please i just need the formulars to this questios
The airline industry is one of the more volatile industries. During lean years in the early 1990s, the industry wiped out the earnings it had reported during its entire history. Pan American Airlines and Eastern Airlines ceased operations, while Continental Airlines, TWA, and US Air filed for bankruptcy protection. The industry bounced back in the mid-1990s, riding on the wings of the U.S. economic prosperity and lower energy prices. The airlines have been especially profitable since 1996, with returns on equity often in excess of 25%. The stock market has recognized the stellar growth in profitability as the market capitalization of many airlines has tripled since then. Volatility in airlines earnings arises from a combination of demand volatility, cost structure, and competitive pricing. Air travel demand is cyclical and sensitive to the economys performance. The cost structure of airlines is dominated by fixed costs, resulting in high operating leverage. While most airlines break even at 60% flight occupancy, deviations from this can send earnings soaring upward or downward. Also, the airline industry is price competitive. Because of their cost structure (low variable but high fixed costs), airlines tend to reduce fares to increase market share during a downturn in demand. These fare reductions often lead to price wars, which reduces average unit revenue. Hence, airfares are positively correlated with volume of demand, resulting in volatile revenues. When this revenue variability is combined with fixed costs, it yields volatile earnings. Airline companies lease all types of assetsaircraft, airport terminal, maintenance facilities, property, and operating and office equipment. Lease terms range from less than a year to as much as 25 years. While many companies report some capital leases on the balance sheet, most companies are increasingly structuring their leases, long-term and short-term, as operating leases. The condensed balance sheets and income statements along with excerpts of lease notes from the 1998 and 1997 annual reports for AMR (American Airlines), Delta Airlines, and UAL (United Airlines) follow.
NOTE: Both the capital and operating leases are noncancellable. Interest rates on the leases vary from 5% to 14%. (Assume a 35% marginal tax rate for all three companies.)
Required:
a. Compute key liquidity, solvency, and return on investment ratios for 1998 (current ratio, total debt to equity,
long-term debt to equity, times interest earned, return on assets, return on equity). Comment on the financial
performance, financial position, and risk of these three companiesboth as a group and individually.
b. To understand the effect of high operating leverage on the volatility of airlines earnings, prepare the following
sensitivity analysis: Assume that 25% of airline costs are variablethat is, for a 1% increase (decrease) in
operating revenues operating costs increase (decrease) by only 0.25%. Recast the income statement assuming
operating revenues decrease by two alternative amounts: 5% and 10%. What happens to earnings at these
reduced revenue levels? Also, compute key ratios at these hypothetical revenue levels. Comment on the risk
of these companies operations.
c. Why do you think the airline industry relies so heavily on leasing as a form of financing? What other financing
options could airlines consider? Discuss their advantages and disadvantages versus leasing.
d. Examine the lease notes. Do you think the lease classification adopted by the companies is reasonable? Explain.
e. Reclassify all operating leases as capital leases and make necessary adjustments to both the balance sheet
and income statement for 1998. [Hint: (1) Use the procedures described in the chapter. (2) Assume identical
interest rates for operating and capital leases. (3) Do not attempt to articulate the income statement with
the balance sheet, i.e., make balance sheet and income statement adjustments separately without tallying
the effects on the two statements. (4) Make adjustments to the tax provision using a 35% marginal tax rate.
Since all leases are accounted for as operating leases for tax purposes, converting operating leases to capital
leases will create deferred tax liabilities. However, since we are not articulating the income statement with the
balance sheet, the deferred tax effects on the balance sheet can be ignored.]
f. What assumptions did you make when reclassifying leases in (e)? Evaluate the reasonableness of these
assumptions and suggest alternative methods you could use to improve the reliability of your analysis.
g. Repeat the ratio analysis in (a) using the restated financial statements from (e). Comment on the effect of the
lease classification for the ratios and your interpretation of the companies profitability and risk (both collectively
and individually).
h. Using the results of your analysis in (g), explain the reliance of airline companies on lease financing and their
lease classifications. What conclusions can you draw about the importance of accounting analysis for financial
analysis in this case?
Note: This case involves extensive data analysis and should be done using Excel. To facilitate the analysis in Excel, the data in the tables in the Second Sheet are available in Excel format. use the excel functions, when i clicking to the cell I have to see the formula.
