Pan American World Airways, Inc (“Pan Am”) is a New York corporation
organized in 1927 which is engaged in commercial air transportation which
it pioneered between the United States and most areas of the world. Pan Am
Corporation (“the Corporation”), a Delaware corporation, is and since
September 14, 1984 has been the parent of Pan Am, it’s principal
For the past few years Pan Am’s financial condition has been very
poor. The company reported a consolidated net loss for 1986 of $469.3
million. The 1988 net loss included a gain of $89.1 million resulting from
the sale of Pan Am’s Airbus A320 aircraft and delivery positions. This gain
was partially offsetted by a reserve of $25.7 million related to the loss
on sale of Pan Am’s subsidiary, which is responsible for the marketing of
excess inventory, and 18 million of year-end adjustments.
Pan Am’s passenger traffic was strong in 1988. An increase of 12.2
percent on capacity of 11.2 percent. This was due to the result of
strengthening of various European currencies against the U.S. dollar, fare
increases in the market, enhanced management systems and procedures, as
well as programs to reduce the dependence on wholesale ticket distributions
throughout the Atlantic, Latin America, Domestic, and systemwide.
Eventhough revenue was strong in 1988, labor and other costs increased
at a higher rate as a consequence of efforts to improve service and
effectiveness of the operation. Labor costs were higher in 1988 due to the
result of an increase in the number of employees during the year. Also the
addition of increased fuel prices, commissions, purchased services,
aircraft rentals, and a $24.0 million foreign exchange loss had a negative
impact on the corporation.
1987 expenses were effected by increases in expenses for fuel,
commissions, maintenance materials and other operating costs which exceeded
expectations. Labor cost reductions were not achieved in 1987. Other losses
which occurred was the settlement of an $18 million provision for the
proposed settlement of an age discrimination suit, and as well as $42.0
million for increased allowances for inventory obsolescence, uncollected
receivables and costs associated with the WorldPass frequent flyer program.
Pan Am lead by it’s founder Juan Trippe, virtually single- handedly
opened up the world to commercial flight. Teeming with adventure,
international intrigue, and financial manipulations, this sky-struck young
man with immense ambition and vision took a seaplane carrying mail 90 miles
from Key West to Havana and expanded the operation into the vast world-wide
airline that at one time considered itself the “chosen instrument” of the
State Department abroad. The airline was considered so official by
Washington that Trippe had power to make deals with foreign governments
In 1934 people thought it was virtually impossible to cross the
Pacific by air, but Trippe saw a way to do it. Through the use of the
famous Clipper Flying Boats, Trippe achieved the impossible, and started
the worlds first trans-atlantic flights to europe, asia, and south america.
Pan Am achieved great heights with the help of pilots like Charles
Lindbergh, who opened many early routes, and hero pilot Eddie Musick, who
pioneered routes across the Pacific, and not to mention Andre Priester, the
engineering marvel behind the early flying boats.
Currently Pam Am provides non-stop service from the states to 36
locations in europe, asia, and south america. The company strives to
provide the best service to all it’s destinations than all the other
carriers in general. Presently the airline is trying to achieve a
“Corporate Image” to attract more business people thus increasing passenger
ASSESSMENT OF COMPANY’S PERFORMANCE AND FINANCIAL CONDITION
Overall, the short term liquidity of Pan Am seems to have a stable
trend but is very poor compared to the average industry’s ratios. Through
the past two years very little changes can be seen in the short-term
liquidity ratios. The firm acid test ratio puts it in the lower quartile.
As for capital structure and long-term solvency we can only say that
the firm is experiencing heavy losses and is relying on long term loans and
secured notes in order to finance themselves. A stockholder deficit and net
losses gave all index ratios negative values. So again we can see that the
capital structure and long-term solvency of the firm is quite poor.
Return on investments where quite poor since no change occurred on the
return of investment and return on equity due to the stockholder deficit.
As for operating performance ratios, these figures where quite poor
also due to heavy losses in operating expenses.
Asset Utilizations ratios where in general good. The firm did have
good sales/cash ratios for the past two years as well as good
sales/receivables ratios.Market Measure ratios were not applicable for the
past two years due to a stock deficit and no dividends givin out.
As for balance sheet analysis, current assets have seemed to increase
five percent during the past two years, especially in cash and receivables.
But a minor decrease in total assets occurred most likely due to the
depreciation and value of equipment and property.
Current Liabilities showed a six percent increase due to increases in
accounts payables, air traffic liabilities, and accured pensions. Long-term
debt did decrease in 1988 but a 32 percent increase in deferred credits
occurred which offsetted that by 25 percent.
As for stockholder deficit, no dividends were issued. Paid-in capital
increased two percent but the accumulated deficit increased by 11 percent
thus adding 118,254 more dollars to the deficit making total stockholder
deficit increase by 24.83 percent. No changes notable for total liabilities
and stockholder deficit.
Pan Am’s operating revenues did increase about 15 percent within the
past two years. This was primarily due to an increase in passenger sales of
16 percent. But as for operating expenses a 30 percent increase resulted
due to a high increase in aircraft and ground rentals for 1988. Also a 45
percent increase depreciation and amortization occurred which put an impact
on 1988 operating expenses. Eventhough sales where high, total operating
cost increases substantially enough to provide a net loss of $84,183. This
loss decreased 25 percent compared to the operating losses of $113,293 in
Pan Am was able to recover some net losses in 1988 due to the sale of
Airbus A320 positions and insurance proceeds over the book value of the
aircrafts. This sale and other expense cutbacks decreased Pan Am’s net
losses in 1988 to 57 percent.
Capital structure and long-term solvency is quite poor due to high
debt’s which incurred from high losses. Pan Am relies heavily on long-term
borrowings from the Pan Am Corporation and other long-term proceeds as well
as other short term investment activities. The only major change in 1988’s
capital structure was the proceeds from the sale of the Airbus A320
positions and Aircraft deposits returned. As for the company’s financial
position, Pan Am is still suffering from the effects of deregulation and
from the losses of the 1980’s, despite sales and new financing, thus
putting it into a high financial risk position.
Pam Am’s liquidity is quite poor, new management is needed to
formulate plans and programs to address liquidity. New plans are also need
to meet longer-term goals of profitability and capital.
Better marketing techniques are needed to attract revenues and
businesses. Perhaps through the use of marketing programs, service product
enhancements and yield management. But then again Pan Am needs to expand
it’s network in order to add additional traffic to support it’s routes and
financial resources to support its operations, since previous financing has
encumbered most of Pan Am’s assets.
The company needs to find a way to achieve bank credit facilities and
stop drawing on its cash balances. Some type of establishment of bank
credit is needed.
Since passenger revenues make up most of Pan Am’s sales, the company
should try to introduce a business image in order to attract businessmen
and businesswomen since most of these people travel around a yearly bases.
This should increase sales throughout the seasons instead of certain
seasons. Offer better services in business class. Even in coach class more
services should be introduced. Some type of advertising is needed to catch
the passengers eye.
As a result, management is aware of the financial difficulties Pan Am
is having, and is doing everything possible to make the airline profitable.
The fate of Pan Am is questionable upon the future demands on the industry.
Fluctuating fuel prices, aircraft rentals, terrorism, natural occurrences,
and other events all have an impact on the airline itself, and the industry
as a whole.