Global Airlines Presented By: Parveen Rai Dan Wurst Amar Leekha

Name: Global Airlines Presented By: Parveen Rai Dan Wurst Amar Leekha
Uploaded: 2017-07-06T20:53:40+00:00
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Description: Global Airlines Presented By: Parveen Rai Dan Wurst Amar Leekha

Global Airlines Presented By: Parveen Rai Dan Wurst Amar Leekha
Aman Sandhu

Overview of Presentation
Industry Overview Current State Trends Key Statistics Regional Overviews Europe, North America & Asia-Pacific British Airways Singapore Airlines SouthWest Conclusion

Characteristics of the Industry
Very cyclical, moves with strength of economy Low Profit Margins….and falling Economic growth Asset intensive industry Investments in aircraft, facilities & equipment Labour constitutes largest cost Jet fuel costs second largest expense Strategic Alliances to defend against competition Technology E-tickets Online Vendors

Future Outlook Recovery of US economy Fuel Prices? Government Funding
Confidence in President Bush Fuel Prices? Government Funding National security Subsidies High tax burden & Regulations Cost structure Increase buying power of customers Customer demands Personal & Business customers

Employee Cost

Profitability

Macroeconomic Forces Slow Economy External Factors Leading to Losses:
Airlines lost $2.5 billion in 2003 (IATA) Total losses: $23.2 billion External Factors Leading to Losses: September 11th Costs of implementing new security measures at airports Severe Acute Respiratory Syndrome (SARS) Increased insurance premiums Rising fuel prices in 2003

Trends Growth in Traffic Large Layoffs
RPM’s grew 2.3% in 2003 Average industry load factor reached record 73.4 % Increase in cargo volume Large Layoffs Increased competition from low-cost carriers Westjet, Southwest and other clone airlines Increased borrowing to cover losses from macroeconomic effects

Capacity Utilization

Regional Overview: European North American Asia-Pacific

European Market Overview

European Market Slower growth for major European carriers:
Increase of “no frill” carriers Deregulation Worldwide Economic downturn Structural problems of overcapacity Threats of terrorism* ***Carriers exposed to US market***

Trends: Euro Market No-frills airlines growing rapidly
Traffic levels within Europe have remained strong Account for 1/3 of UK domestic services and routes between the UK and Europe Increase in amount of planes & routes Deregulations reduce barriers to entry Likely to be followed by industry consolidation Further Growth expected Future focus on other Euro hubs Alliances and Strategic Partnerships

North American Market

North American Market Most mature market
1978 Deregulation: emergence of “no-frills” market Followed by consolidation of industry “No-frills” make up 20% of US domestic market Southwest leading low-cost carrier Sending major carriers into bankruptcy

North America (cont) Major Domestic Airlines expanding international presence US signing of “open skies” agreement Unrestricted capacity and frequency Factors depressing air travel September 11 2001 Recession Fall of US Airways & United: currently restructuring

Asia-Pacific Market

Asia-Pacific Market Relatively immature airline market
Strong growth in airline travel Asian crisis temporarily halted growth Restructuring Disposal of non core assets Termination of loss making routes Wide ranging cost reduction programs

Asia-Pacific Asian carriers look to form alliances with European and N. American carriers Affected by US economy downturn ( ) Less sever on air travel industry compared to US Growth rate expected to be greater than that of western airline markets Rapid growth in large domestic markets (China) Most regulated region for air travel Competitive Advantage: closer to home

Key Measures of Performance

International Routes (Passengers Carried)

International Routes (RPK)

Total Passengers Carried (All Routes)

Total RPK

Past Yields

Industry Growth Trends

Industry Growth Trends (cont)
Air Transport Association

Industry Growth Trends (cont)

Projected Revenue Growth

What Does the Future Look Like?

Profitable Strategies
Recovery of airline industry helps other industries Carriers must demonstrate: “Comfortable” Security Customer service Productivity Government Involvement: Cooperation with airports and airlines Encourage travel Minimize hassles Airport fees Alternatives for short Hauls

Profitable Strategies
Airport – Airline Relationship Work together with final customer in mind Ticket Prices Low cost carriers Increased competition Price conscious business customers Labour Productivity Consolidation of Industry Mergers/Strategic Alliances

Growth Constraints: Fuel Costs
Fuel Efficiency: pm/gallon Hedging

Fuel Costs: Past

Fuel Costs: Future

Growth Constraints: Taxes
1972: Taxes = 7% of ticket price 2004: 26% of ticket

British Airways

British Airlines Listed and Traded on the London Stock Exchange
Trading symbol: BAY Also Trades as an ADR on the TSX and NYSE Symbol: BAB 1 ADR = 10 Shares