The airline industry is one of the more volatile industries. During lean years in the early 1990s, the industry wiped out the earnings it had reported during its entire history. Pan American Airlines and Eastern Airlines Ceased operations, while Continental Airlines. TWA, and US Air fled for bankruptcy protection. The industry bounced back in the mid-1990s, riding on the wings of the US economic prosperity and lower energy prices. The airlines have been especially profitable since 1996, with returns an equity cen in excess of 25%. The stock market has recognized the stellar growth in profitability as the market captalization of many airlines has tripled since then. Volatility in mirinos' earnings arises from a combination of demand volatility, cost structure, and competitive pricing. Air travel demand is cyclical and sensitive to the economy's performance. The cost structure of a fines is dominated by fixed costs, resulting in high operating leverage. While most afines break even at 60% tight occupancy deviations from this can send earnings soaring upward or downward. Also, the airline Industry is price competitive. Because of their cost structure low variable but high fixed costs), airlines tend to reduce fares to increase market share during a downturn in demand. These are reductions aften lead to price wars, which reduces average unit revenue Hence, airfares are positively correlated with volume of demand, resulting in volatile revenues. When this revenue variability is combined with fixed costs, 2 yields volatile canings. Artine companies lease all types of assets-aircraft, airport terminal, maintenance facilities, property, and operating and office equipment. Leese terms range from less than a year to as much as 25 years While many companies report some capital leases on the balance sheet, most companies are increasingly structuring their leases. long-term and short-term, as operating leases. The condensed balance sheets and income statements along with excerpts of lease notes from the 1998 and 1997 annual reparts for AMR American Airlines). Delta Airlines, and UAL (United Arines) follow NOTE: Both the capital and operating lesses are non antelable. Interest rates on the lesses vary from 5% to 14% (Assume a 35% marginal tax rates for all three companies.) Required a Compute key liquidity, solvency, and ratum on investment ratios for 1998 (curent ratio, total debt to quity long-term debt to equity, times interest earned, retum an assets, retum en equity). Comment on the financial performance financial position, and risk of these three companior-both as a group and individually b. To understand the effect of high operating leverage on the volatility of arines camings, prepare the following sensitivity analysis: Assume that 25% of alline costs are variable--that is for a 1% increase (decrease) in operating revenues operaing costs increase (decrease) by only 0.25% Recast the income statement assuming operating revenues decrease by two alternative amounts: 5% and 10%. What happens to earnings at these reduced revenue levels? Also, compute key ratios at these hypothetical revenue levels. Comment on the risk of these companied persons c. Why do you think the arine industry relies so heavily on leasing as a form of financing? What other financing options could airlines consider? Discuss their advantages and disadvantages versus leasing, d. Examine the lease notes. Do you think the lease classification adopted by the companies is reasonable? Explain Reclassily all operating leases capital lases and make necessary adjustments to both the balance sheet and income statement for 1998. Hint: (1) Use the procedures described in the chapter (2) Assume identical interest rates for operating and capital leasts (3) Do not attempt to articulate the income statement with the balance sheet iemake balance sheet and income statement adjustments separately without twlying the effects on the two statements (4) Make adjustments to the tax provision using a 35% marginal tax rate Since all teases are accounted for as operating lases for tax purposes, converting operating teases to capital leases will create deferred tax liabilities. However, since we are not articulating the income statement with the balance sheet the deferred tax effects on the balance sheet can be ignored. 