Airline Finance and Accounting Management




Diploma of Advanced Studies in Aviation Management


MAKE UP EXAM: INSTRUCTIONS


Instructions


1. Compare and contrast the financial strategy of LAN Airlines with that of Southwest. Where relevant, highlight where there may be inconsistencies or room for improvement in LAN Airlines’ financial strategy. Please focus on:

(a) Balance sheet, including working capital management, solvency and aircraft financing (operational leases, financial leases, debt, etc.). Hint: start from common-size balance sheets and also compare working capital (liquidity) and leverage (solvency) ratios; compare the proportion of aircrafts owned, operating leased and finance leased.

(b) Profitability, cost structure and revenue diversification. Hint: start from common-size income statements as well as profitability ratios (generic and industry-specific ones).

2.    Both LAN Airlines and Southwest have been growing at fast paces. Such growth involves significant increases in working capital requirements, which often requires external financing. Compare in a table the benefits and drawbacks of each of the following potential alternatives to finance increases in working capital requirements:

(a) Equity

(b) Local currency-denominated bank loan

(c)  USD-denominated bond

(d) USD-denominated convertible bond

When doing so, please take into specific consideration any relevant take away from Question 1 above (factors increasing or decreasing the credit risk, growth profile, etc.) and account for any risk that each alternative may create. Note: for the sake of this exercise, financing is only meant to cover working capital increases and not aircrafts or other fixed assets.

3.  Then recommend and justify the financing alternative that seems most appropriate for each airline. Hint: it would not be surprising that your recommendation should differ between LAN Airlines and Southwest.

Additional information


In order to clarify the details of some of their strategies, you will have to consult the 2005 financial statements of Southwest and LAN Airlines at the following addresses:

§      Southwest:
http://www.sec.gov/Archives/edgar/data/92380/000095013406001553/d32370e10vLANAirlines: http://www.sec.gov/Archives/edgar/data/1047716/000119312506140463/d20f.htm 

These financial statements are in US GAAP, but the principles are very similar to what we saw in class.There should be no need to consult other sources. If you are in doubt please contact me by email. 

Other guidelines


In your analyses, please concentrate on relative amounts or ratios. There are usually few insights to gain from absolute amounts. If they are not relevant, the absolute amounts that you could use or refer to may hurt your grade.

Be concise and selective and present your conclusions and recommendations as if you were addressing them to Southwest and LAN’s CEO and CFO. Be selective in the numbers and charts that you show. Prefer explanations to tables with numbers (I may not try to understand what tables mean if few explanations are provided). Respect the layout instructions and maximum number of pages above. Do not quote the questions or instructions but briefly introduce (indicative: ½ page) and conclude (indicative: ½ page) your paper and end your paper with a clear, well-motivated and unambiguous recommendation.


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