Trans World Airlines’ Financial Strategy
Introduction
Meeting short-term and long-term organizational goals and objectives require a firm to have and maintain a feasible financial strategy. It is from a sound and well laid out a financial strategy that day-to-day organizational obligations, which contribute to its wholesome growth, are realized (Berdondini, 2017). An entity’s financial strategy addresses three main elements, namely; financing, its investments, and its dividends (Chen & Gayle, 2019). Trans World Airlines (TWA), too, was not an exception. The airline firm operates in a stiffly competitive and capital-intensive airline industry where any slight adjustments to the firm’s revenue or passenger volume could significantly impact its financial results. Trans World Airlines has its headquarters in St. Louis, Missouri, and mainly serves the United States and other nations and regions such as Mexico, Canada, the Caribbean, the Middle East, and Europe. According to the firm’s 1998 statement, for example, 88.5% of its total revenue was generated by the North American market, amounting to a 2.6% increase from the previous fiscal period’s performance.
TWA’s financing
The financing element in a corporate’s financial strategy entails the debt and equity mixes the firm employs in funding its financial needs (Berdondini, 2017). Debt funding includes bonds, loans, commercial paper, and other forms of long-term borrowings. On the other hand, equity funding could consist of stock- which is issued externally by the organization or could also be sourced internally from the firm’s accumulated funds (Berdondini, 2017). In TWA’s case, the firm’s sources of funds are shareholders’ equity, and both long-term and short-term debts. According to the case study, the firm’s September 30, 2000, current long-term debt, for example, stood at $175,164 compared to the previous year’s value that stood at $67,080. The long-term debt, on the other hand, stood at $416,495 million in comparison to the previous year’s $600,909 million. The short-term and long-term debts in the fiscal period of September 30, 2000, therefore totaled $591,659 million against $667,989 million on September 30, 1999. The shareholders’ equity on September 30, 2000, was reported at $803 million compared to $723 million on September 30, 1999.
Funding analysis and recommendations
From the above data, TWA’s September 30, 2000 funding comprised 99% debts, while less than 1% of its operations were funded by equity. It, therefore, infers that TWA’s daily activities depended on cash flows from passengers, freight, mail, and other forms of revenue. Comparing the total operating revenue against operating expenses, the firm ran at a loss. It would, therefore, be recommended that the firm reduces its borrowing capacity since growth in the debt base could lead to bankruptcy or insolvency due to the unsustainability of considerable debts in financing organizational operations (Iatrou & Oretti, 2016).
TWA’s investment portfolio
Trans World Airlines has sizeable investments in other affiliated firms. With the implementation of the 1978 Airline Deregulation Act by the United States federal government, the firm has expanded its investment scope to accommodate other companies, thus spreading its operational risks. This move has been embraced to maintain a competitive advantage over other rival firms in the stiffly competitive airline sector. However, such investment decisions have barely widened TWA’s profitability index as it continues to run at continuous losses. The Airline’s interest and investment income in the last financial quarters of 1999 and 2000, for example, were -$4,310 million and $-3,252 million, respectively, implying that the firm’s investments were yielding negative returns. These negative returns on investment were posted despite the firm making investments in other affiliated firms worth $82,901 million and $90,276 million in the years 1999 and 2000, respectively. Additionally, the negative investments leading to losses have progressed despite TWA’s additional paid-in capital of $728,083 million and $733,224 in the years 1999 and 2000, respectively.
Recommendations
TWA needs to salvage itself from looming insolvency or bankruptcy owing to its financial crisis, which has led to its continuous annual operating losses. Among the options that the airline company could consider settling for are mergers. With mergers, Trans World Airlines could improve its profits and productivity as it cuts down on its overall expenses, which outweigh its total operating revenue (Endo & Ozaki, 2019). Furthermore, a merger with a financially stable and profit-making firm will earn TWA tax loss carry-forward, which would be offset against the interested firm’s profits (Chen & Gayle, 2019). The firm was opting to consider a merger choice between Jet Acquisitions Group of Scottsdale, Arizona, and American Airlines with each bidder offering different terms.
Dividend policy
Like most airline companies in the sector, Trans World Airlines’ dividend policy defines a dividend payout structure. It is from a firm’s dividend policy that allocations of ordinary shares and preference shares are determined (Kiiru & Omurwa, 2019). TWA pays dividends to its preference shareholders. However, for the past two years, the Airline has been unable to pay dividends due to its continuous losses despite incurring them each financial period. In the last quarter of 2000, for example, TWA had preferred stock dividends of $3,515 million, down from $5,864 million the previous year at a comparable quarter. These observations infer that TWA’s dividend policy is volatile since the continuous losses made by the firm have made it impossible for the company to pay out dividends. It is therefore recommended that the firm considers seeking mergers since the instability in its dividend policy is an overall management issue that requires a complete restructuring of the firm’s operations (Kiiru & Omurwa, 2019).
References
Berdondini, A. (2017). Description of a Methodology from Econophysics as a Verification Technique for a Financial Strategy. Available at SSRN 3184781. SSRN: https://ssrn.com/abstract=3184781 or http://dx.doi.org/10.2139/ssrn.3184781
Chen, Y., & Gayle, P. G. (2019). Mergers and product quality: Evidence from the airline industry. International Journal of Industrial Organization, 62, 96-135. https://doi.org/10.1016/j.ijindorg.2018.02.006
Endo, N., & Ozaki, T. (2019). WHAT DRIVES AIRLINES TO MAKE A CROSS-BORDER INVESTMENT? FIRM-LEVEL FACTORS AND INSTITUTIONAL FACTORS. Journal of Air Transport Studies, 10(1), 125. https://etem.aegean.gr/files/Paper_6_-_Endo.pdf
Iatrou, K., & Oretti, M. (2016). Airline choices for the future: from alliances to mergers. Routledge). https://www.icao.int/Meetings/LiberalizationSymposium/Documents/2006-Symposium-Dubai/AlliancesMergers.pdf
Kiiru, J. W., Kirori, G. N., & Omurwa, J. K. (2019). Financial Management Practices and Financial Performance of Services Industry in Kenya: Case of Kenya Airways. Journal of Finance and Accounting, 3(2), 76-93. http://stratfordjournals.org/journals/index.php/journal-of-accounting/article/view/332