Alaska Air Group: Financial Analysis Report

Paper Info
Page count 4
Word count 1139
Read time 5 min
Topic Economics
Type Essay
Language 🇺🇸 US

Summary

This report presents Alaska Air Group’s financial report. Alaska Air is a publicly-traded company on the New York Stock Exchange (McLaney and Atrill 181; Deegan 281; Collier 98). The company operates under Scheduled Passenger Air Transportation. In addition, the company sector falls under the category of Transportation and Warehousing (Arnold 291; Brigham and Ehrhardt 341). The report specifically focuses on the company’s capital structure, liquidity, profitability, and effective use of assets, solvency, and any other relevant factors. Additionally, it compares the company to the industry average and/or its closest competitors.

The company’s capital structure

The company’s capital structure generally consists of long-term debts and short-term debts, as well as other common equity and preferred equity. These debts show how Alaska Air Group, Inc. has been able to fund its general business activities and expansion strategies by relying on various investors and banks. In this section, only short-term and long-term capital structures are evaluated.
Long-term debt obligations (in millions):
2014 2013
Fixed-rate notes payable due through 2024 $ 614 $ 703
Variable-rate notes payable due through 2025 189 168
Long-term debt 803 871
Less current portion 117 117
$ 686 $ 754
Source: (Alaska Air Group, Inc. 53)

In the fiscal year 2014, the company reduced its long-term debt by about 9.02% from $754 to $686. It is imperative to note that Alaska Air has used its aircraft to secure all long-term debts. These facilities are advanced on variable interest rates. In addition, they also have different expiry periods. Alaska Air currently has no plans for long-term debts borrowing.

2014 2013 % change
Short/Current Long Term Debt 117,000 117,000 0%

Source: (Alaska Air Group, Inc. 53).

Between the fiscal period 2013 and 2014, there was no change in the company’s short-term debts. Both short-term and long-term debts are mainly received from banks.

Liquidity.

Fiscal year Current Ratio Quick Ratio
2014 1.050868 1.0162
2013 1.11519 1.0772

The current ratio for the fiscal years presented shows that Alaska Air has a ratio slightly above 1. In this case, the company can therefore fulfill its short-term obligations as expected on a given date. An analyst can assess this ratio fast to understand the financial health of Alaska Air. Generally, higher ratios are preferred because they show that a company can pay off its debts without running into financial troubles. This implies that Alaska Air has a good part of asset values compared to its total current liabilities.

Alaska Air has also maintained a quick ratio above 1 in the reviewed financial periods of 2013 and 2014. Hence, Alaska Air can fulfill its short-term debt obligations when they mature for payment.

Generally, slight but significant declines have been noted in the quick ratio and current ratio because the overall liquidity of the company could be in jeopardy.

It is important to appreciate that a ratio below 1 should worry the company regarding its liquid assets and its abilities to pay off current liabilities. Whenever these ratios critically decline low relative to the current ratio, then the company’s current assets are significantly leveraged by its inventory. While this is not the case at Alaska Air, the declining trend is not healthy for the company. Whenever the liquidity ratios fall below 1, users of financial statements should review other items, including inventory turnover to determine how leveraged the company is.

Profitability.

Fiscal year Profit Margin Return on Assets Return on Equity
2014 0.112704918 0.0978806 0.2844382
2013 0.098525989 0.0870161 0.2503696

Gross Profit Margin for Alaska Air increased from 0.098 to 0.11 between the year 2013 and 2014. This ratio has marginally increased upwards. Alaska Air makes some profits for investors.

Alaska Air makes profits once all expenses, including operating costs, taxes, and preferred stock dividends been paid. The ratio demonstrates that Alaska Air can sufficiently generate profits for investors.

Return on Assets ratio shows an increment from 0.087 to 0.097 between the fiscal period 2013 and 2014. The company is currently generating about 9.7 cents from every dollar held in assets.

Alaska Air’s return on equity ratio has increased from 0.250 to 0.28 in the financial year 2013 and 2014 respectively. The increment in the ratio is a good indicator that the company can generate more revenues from its investments.

Effective use of assets

The liquidity ratios are not too high (above 3). Instead, the company has managed to keep it at 1. Higher ratios are generally associated with poor utilization of cash to generate more revenues. Hence, Alaska Air can be said to be using its assets effectively to generate profits as the profitability ratios demonstrate.

