Term Paper on "Stock Market Southwest Airlines vs. American"

Term Paper 3 pages (1068 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Southwest Airlines vs. American Airlines

Southwest Airlines (NYSE: LUV) was founded in 1971 by Rollin King and Herb Kelleher as a small Texas airline. By 1973 they had turned their first profit, beginning a streak which is unprecedented in the airline industry. They grew slowly in the early years, adding a handful of Texas cities. In 1977 Southwest was listed on the NYSE. With the addition of New Orleans in 1979, the airline began a path of expansion beyond the Texas market, and soon cities across the southwest were being added. They launched they're first loyalty program in 1987, the Company Club, which would later morph into Rapid Rewards. Online booking was added in 2000. Since then, both expansion and profitability have been maintained, even after the terrorist attacks of 9/11.

Southwest finished third in the 18Th Annual Airline Quality Rankings. The rankings are based on four criteria: on-time arrival, denied boarding, mishandled baggage, and consumer complain statistics. The airline industry had a terrible year in 2007, finishing with its worst ranking ever. Southwest climbed from sixth place a year previous, but registered a decline in its score, due to problems with mishandled baggage and denied boarding.

Southwest has had issues in its maintenance department over the past year. In March, they pulled 38 jets, resulting in 126 cancelled flights. The issue was a type of maintenance check that had not been performed. Southwest is already facing regulatory and congressional investigations of its decision in 2006 to continue flying planes that should have been grounded. Furthermore, an FAA audit of Southwest's maintenance practices resulted in a $10.

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2 million fine to the airline this March.

4) Southwest's has strong profitability ratios relative to AMR, the parent corporation of American Airlines. Southwest has a gross margin of 26.14%, ahead of AMR's 21.83%. The difference was more dramatic in terms of operating profit margin and net profit margin.

5) Southwest recorded stronger asset utilization ratios than did AMR. LUV had a return on assets of 4.27%, and a return on invested capital of 0.26%. The airline business is so capital-intensive and with such slim profit margins that these numbers are never strong. For AMR the return on assets was a mere 1.75%.

6) Southwest is more liquid than is American Airlines. Both airlines have fairly strong current, quick and cash ratios, but Southwest has a slight edge in all three.

7). Southwest has a strong interest coverage ratio, whereas AMR lost money and is thus not able to cover their debt obligations. In the airline business, debt is only one fixed obligation - airplane leases and landing fees are fixed obligations that are essential to the conduct of business, which makes the fixed charge coverage ratio more valuable. For Southwest, this is.594, not unusual for the industry but significantly weaker than their interest coverage.

8) the Dupont number for Southwest is 0.16. AMR lost money and has no equity. The Dupont number is 0.113 inasmuch as this has any meaning without profit or equity. For Southwest, the number reflects that they did not make much money for the amount of shareholder's equity.

9) Southwest has a more healthy degree of financial leverage than does AMR. AMR's lack… READ MORE

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Quoted Instructions for "Stock Market Southwest Airlines vs. American" Assignment:

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Stock Market Project

You will analyze a major U.S. corporation and recommend whether to buy, sell, or hold its common stock. The stock and American Airlines will be selected by your instructor and disclosed during the first week in class. You will be graded on the deliverables listed below and your thought process in making your recommendation to buy, sell, or hold. Please do all calculations using data from the most recent quarterly reports and clearly state the dates of the reports and the dates that end the quarter being reported.

Your paper, submitted in Word, will include the following information:

2) A one-paragraph discussion describing the history and business of Southwest Airlines. This is not required for American Airlines. Cite the source on your References page.

3) A summary (one or two paragraphs) of recent news articles about Southwest Airlines. This is not required for American Airlines. Cite the sources on your References page.

4) A written analysis comparing Southwest Airlines profitability ratios versus those of American Airlines. Provide supporting Exhibit A with the ratios of Southwest Airlines and American Airlines. Cite the source of the ratios.

5) A written analysis comparing Southwest Airlines asset utilization ratios versus those of American Airlines. Provide supporting Exhibit A with the ratios of Southwest Airlines and American Airlines. Cite the source of the ratios.

6) A written analysis comparing Southwest Airlines liquidity ratios versus those of American Airlines. Provide supporting Exhibit A with the ratios of Southwest Airlines and American Airlines. Cite the source of the ratios.

7) A written analysis comparing Southwest Airlines debt utilization ratios versus those of American Airlines. Provide supporting Exhibit A with the ratios of Southwest Airlines and American Airlines. Cite the source of the ratios.

8) A written analysis comparing Southwest Airlines Du Pont number with the Du Pont number of American Airlines. Provide supporting Exhibit B with the Du Pont calculation for Southwest Airlines and American Airlines. Cite the source of the data.

9) A written analysis comparing Southwest Airlines degree of operating leverage, degree of financial leverage, and degree of combined leverage with those of American Airlines. Provide supporting Exhibit C with these calculations for Southwest Airlines and American Airlines. Cite the source of the data.

10) Compare Southwest Airlines cost of capital with that of American Airlines. Explain your assumptions in the paper. Provide supporting Exhibit D. Cite the source of your data and any assumptions that you may have to make. You may use the AYTM-WACC Calculator to do the computations.

11) A section describing how Southwest Airlines stock has performed over the past two years versus American Airlines. Compare on a month-to-month basis to see if they move in the same direction. This can be done using data from a variety of reputable sources online.

12) A section in which the present value of the next five years of Southwest Airlines expected earnings are computed. Use the cost of capital (rounded to the nearest whole number) as the discount rate for the computation. Find the growth rate of earnings over the last five years and assume that same growth rate over the next five years. You may use the TVM calculator or the TVM tables for this computation. Also, compute the price earnings ratio (PER) at each of the most recent four quarterly earnings reports and discuss the changes, if any. Remember that PER is based on annual earnings. Use the trailing 12-month*****s EPS for these computations.

13) A recommendation section where you state whether to Buy, Sell, or Hold.

14) References page and in-text citations including the URL and the date accessed for web sources.

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