ratios, investors examine a number of specific airline industry performance metrics. These performance analysis metrics include available seat miles, cost per available seat mile, break-even load factor, and revenue per available seat mile.
FAQs
Investors use certain financial indicators to analyze airline companies such as short-term liquidity, profitability, and long-term solvency. Key financial metrics analyzed by investors are the quick ratio, ROA, and the debt-to-capitalization ratio.
What are the 5 key financial ratios? ›
Financial ratios are grouped into the following categories:
- Liquidity ratios.
- Leverage ratios.
- Efficiency ratios.
- Profitability ratios.
- Market value ratios.
Key financial metrics for airlines include revenue per available seat mile (RASM), cost per available seat mile (CASM), operating profit margin, passenger yield, and load factor. These metrics help airlines understand their financial performance and make informed decisions for better profitability.
What is the key to airline profitability? ›
The load factor helps investors and management determine how well an airline generates sales, covers its expenses, and remains profitable. Airlines have thin profit margins with many costs so having a high load factor is essential to an airline's success.
What are the 4 P's of the airline industry? ›
An airline marketing strategy is an overall business plan that aims to reach prospective consumers. turn them into customers and keep existing ones engaged. When systematically planned, the strategy covers the four Ps of marketing: product, price, place, and promotion.
What is the average financial ratio for the airline industry? ›
The average D/E ratio of major companies in the U.S. airline industry was between 5-6x in 2021, which indicates that for every $1 of shareholders' equity, the average company in the industry has more than $5 in total liabilities.
What are the most crucial financial ratios? ›
Let's get to it.
- Price-Earnings Ratio (PE) This number tells you how many years worth of profits you're paying for a stock. ...
- Price/Earnings Growth (PEG) Ratio. ...
- Price-to-Sales (PS) ...
- Price/Cash Flow FLOW -0.6% (PCF) ...
- Price-To-Book Value (PBV) ...
- Debt-to-Equity Ratio. ...
- Return On Equity (ROE) ...
- Return On Assets (ROA)
Assess the performance of your business by focusing on 4 types of financial ratios:
- profitability ratios.
- liquidity ratios.
- operating efficiency ratios.
- leverage ratios.
Financial ratio analysis is often broken into six different types: profitability, solvency, liquidity, turnover, coverage, and market prospects ratios. Other non-financial metrics may be scattered across various departments and industries.
What are the key success factors for an airline company? ›
The key success factors for airline companies to implement dynamic operations management include structure, culture, strategic alliances, planning and forecasting, technology, marketing and branding, and outsourcing.
Enterprise value-to earnings before interest, taxes, depreciation, amortization, and rent (EV/EBITDAR) is the most common valuation multiple used to value airlines. Analyses also use free cash flow (FCF) yield to analyze airlines.
How do you measure airline performance? ›
What are the key performance indicators (KPIs) used to measure airline performance? The main KPIs include on-time performance, load factor, customer satisfaction, baggage handling efficiency, and revenue per available seat mile (RASM).
How to increase airline profitability? ›
Airlines can employ several revenue generation strategies to maximize their earnings. These strategies include implementing dynamic pricing models and fare optimization techniques, offering premium economy and business class options, and capitalizing on ancillary services.
How is airline profit calculated? ›
The Basic Airline Profit Equation: Total Revenues Minus Total Operating Expense.
Why do airlines struggle to be profitable? ›
Airlines provide a vital service, but factors including the continuing existence of loss-making carriers, bloated cost structure, vulnerability to exogenous events and a reputation for poor service combine to present a huge impediment to profitability.
What is the most important asset for an airline? ›
An airline's most important assets are its airplanes and its people. An airline can have the best planes in the world, but without the employees, an airline can't do anything.
What is American airlines liquidity ratios? ›
Current and historical current ratio for American Airlines Group (AAL) from 2010 to 2023. Current ratio can be defined as a liquidity ratio that measures a company's ability to pay short-term obligations. American Airlines Group current ratio for the three months ending December 31, 2023 was 0.62.
How is quality measured in the airline industry? ›
The model is based on the gap between customers' expectations and perceptions of service quality, across five dimensions: reliability, responsiveness, assurance, empathy, and tangibles. By using a questionnaire with 22 items, you can calculate the score for each dimension and the overall service quality gap.
What is the current ratio of Delta Airlines? ›
Delta Air Lines's current ratio hit its 5-year low in December 2023 of 0.4x. Delta Air Lines's current ratio decreased in 2021 (0.8x, -30.4%), 2022 (0.5x, -34.0%), and 2023 (0.4x, -22.5%) and increased in 2019 (0.4x, +19.6%) and 2020 (1.1x, +167.6%).