1. What assumptions did you make when reclassifying leases in (e? Evaluate the reasonableness of these assumptions and suggest alterative methods you could use to improve the reliability of your anaysis g. Repeat the ratio analysis in (a) using the restate financial statements from (e). Comment on the effect of the lease classification for the ratios and your interpretation of the companies' profitability and risk (both collectively and individusly! Using the results of your analysis in, explain the reliance of airine companies on lease financing and then Inase clications. What conclusions can you draw about the importance of accounting analysis for financial analysis in this so? Note: This case involves extensive data analysis and should be done using Excel. To facilitate the analysis in Excel, the data in the tables in the Second Shoot are available in Excel format use the excel functions, when I clicking to the celll have to see the formula PLEASE UPLOAD THE ASSIGNMENT TO THE MOODLE OTHERWISE THE ASSIGNMENT WILL NOT BE GRADED Question Answer TAM SM IVE Ida 1998 DAL 1997 1907 1998 1998 19 199 1997 Cung 4875 45 13 1951 2147 CA 00 LAIN Intangible Other 149 Intang Other 2714 10 . HS Price of Capel 115 17 154 545 6 4314 40 Other Current La AT 1911 1418 14 Other Long Term Liabilities hefredak 3. 615 156 791 Preferred Sack 2.77 Carbuled Capital 49 1415 1778 12 IN 14 13.741 IR Ir Stall Red Start Du 11 11 11 OM 141 IN Tas 21 1412 Here Question Answer MLP - 13 TIC 950 11 IRE 951 06 1 193 214 190 51 59 59 4 w 341 106 16 1.24 10 11 21.79 10. 11 TML WE IT IS 10 Present of MLP BB Erma For MLPINE SSE 10 SIV 3 341 DO PIE CA EFE 1 ET 57 05 277 11 TMLP Il 105 SHINI 14 153 PMLP 1184 Question Answer OM Owl MLP 101 LAR 1995 350 DIS 363 341 91 57 57 247 135 271 11 11 Bandar Total MLP 14:00 33 SE PMP A AL MR (141 Hatles Return To Am Scality Assy MR TAL 10 10 Head Stafur Red for 1998 Question Answer Cheers Interest Other Income & Adjustments Intra Carglar drop in Coming som Red Hati (17 Total de to quity Long Term Date Equity Times Interested Return Investment Rotone Toalets Center Operating sa Capital.com Amste Average Helsing Lease Term 1 MLP MLP Hiperted . Are years 5 Question Answer + Add of reported year 3 Average A. Kotimate Anurag Romslig Lone Ter ( MLPY MLP in Last Reported 1 3 4 5 AM dan AL 1997 Baterials MLPD New Les Principal component Pop Arap MLP HTML 15 Ave MLP I MIX JAL 1990 1990 Latest and Depren peringan 19 Interest Hispense 20 of Operating Lease Assets 21 Arago Romanian Term Este eet of Operating Le Covenance Statement 24 Decreme in Lee Real Expense 23 feet on Operating.com 25 Therese in interest Expense 23 Decrease in Tus P 099 G.Derde Praial dateret Compleut Var's MLP 10 New Yow MLP stated Compe H. Despese Operating Lease Laylate Created Current Compass 33 Total Operating Lease Liability 35 med No Curves ortion ... VODAFONE 21:26 a chegg.com home / study / business / accounting / accounting questions and answers / the airline industry is one of... Question: The airline industry is one of the more volatile industries. During lean years i... The airline industry is one of the more volatile industries. D the industry wiped out the carnings it had reported durin Airlines and Eastern Airlines ceased operations, while Cont filed for bankruptcy protection. The industry bounced bac wings of the US economic prosperity and lower energy prio profitable since 1996, with returns on equity often in excess ognized the stellar growth in profitability as market capital since then. Volatility in airlines' earnings arises from a combination and competitive pricing. Air travel demand is cyclical and madhu fi This question hasn't been answered yet ASK FOR ANSWER + :) .. VODAFONE 21:26 a chegg.com 5,485 5,437 4,514 4,021 1,764 2,436 5,766 1,629 2,248 5,194 249 1,533 4,046 175 32 1.47 3.69 15 3,257 4,729 (1.288) $22,303 3.286 3.415 (485) $20.859 3.299 1.776 (1.052) $14,603 2.89 81 076 $12.74 Other current liabilities Long-term liabilities Lease liability Long-term debt Other long-term liabilities Preferred stock Shareholders' equity Contributed capital. Retained earnings Treasury stock Total liabilities and equity. Income Statement (5 millions) Operating revenue Operating expenses Operating income Other income and adjustments Interest expense" Income before tax. Tax provision Continuing income $13.5 $18.184 (16.277) (12.01 1,5 $19.205 (16,867) 2.338 198 (372) 2,164 (858) $ 1,306 1,907 137 (420) 1,624 (651) $14,138 (12.445) 1,693 141 (197) 1.637 (547) $ 990 (2 1.4 $ 973 $ lectudes preference dividends. AMR DELTA Operating Capital Operating is no Capital Excerpts from Lease Notes (1998) MUPD 19. $ 273 2000 341 2001 274 $ 1,012 951 949 904 $100 67 57 57 $ 950 950 940 960 323 This question hasn't been answered yet ASK FOR ANSWER umet BER 77 LEEE w III - as ir ME 5 R! ESS D th La 5 CSR - ME ! 