Solvency.

Fiscal year Total-Debt Ratio Debt Equity Ratio
2014 0.6559 1.906
2013 0.6524 1.8773

Debt to equity ratio presents the percentage of Alaska Air financing that originates from external sources, including bankers. A higher ratio usually depicts that Alaska relies heavily on loans and other credit facilities rather than investors to finance its operations. The company currently has a debt to equity ratio of 0.655 from 0.652 in the financial year 2013. The ratio shows that Alaska Air now depends more on creditors to finance its operations.

Alaska Air’s equity ratio shows the fraction of assets financed by shareholders when total equity is compared against total assets. This ratio increased from 1.88 to 1.91 between 2013 and 2014. The ratio shows that once Alaska Air has settled all its liabilities, shareholders will have about 20% of its assets. The ratio also assists to determine how leveraged Alaska Air is when assets funded by debts are evaluated. Today, Alaska’s dependence on investors to fund operations is acceptable at that rate.

Overall, the company does not face any liquidity or solvency crises. In addition, the Altman Z-Score for Alaska Air is 3.59 (based on a weighted average of five ratios). This score shows that Alaska Air is not likely to go bankrupt, and it does not face any financial distress.

2014 Delta Air Lines, Inc. United Continental Holdings, Inc. Southwest Airlines Co.
Gross Margin % 43.1 53.5 58.7
Return on Assets % 1.24 3.05
5.75
Return on Equity % 6.44 42.08
16.10
Current Ratio 0.74 0.65 0.74
Quick Ratio
0.39
0.44
0.57
Debt/Equity 0.97 4.46
0.36

Data from: (Morningstar, Inc. 1).

Although these ratios differ from one company to another, Alaska Air can use them to compare its performance against industry peers. For instance, the company has a higher quick and current ratio relative to its competitors.

Other relevant factors

The company continues to face fierce competition from low-cost carriers. However, after the acquisition of Virgin, the company can defend its market share against Delta, JetBlue, Southwest Airlines, and other competitors (Kacha 1).

With the growing profit margins and declining long-term debts, the company will perform well in the future. It should however focus on enhanced cash flow from its operations while reducing expenses to remain competitive and attract more investors.

Works Cited

Alaska Air Group, Inc. SEC FORM 10-K. 2014. Web.

Arnold, Glen. Corporate Financial Management. London: Financial Times/Prentice Hall, 2007. Print.

Brigham, Eugene and Michael Ehrhardt. Financial Management Theory and Practice. United States: South-Western Cengage Learning, 2009. Print.

Collier, Peter. Accounting for Managers. London: John Wiley & Sons Ltd, 2009. Print.

Deegan, Craig. Financial Accounting Theory. London: McGraw-Hill, 2009. Print.

Kacha, Bryson. Alaska Airlines: Eliminating the Competition. 2016. Web.

McLaney, Evans and Peter Atrill. Financial Accounting for Decision Makers. London: Financial Times Prentice Hall, 2008. Print.

Morningstar, Inc. Financials. 2016. Web.

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Reference

EssaysInCollege. (2022, May 24). Alaska Air Group: Financial Analysis Report. Retrieved from https://essaysincollege.com/alaska-air-group-financial-analysis-report/

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EssaysInCollege. (2022, May 24). Alaska Air Group: Financial Analysis Report. https://essaysincollege.com/alaska-air-group-financial-analysis-report/

Work Cited

"Alaska Air Group: Financial Analysis Report." EssaysInCollege, 24 May 2022, essaysincollege.com/alaska-air-group-financial-analysis-report/.

References

EssaysInCollege. (2022) 'Alaska Air Group: Financial Analysis Report'. 24 May.

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EssaysInCollege. 2022. "Alaska Air Group: Financial Analysis Report." May 24, 2022. https://essaysincollege.com/alaska-air-group-financial-analysis-report/.

1. EssaysInCollege. "Alaska Air Group: Financial Analysis Report." May 24, 2022. https://essaysincollege.com/alaska-air-group-financial-analysis-report/.


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EssaysInCollege. "Alaska Air Group: Financial Analysis Report." May 24, 2022. https://essaysincollege.com/alaska-air-group-financial-analysis-report/.