* From the trend analysis on the industry total size for the US, we can see that air freight and airlines are much bigger than airport services and they were constantly growing until 2020 when air freight accelerated its growth, but airlines plummeted in both revenue and profits due to COVID19. * In fact, almost all airlines and airports lost money in that year. However, both airlines and airport services industries bounced back in 2021.

* The industry trend analysis on profitability confirms our observations and further shows that airport services, although quite small, has the highest gross margin and net margin except during COVID. * Airlines had higher margins than air-freight until 2020 because passengers fly round trips but goods fly only one way. * COVID19 is detrimental to both airlines and airports, but air freight is not affected. 

The US airlines industry is quite concentrated by a few large companies, such as AAL, Delta, united and southwest, …, with the largest four airlines making up nearly 80% of the industry’s total revenue. However, the industry is becoming less concentrated in the past two years during COVID. 

The US air freight industry was more concentrated than airlines with top four companies taking nearly 90% of the industry revenue. And Indeed, COVID seems to make this industry more concentrated. 

We can also find that airport services industry is the most concentrated industry of the three, which is easy to understand because there is limited # of airports in each city, and each is a local monopoly. In summary, air transportation related industries are quite concentrated, small companies may find it hard to survive and thrive. 

Four Firm Concentration Ratio: the market share of the top 4 companies in this industry. Which confirms our previous observations.

The airlines supply chain consists of airlines, airport services, aerospace & defense, oil & gas supplies and so on. A supply chain mapping provides a snapshot of the most profitable segments along this supply chain. Airport services, and oil & gas exploration and production are most profitable segments with a median net margin of 13% in 2021, while airlines is the least profitable segment with a median net margin of -4%. 

On a global scale, oil & gas exploration and production is also the most profitable segment while airlines are least profitable. In both cases, airport services outperformed airlines in profitability partially due to a more concentrated and less competitive market. So how should an airlines expand its business? An airline may expand its business to airport services. Airlines and airfreight companies may join hands to achieve a better balance over risk and profitability.

Let’s first look at revenue vs cost for US airlines in reporting year 2019 pre-COVID. As we can see, AAL is one of the largest three US airlines, and Delta (DAL) made a higher revenue than AAL with less total cost. Southwest (LUV) is smaller in size. As a comparison, the Chinese airlines are much smaller and they were making less revenue with the same cost.

The operating income vs cost analysis for the US airlines shows their difference in profitability. DAL made a much higher operating income than AAL with less cost. Although both UAL and AAL are below the regression line, UAL spent less than AAL but made a higher operating income. LUV made almost the same operating income with half of AAL’s cost. In comparison, the Chinese airlines made much less profit than the US couonterparts.

The operating income vs total assets analysis shows how efficiently these airlines utilize their assets to make money. AAL has the lowest operating income in comparison to DAL and UAL with about the same assets. UAL achieved a higher operating income with less assets than AAL. LUV has less than half of AAL’s assets but achieved an operating income only slightly lower than AAL. In comparison, the Chinese airlines (in blue) were much less efficient in utilizing their assets. 

The operating margin vs. total revenue analysis identifies the profit frontier for the US airlines. Typically, you will observe a declining operating margin as the revenue increases because revenue is the denominator of operating margin. We can see that Southwest (LUV) is on the profit frontier, indicating its competitiveness. Delta (DAL) is also on the profit frontier but American (AAL) is below it. In fact, AAL is the worst performer among its peers: DAL and UA. 

The return vs. risk analysis of the US airlines shows: (1) AAL’s liability asset ratio is above 1, which means that the company’s liability is greater than its assets in 2019, AAL has the lowest ROA among these US airlines. (2) Southwest (LUV) has the least liability asset ratio but the highest ROA. (3) DAL and UAL had about the same liability asset ratio, but DAL’s ROA is higher. In plain words, AAL performed the worst on both ROA and risk, and LUV is the best, while DAL and UAL are in between. 