135 fiy 77 SITE w RE BER . SM MF th La 5 The airline industry is one of the more volatile industries. During lean years in the early 1990s, the industry wiped out the earnings it had reported during its entire history. Pan American Airlines and Eastern Airlines Ceased operations, while Continental Airlines. TWA, and US Air fled for bankruptcy protection. The industry bounced back in the mid-1990s, riding on the wings of the US economic prosperity and lower energy prices. The airlines have been especially profitable since 1996, with returns an equity cen in excess of 25%. The stock market has recognized the stellar growth in profitability as the market captalization of many airlines has tripled since then. Volatility in mirinos' earnings arises from a combination of demand volatility, cost structure, and competitive pricing. Air travel demand is cyclical and sensitive to the economy's performance. The cost structure of a fines is dominated by fixed costs, resulting in high operating leverage. While most afines break even at 60% tight occupancy deviations from this can send earnings soaring upward or downward. Also, the airline Industry is price competitive. Because of their cost structure low variable but high fixed costs), airlines tend to reduce fares to increase market share during a downturn in demand. These are reductions aften lead to price wars, which reduces average unit revenue Hence, airfares are positively correlated with volume of demand, resulting in volatile revenues. When this revenue variability is combined with fixed costs, 2 yields volatile canings. Artine companies lease all types of assets-aircraft, airport terminal, maintenance facilities, property, and operating and office equipment. Leese terms range from less than a year to as much as 25 years While many companies report some capital leases on the balance sheet, most companies are increasingly structuring their leases. long-term and short-term, as operating leases. The condensed balance sheets and income statements along with excerpts of lease notes from the 1998 and 1997 annual reparts for AMR American Airlines). Delta Airlines, and UAL (United Arines) follow NOTE: Both the capital and operating lesses are non antelable. Interest rates on the lesses vary from 5% to 14% (Assume a 35% marginal tax rates for all three companies.) Required a Compute key liquidity, solvency, and ratum on investment ratios for 1998 (curent ratio, total debt to quity long-term debt to equity, times interest earned, retum an assets, retum en equity). Comment on the financial performance financial position, and risk of these three companior-both as a group and individually b. To understand the effect of high operating leverage on the volatility of arines camings, prepare the following sensitivity analysis: Assume that 25% of alline costs are variable--that is for a 1% increase (decrease) in operating revenues operaing costs increase (decrease) by only 0.25% Recast the income statement assuming operating revenues decrease by two alternative amounts: 5% and 10%. What happens to earnings at these reduced revenue levels? Also, compute key ratios at these hypothetical revenue levels. Comment on the risk of these companied persons c. Why do you think the arine industry relies so heavily on leasing as a form of financing? What other financing options could airlines consider? Discuss their advantages and disadvantages versus leasing, d. Examine the lease notes. Do you think the lease classification adopted by the companies is reasonable? Explain Reclassily all operating leases capital lases and make necessary adjustments to both the balance sheet and income statement for 1998. Hint: (1) Use the procedures described in the chapter (2) Assume identical interest rates for operating and capital leasts (3) Do not attempt to articulate the income statement with the balance sheet iemake balance sheet and income statement adjustments separately without twlying the effects on the two statements (4) Make adjustments to the tax provision using a 35% marginal tax rate Since all teases are accounted for as operating lases for tax purposes, converting operating teases to capital leases will create deferred tax liabilities. However, since we are not articulating the income statement with the balance sheet the deferred tax effects on the balance sheet can be ignored. 