Airlines Industry is a highly competitive industry which generally earns low returns because of the high cost of operation. This can bring disaster when times get tough in the economy. Continental Airlines (Ticker CAL) is the fourth largest airline in the US based on revenue passenger miles. It was founded in 1931 and commenced operations in 1934. Continental Airlines had been through Chapter 11 twice. It filed for the bankruptcy for the first time in September 1983 and remained under Chapter 11 from 1983 to 1986. Continental filed for its second bankruptcy in 1990 mainly due the increased jet fuel prices after the Gulf War of 1990. In 1993 Air Canada, Air Partners and Texas Pacific Group, enabled Continental to emerge from bankruptcy by investing $450 million in the airline.
Was Continental Airlines heading towards bankruptcy for the third time before merging with United Airlines (Ticker UAUA)? Altman Z-score analysis, capital structure analysis, and profitability analysis shows that the company was in distress before the merger was announced.
Altman Z score analysis:
Altman Z-Score decreased to 1.2 in year 2009 from 1.7 in year 2008. At the end of June 2010, the company had a Z-Score of 0.49, which means that company was in distress zone and chances of financial embarrassment were very high. (Data Source: Old School Value)
Zones of Discrimination:
Z > 2.99 –“Safe” Zone
1.8< Z< 2.99 –“Grey” Zone
Z< 1.80 –“Distress” Zone
Capital Structure Analysis:
At the end of year 2009, the company’s total debt to equity ratio was 1062%. Debt comprised 91.4% of the total capital and equity comprised only 8.6% of the total capital. Also about 15% of the company’s total debt was due in year 2010 and another 18% was due in year 2011, which would have created problems for the company. The company had approximately $7 billion worth operating lease commitments due in next five years.
(Source: Capital IQ)
Profitability Analysis:
Continental Airlines had negative operating earnings in year 2008 and 2009. Company’s ROA and ROE were also negative in the year 2008 and 2009. In year 2009, the company paid around $330 million as interest expense.
Jet Fuel Price Analysis:
The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. Jet fuel price in 2010 increased by about 10.7% with compared to 2009.
(Source: http://www.iata.org)
Disclaimer: The information/data in this article has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity.
Disclosure: The author of this article holds no financial interest in the securities of this company. The author of this article knows of no existence of any conflicts of interest that might bias the content or publication of this article. The author is not monetarily or financially compensated in any way for writing this article.
This article is also available at http://sudhanshujain.wordpress.com/
Was Continental Airlines heading towards bankruptcy for the third time before merging with United Airlines (Ticker UAUA)? Altman Z-score analysis, capital structure analysis, and profitability analysis shows that the company was in distress before the merger was announced.
Altman Z score analysis:
Altman Z-Score decreased to 1.2 in year 2009 from 1.7 in year 2008. At the end of June 2010, the company had a Z-Score of 0.49, which means that company was in distress zone and chances of financial embarrassment were very high. (Data Source: Old School Value)
Zones of Discrimination:
Z > 2.99 –“Safe” Zone
1.8< Z< 2.99 –“Grey” Zone
Z< 1.80 –“Distress” Zone
Capital Structure Analysis:
At the end of year 2009, the company’s total debt to equity ratio was 1062%. Debt comprised 91.4% of the total capital and equity comprised only 8.6% of the total capital. Also about 15% of the company’s total debt was due in year 2010 and another 18% was due in year 2011, which would have created problems for the company. The company had approximately $7 billion worth operating lease commitments due in next five years.
| Million $ | Percent | |
| Debt | 6266 | 91.4% |
| Equity | 590 | 8.6% |
| Total | 6856 | 100% |
| Million $ | Percent | |
| LT Debt (Incl. Cap Leases) Due 2010 | 975 | 15.6% |
| LT Debt (Incl. Cap Leases) Due 2011 | 1148.9 | 18.3% |
| LT Debt (Incl. Cap Leases) Due 2012 | 590.9 | 9.4% |
| LT Debt (Incl. Cap Leases) Due 2013 | 656.9 | 10.5% |
| LT Debt (Incl. Cap Leases) Due 2014 | 338.9 | 5.4% |
| Total LT Debt (Incl. Cap Leases) Due in next 5 years | 3710.6 | 59.2% |
| Total LT Debt (Incl. Cap Leases) Due after 5 years | 2555.5 | 40.8% |
| Total | 6266 | 100.0% |
| Million $ | Percent | |
| Total Term Long | 350 | 5.6% |
| Total Senior Bonds and Notes | 5272 | 84.1% |
| Total Capital Leases | 196 | 3.1% |
| Total Trust Preferred | 248 | 4.0% |
| Other Borrowings | 200 | 3.2% |
| Total | 6266 | 100.0% |
| Million $ | Percent | |
| Operating Lease commitment due 2010 | 1485 | 10.5% |
| Operating Lease commitment due 2011 | 1432 | 10.1% |
| Operating Lease commitment due 2012 | 1487 | 10.5% |
| Operating Lease commitment due 2013 | 1331 | 9.4% |
| Operating Lease commitment due 2014 | 1285 | 9.1% |
| Operating Lease commitment due in next 5 yrs | 7020 | 49.7% |
| Operating Lease commitment due after 5 yrs | 7094 | 50.3% |
| Total | 14114 | 100.0% |
Profitability Analysis:
Continental Airlines had negative operating earnings in year 2008 and 2009. Company’s ROA and ROE were also negative in the year 2008 and 2009. In year 2009, the company paid around $330 million as interest expense.
Jet Fuel Price Analysis:
The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. Jet fuel price in 2010 increased by about 10.7% with compared to 2009.
| 27 Aug 10 | Share in World Index | cts/gal | $/bbl | $/mt | Index Value 2000= 100 | vs. 1 week ago | vs. 1 month ago | vs.1 yr ago |
| Jet Fuel Price | 100% | 208.2 | 87.5 | 689.3 | 239.1 | 1.7% | 0.8% | 10.7% |
| Asia & Oceania | 22% | 203.6 | 85.5 | 675.5 | 244.3 | -0.6% | -1.3% | 10.2% |
| Europe & CIS | 28% | 208.5 | 87.6 | 690.1 | 236.0 | 1.9% | 0.3% | 10.2% |
| Middle East & Africa | 7% | 200.4 | 84.2 | 664.2 | 251.4 | 0.6% | 0.0% | 9.9% |
| North America | 39% | 210.8 | 88.5 | 698.6 | 235.4 | 2.8% | 2.2% | 11.4% |
| Latin & Central America | 4% | 219.8 | 92.3 | 710.8 | 255.7 | 2.9% | 3.0% | 11.5% |
Disclaimer: The information/data in this article has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity.
Disclosure: The author of this article holds no financial interest in the securities of this company. The author of this article knows of no existence of any conflicts of interest that might bias the content or publication of this article. The author is not monetarily or financially compensated in any way for writing this article.
This article is also available at http://sudhanshujain.wordpress.com/