Multiple rankings, when combined together, can provide insightful information on the performance of the company. For instance, the enterprise ranking of US airlines on total revenue shows that AAL is the second largest airline, but the enterprise ranking on net margin shows that AAL is one of the least profitable airlines in the US, barely broke even. 

Multiple rankings, when combined together, can provide insightful information on the performance of the company. For instance, the enterprise ranking of US airlines on total revenue shows that AAL is the second largest airline, but the enterprise ranking on net margin shows that AAL is one of the least profitable airlines in the US, barely broke even. 

Here the company is AAL, and the population is all US airlines. The KPI examination of AAL relative to the US airlines industry sounds quite many alarms for AAL. The red boxes refer to the KPIs for which the percentile rank of AAL is either below 25% (low) or above 75% (high). For profitability, despite its normal gross margin, AAL’s operating margin, net margin, and ROAs are low in the industry, implying the low profitability. For financial health,  AAL has a high liability asset ratio which is above one, indicating its inability to pay long-term debts, and thus poor health. Regarding growth, except for a normal total revenue growth, the growth rates in operating income and net income are low, implying slow growth among its peers. For operational efficiency, AAL has a fine operating cost over revenue ratio, but its inventory days is high, indicating a mixed operating efficiency.

We first compare these companies by size. We can see that AAL (red) has the revenue and gross profit comparable to DAL and UAL, but profits only slightly larger than the smallest competitor, Alaska airlines. Comparing these airlines by profitability, we can see that AAL has the smallest margins and ROA – explained its stock market performance.

We first compare these companies by size. We can see that AAL (red) has the revenue and gross profit comparable to DAL and UAL, but profits only slightly larger than the smallest competitor, Alaska airlines. Comparing these airlines by profitability, we can see that AAL has the smallest margins and ROA – explained its stock market performance.

The trend analysis expands our insights over time. An enterprise trend analysis on size shows that over time, the total revenues of these airlines kept increasing until the pandemic, then plummeted during the pandemic, finally bounced back post-pandemic. The operating incomes of these airlines were stable before pandemic except AAL which was declining, and AAL (in blue) had the sharpest decline during COVID and the smallest rebound.

The enterprise trend analysis on financial health shows that Southwest has the best short-term financial health, and AAL has the worst long-term risk.

Analyzing the US airline industry 2019-2021, we found a strong negative correlation between ROA and Liability Asset Ratio, that is, a higher liability asset ratio may lead to a lower ROA. Thus Liability Asset Ratio can be an important factor that drives an airline’s financial performance, that is, the more liabilities an airline carries, the more likely it will incur lower ROA. 

The breakdown analysis can pinpoint to the problems and causes. The revenue breakdown of American Airlines in 2019 together with the US airline industry and Delta (DAL) and Southwest (LUV) shows that American Airlines’ COGS are higher than the industry average; AAL is also higher in Other Costs (interest on loans for equipment, government subsidies, etc.) compared to Delta and Southwest. Delta Airlines’ COGS is the same as the industry average but it is low on Other Costs. Southwest has a lower than the industry average COGS and SG&A cost but a high Other Costs. As a result, Southwest and Delta have a higher net income than the industry average and American Airlines

The asset breakdown shows the causes for the high other costs. First, Delta Air Lines is much lighter on PPE, property, plants & equipment, than other airlines, explaining its small Other Costs. Recalling DAL generated the highest revenue in 2019, thus Delta stood out by having the best asset utilization. Second, southwest has high PPE which implies its high other costs. However, Southwest stood out by tightly controlling its COGS and SG&A costs. Finally. AAL has the highest PPE, implies its high other cost. Given its lower revenue than DAL, thus AAL’s asset utilization is much less efficient than DAL. Together with AAL’s high COGS (as we saw in previous slide), now we find the causes for AAL’s poor financial performance.

Post-COVID, we observed that AAL and the US airline industry were moving towards down-sizing PPEs as we suggested, for example, AAL reduced its PPEs from nearly 73% of its assets in 2019 to 56% in 2021. However, AAL still has much work to do to catch up with its competitors.