It has been a successful business that has grown into a powerful force in the airline industry.
Assumption relaxation in revenue recognition was observed by another major airliner thus boosting revenues and earnings in their reporting period. Investors need to pay close attention to assumptions and estimates that may be used by the preparer of any report.
The examples of these airline companies give a clear picture of how assumptions can be used to project companies in better light. It is common knowledge that graphs and figures can be used to distort reality, so that differences seem larger than they are.
The reader is influenced by the statistician or accountant to see a supposed reality. Key assumptions used whilst preparing a report are amongst the most important aspects to consider whilst reading a financial report.
It is also imperative that the assumptions used are based on as sound a footing as possible to avoid overly optimistic forecasts. We have noticed a few major changes in assumptions by some major US airlines, to make the best of the feel good factor which in turn, is largely caused by the latest cyclical upturn in profitability.
A few examples are: Pension The first case in our review is a major airliner with obligations of around USD 24bn payable as pension benefits. Expected return on plan assets is among the key assumptions in calculating the yearly pension cost to be expensed.
And this airline company not only exhibits way higher assumptions of expected return versus peers, but also when stacked against its own historical performance.
There were losses in making calculation meaningless. In terms of sales, the firm has added near 50 bps to bps to the profit margins, which is a high number considering historical profit margin range. While the pension deficit is high, historically it cannot be meaningfully compared given the negative net worth.
This though is not all, there is more to it. Here the valuation relates to illiquid assets and thus again depends on assumptions. These have nearly doubled since Revenues Revenues are another area ripe for assumptions.
The chart below is of growth forreported by another major airline. To complicate an already complex situation, the company sells the reward points to Chase Bank.
In an earlier period, the company used to defer portion of amounts received on such sale of points and recognize them as passenger revenue when the awards were actually flown. However under a new agreement with Chase in Julythe company amended its co-branded credit card agreement.
The company now allocates revenue over the term of agreement and in addition also estimates the value of various deliverable elements involved, like the main elements of travel points, advertising and use of brand etc.A description of the organisation and the market in which it operates 3 A description of the IT governance used 3 Airline and travel industry profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic.
Strategic Analysis Of Southwest Airlines Case Study Management Essay. Print says Colleen Barrett (p.7 in the case study text). Another example of the Southwest attitude towards its employees is a quote by Herb Kelleher (CEO): "Fun is a stimulant to people.
The major political/legal force was the deregulation of the airline industry. in a panel of ten international airlines. Secondly, the field study was complemented with findings from two explanatory case studies.
This study explains how in developing risk management systems airlines balance the sometimes conflicting technical and institutional demands of their respective task and institutional environments.
Read a case analysis by Multi-Act of Airliners economic performance. Read a case analysis of how key assumptions play an important role in the reading of financial reports. This case study by Multi-Act of an airline industry forecast shows how figures can be used selectively to present a healthy picture.
Read "Ex ante governance decisions in inter-organizational relationships: A case study in the airline industry, Management Accounting Research" on DeepDyve, the largest online rental service for scholarly research with thousands of academic publications available at your fingertips.
Governance has become one of the most important aspects of IT. IT governance is a must for any organization seeking to keep an eye on its investments. The move to e-commerce environment represents an opportunity as well as a threat.
Airline industry has been heavily affected by this move.