Southwest Airlines: Analysis, Valuation, and Prospects for Growth in the Near Future
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Memorandum From: To: Brandon Mills, Executive Director of the DD Investment Fund Date: 12th December 2012 Subject: Southwest Airlines-Analysis and Valuation The current memo outlines the analysis and valuation of Southwest Airlines along with sectoral trends in the US airline industry, its prospects for growth in the near future
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Overvie w of the US Airlines Industry and Growth Prospects In the last 20 years, capacity in the US airline industry has grown at a CAGR of 1.4 % to ~ 1,012 billion available seat miles while passenger traffic has grown at a CAGR of 2.7% to 826 billion revenue passenger miles. Thus capacity utilisation has steadily increased from 63% in the year 1990 to 82% in the year 2011. The mean capacity utilisation of the airline industry is 72% while the median stands at 71%. The historical trends over the last 20 years have been outlined in Annexure 1. Industry Revenue has grown @ 2.92% CAGR to ~104 bn $. The industry is only marginally profitable with average returns (Industry Operating Profit/Industry Assets) of merely 0.7% across the last 20 years. The trends in returns in outlined in Annexure 2. ROIC below WACC translates to loss of investor wealth. The Annexure 3 depicts the trend between Passenger Revenue and GDP (Source : MIT Airline Data Project) Annual U.S Domestic Average Itinerary Fare has grown at a CAGR of merely 1.38% from $292 to $ 364. However it registered healthy growth rates of 8.4% and 8.2% in 2010 and 2011. The market share of key players is set out in Anne xure 4 and 5. It may be seen that the top 5 players after the mergers - Delta Air Lines Inc., American Airlines Inc., United Air Lines + Continental, Southwest +Airtan and US Airways Inc. control 80% of the market. This shows signs of consolidation in the US industry. The factors that are at play in the current scenario are as follows: a) Economic trends are weak
Memorandum From: To: Brandon Mills, Executive Director of the DD Investment Fund Date: 12th December 2012 Subject: Southwest Airlines-Analysis and Valuation The current memo outlines the analysis and valuation of Southwest Airlines along with sectoral trends in the US airline industry, its prospects for growth in the near future
contact@solvemyassignment.com
http://solvemyassignment.com/
Overvie w of the US Airlines Industry and Growth Prospects In the last 20 years, capacity in the US airline industry has grown at a CAGR of 1.4 % to ~ 1,012 billion available seat miles while passenger traffic has grown at a CAGR of 2.7% to 826 billion revenue passenger miles. Thus capacity utilisation has steadily increased from 63% in the year 1990 to 82% in the year 2011. The mean capacity utilisation of the airline industry is 72% while the median stands at 71%. The historical trends over the last 20 years have been outlined in Annexure 1. Industry Revenue has grown @ 2.92% CAGR to ~104 bn $. The industry is only marginally profitable with average returns (Industry Operating Profit/Industry Assets) of merely 0.7% across the last 20 years. The trends in returns in outlined in Annexure 2. ROIC below WACC translates to loss of investor wealth. The Annexure 3 depicts the trend between Passenger Revenue and GDP (Source : MIT Airline Data Project) Annual U.S Domestic Average Itinerary Fare has grown at a CAGR of merely 1.38% from $292 to $ 364. However it registered healthy growth rates of 8.4% and 8.2% in 2010 and 2011. The market share of key players is set out in Anne xure 4 and 5. It may be seen that the top 5 players after the mergers - Delta Air Lines Inc., American Airlines Inc., United Air Lines + Continental, Southwest +Airtan and US Airways Inc. control 80% of the market. This shows signs of consolidation in the US industry. The factors that are at play in the current scenario are as follows: a) Economic trends are weak