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Financial Analysis of Selected Airlines

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A BRIEF ANALYSIS OF SELECTED AIRLINEЎЇS PROSPECTS

Table of Contents:

1. Introduction 3

2. Trends and Strategies in the Airline Industry: a Brief Overview 3

3. Airline Profiles 5

3.1 Southwest Airlines 5

3.2 United Airlines 5

3.3 American Airlines 5

4. The Impact of Acquisitions and Mergers 6

4.1 United Airlines/USAir 6

4.2 American Airlines/Trans World Airlines 7

4.3 Southwest Airlines/ATA 7

5. The Impact of Bankruptcy Proceedings on Untied Airlines 8

6. Effect of United Airlines Chapter 11 Proceedings on Other Airlines 9

7. External Factors Affecting the Airline Industry 9

7.1 Effects of September 11 on the Airline Industry 9

7.2 Effects of the Iraq War on the Airline Industry 10

7.3 Effects of SARS on the Airline Industry 10

7.4 The Impact of Oil Prices 11

7.4.1 Fuel Hedging 11

7.4.2 Jet Fuel Hedging Strategies 12

7.4.3 Airline Stock Prices Fall Due to Record Fuel Prices 13

8. Conclusion 13

1. Introduction

This analysis focuses on the US airline industry and its companiesЎЇ stocks during the last decade. Specifically, this analysis gives attention to two so-called legacy airlines which include UAL Corporation, holding company for United Air Lines, Inc. (Ў°United AirlinesЎ±), AMR Corp., holding company of inter alia American Airlines, Inc. (Ў°American AirlinesЎ±), and a low cost carrier, Southwest Airlines Co. ("Southwest Airlines"). These three airlines were chosen in particular as they each have very unique strategies on how they compete in this extremely competitive industry.

2. Trends and Strategies in the Airline Industry: a Brief Overview

Hurt by poor profits and scarred from likely terrorist attacks against the US due to the US involvement in the Iraq war, the airline industry finds itself on a bumpy course. In an effort to head off a drop in the number of passengers and rising costs for security , companies laid off staff and trimmed services. In an already intensely competitive market, the Ў°inevitableЎ± industry wide shakedown will have far-reaching effects on the industry's trend towards expanding domestic and international services.

International traffic is intricate for US Airlines. Many airlines are still partly owned by their respective nations, and treaties between nations determine which airlines can land where. To get around national laws and regulatory problems, US airlines have formed global alliances such as Star (United Airlines and Lufthansa) , Oneworld (American Airlines and British Airways) , and SkyTeam (Delta Air Lines, Air France, and AeroMЁ¦xico) . Through such alliances, airlines benefit from each other's resources, which include additional routes and marketing strategies as well as code-sharing agreements, without incurring the high costs of expansion. The costs involved with increased security precautions and route changes will force the airlines to examine their agreements. For customers, airline alliances offer broader frequent flier programs, streamlined travel, and simplified systems for purchasing tickets, but those benefits may do little to allay passenger concerns regarding safety. Even as airlines stake out their positions in the global market, they are not immune to domestic competition. Regional airlines have gained new ground with the development of newer, smaller jets that are faster than turboprop (propeller) planes and have greater ranges. The new regional jets have also made operating in previously underserved markets more cost-efficient. Recognizing their potential, major US carriers Delta Air Lines (which owns regional carriers Delta Express, Atlantic Southeast, and Comair) and American Airlines (with its AMR Eagle) have sought to control all or part of the upstart regional airlines.

To confront such difficulties, major carriers were hoping to merge, such as United Airlines and US Airways. Yet, they were repudiated by regulators scrutinizing competition issues. As the world's airlines struggle to rise

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