5) Discuss how to solve the airline's most pressing problems.

HINT: the sources and uses of funds statement will tell you that the airline violated the matching principle which is the maturity structure of assets and liabilities.

Think about both major solutions and minor solutions.

(I included all the information leading up to the questions, my question here is only question number 5)

Case Study 1 RATIO ANALYSIS WELLINGTON AIRLINES Myers is the new treasurer of Wellington Airlines. She graduated from a major Melssity in Delaware with a M.B.A. in Finance. After five years of experience with one the "big eight" CPA firms in New York, she joined the accounting staff of Midwest Airlines assumed the position of treasurer at Wellington Airlines on May 3, 1986. One of her first responsibilities is to analyze the company's financial condition shortly after the airline's fiscal year, which ended on June 30, 1986. and served in a variety of accounting and finance positions for ten years. Exhibit 1 Wellington Airlines Balance Sheets as of June 30, 1985-1986 (in millions of dollars) 1985 1986 Cash Accounts receivable Maintenance and supplies inventory 140 196 210 $420 5392 1,680 2,072 700 784 980 1288 $1,400 S1,680 $63 $76 Total current assets Gross plant and equipment Less: accumulated depreciation Net plant and equipment Total assets Accounts payable Notes payable $175 $406 273 280 280 280 622 214 $1,400 $1,680 Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and net worth 95 PART 2: CASE STUDIES Melissa Myers has seen major changes in the airline indu competition a 96 ) in 1978. The ATRDsenacted ent to the Federal Aviation Act of 1958, de This law, among other things, increased com airlines into the marketplace. Before 1978, tilitaesy signid lated fares and authorized routes for airlines. Under the 1978 phased out by the end of 1985 Wellington Airlines added several cities to its routes shortly af the industry because management felt such a move would facilitat the deregulation purchased a number of new airplanes to meet its expa Air Transportation Regulatory Reform Act (ATRRA regulated the airline indust e entry ard (CAB) had ta legislation, the CAB B e Civil Aero nautics BoardCABL Of routes and anes. These new airplanes were mostly financed by short-term bank lopated asing from profits generated by the expansion. However, the airline encoun fare and route competition from other trunk carriers. The indu 1978 caught Wellington with huge fixed costs and expensive labor agen regional carriers, free of such cumbersome overhcad, we profitably, but Wellington's ability to do so downturn depressed passenger traffic, thereby causing a glut of airline capacity re able to offer lower fr was strained. Furthermore, the economic Exhibit 2 Wellington Airlines Income Statement for Year Ended June 30,1986 (in millions of dollars) Operation revenues Passengers Freight Other $1,830 95 35 Total revenues $1,960 Operation expenses Flying operations Maintenance Equipment and passenger services Promotion and sales General and administrative Depreciation 662 212 523 209 52 84 1,742 Total operating expenses Operating income Interest expense 5160 80 Earnings before tax Tax Earning after tax Case Study 1: Ratio Analysis 97 one of the largest airlines in the United States, is headquartered in Los ia. Since its establishment in 1917, the company has successfully weath- cclical fluctuations characteristic of the airline industry, But as with rest of he airline industry, its sales and profitability for the last few years severely declined. The failure of Braniff Airlines reflected the serious problems facing the entire airline industry because of business slowdowns, deregulation of the industry, the air traffic controllers' strike, higher fuel costs, and intensified competition. Expanding operations had resulted in an increasingly strained working capital position for Wellington. Profits for the airline had dropped considerably since its expansion program started early in les, Californ 1979 (see Exhibits 1, 2 and 3). Exhibit 3 Industry Average Ratios Ratios Current ratio Quick ratio Average collection period Asset turnover Debt ratio Times interest earned Profit margin on sales Return on investment Industry 3.5 times 1.50 times 30.0 days 1.20 times 45.0 percent 4.10 times 4.00 percent 4.80 percent 8.73 percent Rcturn on net worth7 ret Calculate the appropriate ratios of liquidity,leverage activity, and profitability for Wellington. QUESTIONS . Would happen to net working capital if Wellington Airlines used $10 on cash to pay off $10 million long-term debt in 19862 What would hap- pen to inventory in 1986. List net working capital if Wellington Airlines used $10 million cash to buy 3. 4. discuss cautions which must be taken in using industry average ratios. pany intered an increasingly strained working capital position. s how to solve the airline's most pressing problems. repare Wellington's funds flow statement and then explain why the com encoun 5. Discuss wo to http://finance yahoo.com. Enter ticker symbol DAL, and you will find arious information about Delta Airlines inc Internet Questions 1, nce.yahoo.com