American Delta Southwest

< %hreat of Entry

Easy entry, given low bank borrowing rates
Highly saturated
Brand name recognition and frequent flier points important
Barriers to entry heightened by the hub system
< Bargaining Power of Suppliers
ow threat of forward integration
High supplier concentration
< Bargaining Power of Buyers
ow buyer bargaining power
Buyers can comparison shop for fares thanks to the internet
< Availability of Substitutes
ikely substitutes include automobiles, trains, and interstate bus lines.
Customers consider time, money, personal preference, and convenience when travelling
< Competitive Rivalry
ierce competition
Moderate industry growth
Carriers struggling to increase market share
High exit barriers
< Southwest
ow prices, friendly service, no "frills
ow operating expenses fuel hedging
requent, direct flights (point-to-point flights)
< American
Second largest airline
arge fleet and large number of routes
Acquisitions and mergers, international flights
ull service, brand loyalty (first frequent flyer program)
< Delta
argest airline in U.S.
ncreased international routings
Brand loyalty
Airline industry-leading airport model
2006
(Best overaII
Year)
RNOA NOPM NOAT ROE
American
Airlines
4.35% 3.7% 1.17 -22%
Delta Airlines -13% 3.22% -3.96% -53.58%
Southwest
Airlines
7.98% 7.27% 1.097 7.6%
20.36
15.63
8.75
0
5
10
15
20
25
Passenger Revenue
2004
2005
2006
-35.00
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
Profit Margin
2004 2005 2006
0.19
0.42
0.73
0.2
0.7
0.66
0.19
0.64
0.56
American Airlines Delta Airlines Southwest Airlines
"uick Ratio
2004 2005 2006
American Airlines Delta Airlines Southwest Airlines
2004 -0.77 -22 8.5
2005 -0.45 -12 10.8
2006 4.7 0.34 10.3
Operating Margin
33
30
23
20
13
10
3
0
3
2004 2003 2006
294
429
361
261
296
079
2133
1823
3128
keturn on Assets
SouLhwesL
Amerlcan
uelLa
et ncome
%otal Assets
%ime
23
20
13
10
3
0
3
2004 2005 2006
031 021 024
2328
910
1987
236
068 048
Debt to Lqu|ty
SouLhwesL
Amerlcan
uelLa
1lme
%otal iab.
%otal Equity
nformation beyond FinanciaI Statements
< Management Discussion and Analysis (MD&A)
< Independent Auditor Report
< inancial statement footnotes
< Regulatory filings
Audit report
< Accounting firm
- American, Southwest : Ernst & Young
- Delta : Deloitte & %ouche (04,05), Ernst & Young (06)
< All 3 companies received an "unqualified opinion
Useful financial information for investors
2007 2008 2009 2010
NOPAT 644,080.39 709,238.66 780,988.66 859,997.24
NOA 7,810,757.16 8,443,249.89 9,143,069.87 9,896,796.11
NOAT 1.30 1.36 1.38 1.40
FCFF 439,323.23 76,745.94 81,168.68 106,270.99
Est. Stock Price $14.53 $12.80
ActuaI Stock Price $14.62 $13.21
10 Year CAGR 10.12%
WACC 8.65%
Growth 7.70%
2007 2008 2009 2010
NOPAT 846,499.38 880,020.61 914,869.28 951,097.96
NOA 8,442,425.06 8,808,655.68 9,186,113.38 9,575,043.93
NOAT 2.84 2.83 2.82 2.81
FCFF 491,074.32 513,789.99 537,411.59 562,167.41
Est. Stock Price $30.89 $24.19
ActuaI Stock Price $30.33 $9.03
10 Year CAGR 3.96%
WACC 8.00%
Growth 2.00%
2007 2008 2009 2010
NOPAT 456,891.62 467,703.70 478,771.64 490,101.50
NOA 13,794,275.37 13,968,464.98 14,144,592.50 14,322,681.96
NOAT 1.28 1.30 1.31 1.32
FCFF 284,616.25 293,514.09 302,644.12 312,012.04
Est. Stock Price $17.26 $12.95
ActuaI Stock Price $20.72 $14.42
10 Year CAGR 2.36%
WACC 10.00%
Growth 2.00%
Based on:
< iquidity tests
< Predicted stock price
< Multiple other financial factors