components of the transportation industry - Financial Reporting and Analysis

Three components of the transportation industry will be discussed: air carriers, railroads, and the motor carrier industry. The Civil Aeronautics Board, which requires the use of a uniform system of accounts and reporting, regulates interstate commercial aviation.

The Interstate Commerce Commission, which also has control over a uniform system of accounts and reporting, regulates interstate railroads. The Interstate Commerce Commission also regulates interstate motor carriers whose principal business is transportation services.

Financial Statements

The balance sheet format for air carriers, railroads, and motor carriers resembles that for manufacturing or retailing firms. As in a heavy manufacturing firm, property and equipment make up a large portion of assets. Also, supplies and parts comprise the basic inventory items. The income statement format resembles that of a utility. The system of accounts provides for the grouping of all revenues and expenses in terms of both major natural objectives and functional activities. There is no cost of goods sold calculation; rather, there is operating income: revenue (categorized) minus operating expenses. In essence, the statements are a prescribed, categorized form of single-step income statement. They cannot be converted to multiple-step format.

Ratios

Most of the traditional ratios also apply in the transportation field. Exceptions are inventory turnovers (because there is no cost of goods sold) and gross profit margin. The ratios discussed in the subsections that follow are especially suited to transportation. They are derived from the 1998 statement of income and balance sheet for Delta Air Lines, Inc.,presented in Figure.

The traditional sources of industry averages cover transportation. The federal government accumulates numerous statistics for regulated industries, including transportation. An example is the Interstate Commerce Commission’s Annual Report on transport statistics in the United States.

For the motor carrier industry, a particularly good source of industry data is the annual publication Financial Analysis of the Motor Carrier Industry, published by the American Trucking Association, Inc., 1616 P Street, NW, Washington, DC 20036. This publication includes an economic and industry overview, distribution of revenue by carrier type, and industry issues. It also includes definitions of terminology that relate to the motor carrier industry.

There are hundreds of motor carrier firms, most of which are relatively small. TheAmerican Trucking Association compiles data by composite carrier groups. For example,

DELTA AIR LINES, INC.

Consolidated Balance sheets

Concluded

Consolidated Statement of operations

Group A includes composite data for several hundred general freight carriers with annual revenues of less than $5 million. One of the groups includes composite data for the publicly held carriers of general freight.

The very extensive composite data in the American Trucking Association publication include industry total dollars for the income statement and balance sheet. It also includes vertical common-size analyses for the income statement and the balance sheet. This publication also includes approximately 36 ratios and other analytical data, such as total tons.

Operating Ratio

The operating ratio is computed by comparing operating expense to operating revenue. It measures cost and should be kept low, but external conditions, such as the level of business activity, may affect this ratio. Operating revenues vary from year to year because of differences in rates, classification of traffic, volume of traffic carried, and the distance traffic is transported. Operating expenses change because of variations in the price level, traffic carried, the type of service performed, and the effectiveness of operating and maintaining the properties. Common-size analysis of revenues and expenses is needed to explain changes in the operating ratio.

Figure presents the operating ratio for Delta Air Lines, Inc. The operating ratiofor Delta improved from 88.74% in 1997 to 88.03% in 1998. The operating ratio can dramatically affect the profitability of a carrier. In fact, Delta went from an operating income in 1997 of $1,531,000,000 to an operating income in 1998 of $1,693,000,000.

DELTA AIR LINES, INC.

DELTA AIR LINES, INC

Long-Term Debt to Operating Property

Because of the transportation companies’ heavy investment in operating assets, such as equipment, the long-term ratios increase in importance. Long-term borrowing capacity is also a key consideration. The ratio of long-term debt to operating property ratio gives a measure of the sources of funds with which property is obtained. It also measures borrowing capacity. Operating property is defined as long-term property and equipment.

Figure presents this ratio for Delta Air Lines. For Delta, the long-term debt to operating property ratio decreased in 1998 to 19.12% from 22.35%. These are good numbers in relation to recent prior years.

DELTA AIR LINES, INC.

DELTA AIR LINES, INC.

Operating Revenue to Operating Property

This ratio measures turnover of operating assets. The objective is to generate as many dollars in revenue per dollar of property as possible. Figure presents this ratio for Delta Air Lines. The operating revenue to operating property decreased moderately between 1997 and 1998.

DELTA AIR LINES, INC.

DELTA AIR LINES, INC

Per-Mile, Per-Person, and Per-Ton Passenger Load Factors

For transportation companies, additional insight can be gained by looking at revenues and expenses on a per unit of usage basis. Examples would be per mile of line or per tenmiles for railroads, or a per passenger mile for air carriers. Although this type of disclosureis not required, it is often presented in highlights.

This type of disclosure is illustrated in Figure, which shows statistics for Delta Air Lines. Statistics in Figure are available for revenue passengers enplaned, available seat miles, revenue passenger miles, operating revenue per available seat mile, passenger

DELTA AIR LINES, INC.

DELTA AIR LINES, INC

mile yield, operating cost per available seat mile, passenger load factor, break even passenger load factor, available ton miles, revenue ton miles, and cost per available ton mile.

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