US Airways Cost Analysis - Essay Example

? Company Analysis Cost Analysis Table of Contents Table of Contents 2 How much do US Airways profits fluctuate due to fuel volatility? 3 2. Why isfuel volatility bad for profits? Do a cost analysis alone, and then do a full profit maximizing analysis. 3 3.What is Express Operation’s operating cost per ASM? What is its operating cost per RPM? What is the difference between these two numbers? 4 4.Calculate the same numbers for US Airways. Why does Express do such worse? 5 5.Why will the merger benefit the firms? 6 6.Why do you think the FTC allowed the UA-CO merger but is blocking the AA-US merger? 6 Works cited 8 1. How much do US Airways profits fluctuate due to fuel volatility? The quarterly report of 2013 of US Airways shows that, as compared to 2012, the net income earned by the company in the second quarter of 2013 has decreased, which has further lowered the Earnings per Share (EPS) available to the shareholders. The reason for this decrease in profits can be apportioned to the volatility in prices of fuel. As mentioned in the quarterly report of 2013, on a daily basis the prices of Brent crude oil had fluctuated between $110 per barrel to $97 per barrel in the month of April, and in the quarter end the price was found to be $102 per barrel. Although the U.S. airline Industry is facing moderate fuel prices in the second quarter of 2013, but in the 1st quarter of 2012, the industry faced higher volatility and uncertainty which have affected the business. The uncertainty in the prices of fuel has caused disruptions in the supply of aircraft fuel and has adversely affected the operating results and liquidity of the company. 2.  Why is fuel volatility bad for profits? Do a cost analysis alone, and then do a full profit maximizing analysis. Volatility in the prices of fuel has serious affects on profits of the company. The volatility results in ups and downs in dividends and share prices which adverse affects global growth. Volatility in the prices of fuel also affects output, operations and cash flow, which in turn affects profitability. The cost of express and mainline fuel was $1.13billion in the second quarter of 2013, which was 4.6% or $55million lower as compared to the second quarter of 2012. The company is trying to maintain a low cost structure, but it is dependent on two factors, the health of the economy and the price of fuel. The mainline costs per available seat mile excluding special items, fuel and profits have decreased by 0.4%, i.e. 0.04cents, from 8.25cents in the second quarter of 2012, to 8.21cents in the second quarter of 2013. In such a situation, the company can attempt to maximize its profits by an attempt to minimize its risks by adopting risk control measures. Systematic risk is not under the control of the company, but the company may try to overcome unsystematic risks with the help of strategic decisions. 3. What is Express Operation’s operating cost per ASM? What is its operating cost per RPM? What is the difference between these two numbers? Cost per Available Seat Miles (CASM) is a measure of unit cost used commonly in the airline industry. It is expressed in cents to manage each seat mile offered. It is computed by dividing various measures of operating revenue by ASM (Available Seat Miles). Cost per ASM is used to compare costs of different airlines or of the same airline across different time periods. A lower CASM makes it easier for an airline to make profit, but does not guarantee profitability. Revenue Passenger Mile (RPM) is created when a passenger pays to fly one mile and is considered to be the basic measure of airline passenger traffic. RPM can be considered to be the basic amount of production created by an airline. RPM can be calculated by multiplying the number of filled seats by the number of miles flown. Over an airline’s system ASM can be compared to RPM to determine the total passenger load factor. RPM is frequently compared to ASM, as ASM determines the total number of passenger miles that could be produced to verify the amount of revenue earned in comparison to the total revenue. 4. Calculate the same numbers for US Airways. Why does Express do such worse? The total operating revenues in the second quarter of 2013 were $3.91billion as compared to $3.80billion in 2012, i.e. an increase by 2.9%, i.e. $110million. As a results of this increase the significant changes that occurred in the components of operating revenues are- Mainline passenger revenues were $2.57billion in the second quarter of 2013 as compared to $2.45 billion in 2012. The Mainline RPM has increased 5.9% as mainline capacity and ASM increased by 4.2%, resulting in a 1.4point increase in load factor to a record 86.0%. The express passengers revenues were $882 million in the second quarter of 2013 as compared $916million in 2012. The Express RPMs increased by 3.5% as express capacity, and ASM decreased by 0.3% resulting in a 3.0point increase in the load factor to a record 79.8%. The express did such a worse because the company have not entered into any transactions to hedge their fuel consumption inspite of being aware of the fact that, one percent increase in the price of per gallon of fuel would result in an increase of $15million in the annual expense of the company. Thus the company’s operations were affected by any increase or decrease in the prices of fuel. 5. Why will the merger benefit the firms? The merger is said to benefit the firms US Airways and AMR Corporation (i.e. American Airlines) because of the following reasons. The employees of American Airlines will be able to receive industry competitive compensation and benefit packages, which will inspire the employees to create new opportunities for advancement and growth over the long-term. The merger if successful will help the companies to earn huge amount of revenue, since on merger they will form the world’s largest carrier. The new company would act as a monopoly in the London-Philadelphia route, offering greater number flights in more routes. Thus frequent fliers would enjoy service to more cities with greater depth of schedule offerings and travel options (American Airlines and US Airways: Combination is good for Pennsylvania and Delaware, 1). The merger would generate added revenue of more than $1.5billion per year, with an additional cost savings. This will give a stronger competitive base to the merged company. 6. Why do you think the FTC allowed the UA-CO merger but is blocking the AA-US merger? According to the Federal Trade commission, the reason behind approving the merger between United Airlines and Continental was that the commission realized that the merger would help the industry to return to a better profitable and stable position, and would also lead to a rise in the fares without any adverse effect on the airline customers. But, the commission felt that the merger between American Airlines and US Airways would lead to an increase in the cost of the consumers because of higher fare prices and fees, which would in turn affect competition and the airline industry. The commission realized that since the merger will create the world’s largest airline, it would act as a kind of monopoly in the industry. Thus, this merger would lead to an increase in frustration among airline customers because of rising fares, increased fees, and cuts in available seats and services. Works cited NewAmericanarriving. American Airlines and US Airways: Combination is good for Pennsylvania and Delaware. 2013. Web. 10 Sept. 2013. . US Airways Inc. XNYS: LCC US Airways Group, Inc Quarterly Report. 2013. Web. 16 Sept. 2013. . Mouawad, Jad. U.S., Filing Suit, moves to Block Airline Merger. 2013. Web. 16 Sept. 2013. . Yang, Jia Lynn, and Ashley Halsey III. Antitrust officials sue to block US Airways-American Airlines merger. 2013. Web. 16 Sept. 2013. < http://articles.washingtonpost.com/2013-08-13/business/41355437_1_airways-american-american-airlines-albert-foer>. Read More