1. What assumptions did you make when reclassifying leases in (e? Evaluate the reasonableness of these assumptions and suggest alterative methods you could use to improve the reliability of your anaysis g. Repeat the ratio analysis in (a) using the restate financial statements from (e). Comment on the effect of the lease classification for the ratios and your interpretation of the companies' profitability and risk (both collectively and individusly! Using the results of your analysis in, explain the reliance of airine companies on lease financing and then Inase clications. What conclusions can you draw about the importance of accounting analysis for financial analysis in this so? Note: This case involves extensive data analysis and should be done using Excel. To facilitate the analysis in Excel, the data in the tables in the Second Shoot are available in Excel format use the excel functions, when I clicking to the celll have to see the formula PLEASE UPLOAD THE ASSIGNMENT TO THE MOODLE OTHERWISE THE ASSIGNMENT WILL NOT BE GRADED Question Answer TAM SM IVE Ida 1998 DAL 1997 1907 1998 1998 19 199 1997 Cung 4875 45 13 1951 2147 CA 00 LAIN Intangible Other 149 Intang Other 2714 10 . HS Price of Capel 115 17 154 545 6 4314 40 Other Current La AT 1911 1418 14 Other Long Term Liabilities hefredak 3. 615 156 791 Preferred Sack 2.77 Carbuled Capital 49 1415 1778 12 IN 14 13.741 IR Ir Stall Red Start Du 11 11 11 OM 141 IN Tas 21 1412 Here Question Answer MLP - 13 TIC 950 11 IRE 951 06 1 193 214 190 51 59 59 4 w 341 106 16 1.24 10 11 21.79 10. 11 TML WE IT IS 10 Present of MLP BB Erma For MLPINE SSE 10 SIV 3 341 DO PIE CA EFE 1 ET 57 05 277 11 TMLP Il 105 SHINI 14 153 PMLP 1184 Question Answer OM Owl MLP 101 LAR 1995 350 DIS 363 341 91 57 57 247 135 271 11 11 Bandar Total MLP 14:00 33 SE PMP A AL MR (141 Hatles Return To Am Scality Assy MR TAL 10 10 Head Stafur Red for 1998 Question Answer Cheers Interest Other Income & Adjustments Intra Carglar drop in Coming som Red Hati (17 Total de to quity Long Term Date Equity Times Interested Return Investment Rotone Toalets Center Operating sa Capital.com Amste Average Helsing Lease Term 1 MLP MLP Hiperted . Are years 5 Question Answer + Add of reported year 3 Average A. Kotimate Anurag Romslig Lone Ter ( MLPY MLP in Last Reported 1 3 4 5 AM dan AL 1997 Baterials MLPD New Les Principal component Pop Arap MLP HTML 15 Ave MLP I MIX JAL 1990 1990 Latest and Depren peringan 19 Interest Hispense 20 of Operating Lease Assets 21 Arago Romanian Term Este eet of Operating Le Covenance Statement 24 Decreme in Lee Real Expense 23 feet on Operating.com 25 Therese in interest Expense 23 Decrease in Tus P 099 G.Derde Praial dateret Compleut Var's MLP 10 New Yow MLP stated Compe H. Despese Operating Lease Laylate Created Current Compass 33 Total Operating Lease Liability 35 med No Curves ortion ... VODAFONE 21:26 a chegg.com home / study / business / accounting / accounting questions and answers / the airline industry is one of... Question: The airline industry is one of the more volatile industries. During lean years i... The airline industry is one of the more volatile industries. D the industry wiped out the carnings it had reported durin Airlines and Eastern Airlines ceased operations, while Cont filed for bankruptcy protection. The industry bounced bac wings of the US economic prosperity and lower energy prio profitable since 1996, with returns on equity often in excess ognized the stellar growth in profitability as market capital since then. Volatility in airlines' earnings arises from a combination and competitive pricing. Air travel demand is cyclical and madhu fi This question hasn't been answered yet ASK FOR ANSWER + :) .. VODAFONE 21:26 a chegg.com 5,485 5,437 4,514 4,021 1,764 2,436 5,766 1,629 2,248 5,194 249 1,533 4,046 175 32 1.47 3.69 15 3,257 4,729 (1.288) $22,303 3.286 3.415 (485) $20.859 3.299 1.776 (1.052) $14,603 2.89 81 076 $12.74 Other current liabilities Long-term liabilities Lease liability Long-term debt Other long-term liabilities Preferred stock Shareholders' equity Contributed capital. Retained earnings Treasury stock Total liabilities and equity. Income Statement (5 millions) Operating revenue Operating expenses Operating income Other income and adjustments Interest expense" Income before tax. Tax provision Continuing income $13.5 $18.184 (16.277) (12.01 1,5 $19.205 (16,867) 2.338 198 (372) 2,164 (858) $ 1,306 1,907 137 (420) 1,624 (651) $14,138 (12.445) 1,693 141 (197) 1.637 (547) $ 990 (2 1.4 $ 973 $ lectudes preference dividends. AMR DELTA Operating Capital Operating is no Capital Excerpts from Lease Notes (1998) MUPD 19. $ 273 2000 341 2001 274 $ 1,012 951 949 904 $100 67 57 57 $ 950 950 940 960 323 This question hasn't been answered yet ASK FOR ANSWER umet BER 77 LEEE w III - as ir ME 5 R! ESS D th La 5 CSR - ME ! 135 fiy 77 SITE w RE BER . SM MF th La 5
