The airline industry is one of the more volatile industries. During lean years in the earl the industry wiped out the earnings it had reported during its entire history. Pan Airlines and Eastern Airlines ceased operations, while Continental Airlines, TWA, and tt filed for bankruptcy protection. The industry bounced back in the mid-1990s, riding o wings of the U.S. economic prosperity and lower energy prices. The airlines have been especial profitable since 1996, with returns on equity often in excess of 25%. The stock market h ognized the stellar growth in profitability as market capitalization of many airlines has since then. has rec tripled Volatility in airlines' earnings arises from a combination of demand volatility, cost and competitive pricing. Air travel demand is cyclical and sensitive to the econonm mance. The cost structure of airlines is dominated by fixed costs, resulting in high o leverage. While most airlines break even at 60% flight occupancy, deviations from this structure operating can send earnings soaring upward or downward. Also, the airline industry is price competitive. Because o their cost structure (low variable but high fixed costs), airlines tend to reduce fares to in 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 assets-aircraft, 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 com- . The ong with excerpts of lease notes from the 1998 and 1997 annual reports for AMR (American Airlines), Delta Airlines, and UAL panies are increasingly structuring their leases, long-term and short-term, as operating leases condensed balance sheets and income statements al (United Airlines) follow. AMR DELTA UAL 1998 1997 1998 1997 1998 1997 Batance Shoets ($ millions) Assels Current assets Freehold assets (net) Leased assets (net) $ 4875 $ 4.986 3,362 $2.867 2.908 2,239 11,073 9,022 7,695 10,951 .80 2,147 2,086 347 2,103 1,694 1.832 2,597 174 299 . 3,042 2,714 1,920 Total assets $22.303 $20,859 $14,603 $12,741 $18,559 s (contr The airline industry is one of the more volatile industries. During lean years in the earl the industry wiped out the earnings it had reported during its entire history. Pan Airlines and Eastern Airlines ceased operations, while Continental Airlines, TWA, and tt filed for bankruptcy protection. The industry bounced back in the mid-1990s, riding o wings of the U.S. economic prosperity and lower energy prices. The airlines have been especial profitable since 1996, with returns on equity often in excess of 25%. The stock market h ognized the stellar growth in profitability as market capitalization of many airlines has since then. has rec tripled Volatility in airlines' earnings arises from a combination of demand volatility, cost and competitive pricing. Air travel demand is cyclical and sensitive to the econonm mance. The cost structure of airlines is dominated by fixed costs, resulting in high o leverage. While most airlines break even at 60% flight occupancy, deviations from this structure operating can send earnings soaring upward or downward. Also, the airline industry is price competitive. Because o their cost structure (low variable but high fixed costs), airlines tend to reduce fares to in 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 assets-aircraft, 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 com- . The ong with excerpts of lease notes from the 1998 and 1997 annual reports for AMR (American Airlines), Delta Airlines, and UAL panies are increasingly structuring their leases, long-term and short-term, as operating leases condensed balance sheets and income statements al (United Airlines) follow. AMR DELTA UAL 1998 1997 1998 1997 1998 1997 Batance Shoets ($ millions) Assels Current assets Freehold assets (net) Leased assets (net) $ 4875 $ 4.986 3,362 $2.867 2.908 2,239 11,073 9,022 7,695 10,951 .80 2,147 2,086 347 2,103 1,694 1.832 2,597 174 299 . 3,042 2,714 1,920 Total assets $22.303 $20,859 $14,603 $12,741 $18,559 s (contr