British Airlines As of Market Close on November 2, 2004
Bid: Pents ($4.93 CDN) Ask:219 Pents ($4.94 CDN) Volume 28,551,043 Outstanding Shares: 1,070,077,000

Background One of the leading airlines in Europe Operating Bases
Second biggest in Europe by passengers carried Operating Bases Heathrow Gatwick British Airways is a public limited company Employed approximately 49,072 employees in 2004 It operates 291 aircraft Flies to 550 destinations in 133 countries

A Quick History Lesson Successors:
Aircraft Transport and Travel Limited (Daimler Airways) Instone Handley Page British Air Marine Navigation Smaller Airlines (1935 merged into British Airways Limited) Merged In 1939 British Overseas Airways Corporation Trading of BA shares began in 1987

Alliance Member of Oneworld American airlines Qantas Cathay Pacific
Iberia Finair Aer Lingus LanChile

Franchises and Holdings
GB airlines British Mediterranean British Airlines Citiexpress Loganair Sun Air Holdings Air Mauritius Qantas Spanish Iberia

Stated Objectives Future size and shape strategy
Achieve a 10% operating margin Operating margin up 1.6 points from 3.8 points in 2003 13,000 reduction in employees since August, 2001 Fleet and network strategy Aircraft replacements Reduced fleet by 39 aircraft Gatwick moving to point and spoke strategy Low fares strategy On 180 shorthaul routes Compete with no frill competitors External cost reductions Hedging strategies Employee cost saving strategies Product and service improvements

Main Competitors Europe Market North American Market Lufthansa
Air France North American Market United

Cost Structure

Geographic Revenue Distribution

Strengths/Opportunities
Strong Brand Equity Account for over half of flights within UK New low fares strategy to compete against “no frills airlines” 37.3% increase in operating profit Increasing air travel

Weaknesses and Threats
Heavy Competition Strict Government Regulations Route flying rights Fare setting Airport access “Slots” availability New operational standards (security, safety) Jet Fuel Prices Terrorism Demand for travel affected by economic conditions (SARS) Increased Insurance Costs Increased Security Costs

Management Chief Executive Rod Eddinghton May 2000 John Rishton CFO
September 1994 via controller Mike Street Director of customer service and operations 1997 Robert Webb QC General Counsel 1998 Martin George Director Marketing and Communications 1987 via director of Marketing

Management Con’t Roger Maynard Director of Investments
1987 via VP Commercial Affairs N.A Alan McDonald Director Engineering 1966 Lloyd Cromwell Griffths Director of Flight Operations 1973 via Chief Pilot Paul Coby Chief Info Officer Robert Boyle Director of Commercial Planning Neil Roberts Director for People

Operations 2004 2003 2002 2001 2000 Passenger Load Factor .73 .719
.704 .714 .696 RPK (Millions) 103,092 100,112 106,270 123,970 127,425 Passengers Carried 36,103,000 38,019,000 40,004,000 44,462,000 18,315,000 ASK (Millions) 141,272 139,172 151,046 17,2524 183,158 Breakeven Load Factor .636 .639 .65 .644 .659 RTK (Millions) 14,771 14,231 14,362 16,987 17,215 Tons Cargo Carried 796,000 764,000 755,000 914,000 909,000

Liquidity Analysis Q1-2004 2004 2003 2002 2001 2000 1999 Current .922
0.922 .773 .799 .813 .777 .847 NWC -242 -231 -818 -642 -562 -774 -465

Capital Structure Analysis
Q1-2004 2004 2003 2002 2001 2000 1999 Debt/Equity 4.21 5.54 6.15 5.16 4.44 4.53 3.04 Interest Coverage 2.1 1.6 .3 1.7 1

Capital Market Analysis
Q1-2004 2004 2003 2002 2001 2000 1999 Price Earnings 7.58 7.62 -10.7 -21.35 14.99 -7.85 3.96 Market to Book 1.56 1.52 .62 1.16 1.34 1.42 1.44 Dividend Yield .057 .054 .042 Dividend Payout .852 -.427 .164

Profitability Analysis
Q1-2004 2004 2003 2002 2001 2000 1999 ROA 4.38% 3.05% -.87% -.88% 1.64% -3.28% .9% ROE 20.53% 19.96% -6.21% -5.42% 8.92% -18.11% 3.64% Profit Margin 5.23% 3.84% -1.32% 4.1% .94% EPS .370 -.103 -.114 .210 -.420

Cash Flow Analysis 2004 2003 2002 2001 2000 Free Cash Flow
£676,000,000 £ 942,000,000 £ 213,000,000 £ 491,000,000 £ 316,000,000

