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Acc 230 Week 9 Final Evaluating Financial Health - Continental Airlines

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Acc 230 Week 9 Final Evaluating Financial Health - Continental
Airlines
Final
Accounting 230 Financial Reporting: Peeking Under the Financial
Hood
Continental Airlines
Continental Airlines (Continental) was incorporated in 1980. Based out of
Houston, Texas, Continental Airlines is fifth largest airline in the world.
This is based on the 2009 number of scheduled miles flown by revenue
passengers (SEC1). Continental and its smaller divisions offer more than
2,750 departures in the Americas, Europe and Asia. Continental
currently employs more than 43,000 people. More than 67 million people
per year choose continental as their chosen air carrier (Unknown2). With
such a big company comes incredible opportunity for large amounts of
profit to be made or lost.
Current Happenings
Recently, Continental merged with former competitor United. The merger
took place May 3, 2010. This merger was created to provide customers
with a higher quality of service, improve career opportunities within the
company and to improve profitability and shareholder value over a
longer term (Unknown2). The related costs associated with the merger,
and other unique charges, was $24 million. The majority of these costs
were related to financial advising fees, legal fees, and consultant fees,
cost of communication and accounting fees. The merger is expected to
bring between $800 million and $900 million in revenue annually
(Unknown1).
Current Financial Performance – 2010
The second quarter for 2010 proved to be extremely profitable for
Continental in comparison to the same quarter in 2009. Including the
merger-related costs, a net income of $233 million was reported

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(Unknown1). Income from operations in the 2010 second quarter was up
$482 million in comparison to the same quarter in 2009. This increased
allowed for a 2010 second quarter operating income of $328 million
(SEC2). The statement of operations showed that total revenue in the
2010 second quarter increased 18.6 percent (Unknown3). The total
revenue for the second quarter equaled $3.7 billion. Continental bases
their costs on the available seat mile (CASM). In the second quarter,
CASM increased 3.9 percent in comparison to the second quarter in
2009 (SEC2). This is likely due to the increase in fuel cost over the
period. At the end of the quarter, there was a total of $3.5 billion in short-
term investments, cash and cash equivalents (SEC2).
The third quarter estimates are shown to have a 17.7 percent increase in
revenue per passenger (Herbst). Total operating revenue is expected to
increase to 18.7 percent. This is only a .1 percent increase from the
second quarters reporting. Total operating costs are expected to
increase to 7.4 percent. The second quarter increase was only 3.7
percent (Herbst). The projections show a trend similar to the second
quarter of 2010. Along with an estimated increase of total revenue there
is corresponding increase in total operating costs. Also in the third
quarter the CASM is expected to increase by 15.5 percent (Herbst). This
is likely due to the high expected increase of 12 percent in fuel costs
(Herbst). Based on the estimates the company’s revenue is slowing
gaining profits while the expenses are quickly adding up.
Industry Comparison
The following industry comparison is based on the nine largest airline
companies (Herbst). Comparatively Continental Airlines is financially
healthy. The company does stand in the middle of the pack as far as
revenue per scheduled miles flown per passenger. The estimated third
quarter revenue is nearly 1% higher than the industry estimate of $3.9
billion (Herbst). However, the estimated third quarter operating expenses
is also slightly higher (0.3%) than the industry average (Herbst). Net
income is expected to be higher than the industry average. The third
quarter is also estimating a very large increase in earnings per share,
putting the 2010 third quarter estimate well above the industry average
as well. These estimates are expected to last throughout 2010 (Herbst).
Conclusion

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It can be seen on the financial statements provided by the multiple
avenues of information that Continental Airlines has made great strides
in improving its financial health. This is one of the largest airlines in the
world and the growth potential is evident. The 2010 merger with United
is expected to add significant profits to the company (Unknown2).
Continental has already proven it has the ability to be profitable as seen
in the 2010 second quarter reports. Comparatively Continental is staying
above the industry standards in the amount of revenue, net income and
earnings per share the company makes. Bloomberg Business Week
sums it up best with the following quote: “Compared to the same quarter
last year, Continental Airlines, Inc. has been able to grow revenues from
$2.8B to $3.4B. Most impressively, the company has been able to
reduce the percentage of sales devoted to cost of goods sold from
91.79% to 78.38%. This was a driver that led to a bottom line growth
from a loss of $213.0M to a gain of $233.0M.” (Unknown3)
Resources:
Unknown1, Continental Airlines Announces $233 Million Second Quarter
Profit, 2010 -
Retrieved August 30, 2010 from: http://www.continental.com/web/en-
us/apps/vendors/default.aspx?i=http%3A%2F%2Fphx%2Ecorporate
%2Dir%2Enet%2Fphoenix%2Ezhtml%3Fc%3D85779%26p%3Dirol
%2DnewsArticle%26ID%3D1450510
Unknown2, CO Facts 3rd Quarter 2010 - Retrieved August 30, 2010
from:
http://www.continental.com/web/en-
us/content/company/profile/continentalFacts2010q3.pdf
Unknown3, Financial Statements for CONTINENTAL AIRLINES-CLASS
B (CAL) –
Retrieved August 30, 2010 from:
http://investing.businessweek.com/businessweek/research/stocks/financi
als/financials.asp?
ticker=CAL:US&dataset=incomeStatement&period=Q&currency=US
%20Dollar
Herbest, Robert - Airline Data & Analysis,2010 Retrieved August 30,
2010 from:

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