Financial Management Analysis – AMR Introduction According to PHX Corporate (2011) documents filed with the Securities and Exchange Commission (SEC) indicates that AMR’s principal office is located in Forth Worth, Texas. The company which operates mainly in the airline industry was incorporated in October 1982…
AMR also has a wholly owned subsidiary American Eagle Holding Corporation (AMR Eagle). AMR Eagle owns two airlines – American Eagle Airlines and Executive Airlines. This two airlines operate as regional airlines and do business as American Eagle and are known as American Eagle Carriers (PHX Corporate 2011). These airlines act as feeders for American Airlines. Information provided by PHX Corporate (2011) indicates that American Airlines also have contractual arrangements with independently owned regional airlines which does business as American Connection. These operations consist of a fleet of approximately 900 aircraft which serves approximately 250 cities in some 50 countries with an average of approximately 3,400 flights daily. AMR through its airlines faces competition on its domestic route from Air Tran Airways, Alaska airlines, Continental Airlines, Delta Airlines, Frontier Airlines, Jet Blue, Hawaiian Airlines, Southwest Airlines, Spirit Airlines, United Airlines, US Airways, Virgin American Airlines and their affiliated regional carriers (PHX Corporate 2011). Other competitors that provide domestic transportation include ground and rail services. The competition that AMR’s subsidiaries face has implications for the pricing of the services that they offer and for the profitability and continued viability of their operations. American Airlines has entered into various arrangements with other carriers and transportation providers including Jet Blue and other airlines operating out of other countries such as British Airways. Analysis of AMR’s operation This paper analyzes AMR’s financial statements, assesses the impact of financing techniques, assesses various market alternatives such as bond and securities markets as alternatives to raising capital, and evaluates the impact of varying the levels of working capital. Profitability Ratios According to SEC filings the company has accumulated losses of over $5.9 billion. Profitability ratios show the effects of a combination of factors. Brigham and Ehrhardt (2005) indicate that it is the combined effects of liquidity, the management of assets and the impact of debt on the operating results. The table below shows a number of ratios that impact profitability. AMR Corporation Key Performance Indicators Profitability Ratios 2010 2011 Gross Profit Margin 49.63% 40.80% Net Profit Margin -2.12% -2.90% Return on capital employed -0.56 -0.9 Return on equity -47.89 Table 1 – Profitability Ratios Table 1 indicates that over 50% of the company’s revenue is spent on cost of sales resulting in gross profit margins of 49.63% for 2010 and 40.8% in 2011, which suggests an 8.8% reduction in the gross profit margin. These figures indicates increasing costs and would suggests that unless operating expenses can be reduced substantially the corporation will continue to make huge losses. The net profit is calculated by deducting AMR’s operational expenses from its gross profit and represents earnings before tax (EBT) as a percentage of revenues. Brigham and Ehrhardt (2005) indicate that this ratio indicates the profit per dollar of sales. In this case the figures are negative and indicate the losses generated for each dollar of sales. The information in Table 1 indicates that the net profit margins for the year 2010 and the current 2011 period are negative 2.12% and negative 2.90%. When combined with the information of the gross profit margins for both periods the information suggests that operating ...
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