Evaluating Financial and Operational Performance in the Airline Industry
Posted: 1 Jun 2017
Abstract
From its earliest beginnings in the years following World War II, the commercial airline industry has grown into an essential component supporting economic growth, trade, investment, and tourism throughout the world. This case includes short profiles for four airlines—United, Southwest, Spirit, and Japan Airlines—including descriptions of each company's operations strategy, history, and financial situation. A series of exhibits provides income statement and balance sheet information for each airline for the years dated 2012, 2013, and 2014. This case is suitable for management students who have already been exposed to the basics of accounting and operations management decision making. It builds business intuition that integrates concepts from the courses of operations, accounting, and finance. As such, it is appropriate for use in an operations course or an introductory finance/accounting course. Students examine the financial statements of the four competitor airlines and calculate the financial ratios that make up the return on equity for each. Then they critically evaluate the links between each company's financial ratios and its unique operations strategy and financial situation. As a result, students can understand the effects that strategic operations management and financial decisions can have on financial statements and important financial ratios—and gain the insights one can by examining the equivalent ratios of close competitors.
Excerpt
UVA-OM-1535
Apr. 21, 2015
Evaluating Financial and Operational Performance in the Airline Industry
Industry Background
From its earliest beginnings in the years following World War II, the commercial airline industry grew into an essential component supporting economic growth, trade, investment, and tourism throughout the world. The industry initially featured mostly state-owned players (and many countries continued to employ national carriers for their perceived strategic importance), but the Airline Deregulation Act of 1978 welcomed in an era of U.S. competition that helped combat monopolistic concerns such as artificially high ticket prices, high barriers to entry, and slow response times. The legislation increased competition dramatically by eliminating fare and route regulations, resulting in lower ticket prices and ever-decreasing passenger perks, but it also led to waves of airline mergers and bankruptcies, which harmed investors and pressured airline workers.
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Keywords: airline, industry, operations, finance, passenger, merger, international, national, regional, cargo, low-cost carrier, revenue, United, Southwest, Spirit, Japan
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