Stock Valuation Discount Rate Beta = 1.98459
Market Return = 7.48% (FTSE 20 yr average return) Risk Free = 2.47% (1 Year LIBOR) Discount Rate = 12.22% Average Cash Flow = £527,600,000

Stock Valuation 2004 2005 2006 2007 2008 2009 2010 2011 2012 Free Cash Flow 527.6 Discounted 470.23 419.1 373.53 332.91 296.72 264.45 235.7 210.07 187.23 PV = £7,789,940,000 Market Capitalization = £3,032,128,400 Undervaluation = £4,757,811,600

Pricing Chart

Pricing Chart (5 Year)

Recommendations Poor operating statistics Liquidity Problems
Barely covering interest Poor earnings Therefore…Sell

Singapore Airlines Listed and traded on the Singapore Stock Exchange
Share price as of Nov SD Also traded in the US as an ADR: Symbol SPAAF Exchange Rate: SD – 1 CAD (As of Nov 3rd) Number of shares issued 1,218,149,660

Brief History SIA began in May 1947, when Malaysian Airways first operated a twin-engined Airspeed Consul between Singapore, Kuala Lumpur, Ipoh and Penang. 1963 – Changed to Malaysian Airlines with formation of federation of Malaysia 1966 – Became Malaysian-Singapore Airlines 1972 – Restructured itself into 2 airlines (Malaysian & Singapore Airlines)

Stated Objectives Continue to offer innovative promotions to attract new customers and maintain competitive advantage Create new non-stop routes which will connect the East to West. These flights offer quick and efficient non-stop service utilizing SIA’s new Airbus A ’s After implementing the longest flight in the world from Singapore to Los Angeles and recently creating a new non-stop route from Singapore to New York, SIA plans to create new routes to decrease flight and stop-over time Provide competitive fares through their low-cost subsidiaries (Tiger, SilkAir and Virgin Airways) Build new terminal in strategic locations to cater for low-cost airlines (i.e. new terminal built in Changi Airport)

Route Map

Star Alliance Members Air Canada Singapore Airlines Air New Zealand
Asian Airlines Austrian BMI LOT Polish Airlines Lufthansa Singapore Airlines Spanair Thai Airways United US Airways VARIG SAS

Subsidiaries of SIA Silk Air SIA Engineering Co. Tradewinds SIA Cargo
SATS

Main Competitors Cathay Pacific Japan Airlines Malaysian Airlines

Strengths Great Reputation for quality service Low Debt Structure (low interest costs) Addition of new Airbus A ’s New non-stop routes Partners & Alliances Profit Sharing Plans Excellent in flight-service (fleet) Weaknesses Terrorism Jet Fuel Prices SARS War in IRAQ Decrease in load factor Decline in EPS

Cost Structure

Geographic Distribution Of Revenue

Operating Data 04-03 03-02 02-01 01-00 00-99 Pax Carried ASK RPK
ASK RPK Pax Load Factor 73.30% 74.50% 74.00% 76.80% 74.90% Pax Break/ Even Factor 72.80% 73.60% 71.10% 70.20% 66.2%

Liquidity Analysis 2004 2003 2002 2001 2000 Current Ratio 0.9177
0.6871 0.9243 0.8925 0.9432 Net Working Capital Ratio -0.013

Capital Structure Analysis
2004 2003 2002 2001 2000 D/E 0.3900 0.3952 0.3937 0.3619 0.3547 Interest Coverage Ratio 13.333 15.159 21.811 50.792 39.352

2004 2003 2002 2001 2000 P/E 15.638 10.011 27.746 10.751 17.505 Market-Book 11.802 11.286 10.951 10.738 9.537 Dividend Yield Dividend Payout

Profitability Analysis Ratio
2004 2003 2002 2001 2000 ROA 4.336% 5.639% 3.462% 9.017% 6.923% ROE 6.038% 7.863% 4.770% 12.25% 9.172% Profit Margin .08700 EPS 0.697 0.874 0.519 1.265 0.914

Quarterly Financial Data
2004 Q1 April – June Q2 July – Sept ROE ROA P/E 52.830 37.201 D/E .42105 .44297 EPS 0.212 0.293 P/BV

Cash Flow Analysis 1153.7 Million 2004 2003 2002 2001 2000
Free Cash Flow (SGD) Million 94.4 Million -472.7 Million 756.2 87.3

Market Return = 5.36% Strait Times Index (10 Yr Average) Risk Free Rate = 1.4% (5 Year Bond) Discount Rate = % Average Cash Flow = Million SGD

Stock Valuation Present Value: 3,294,660,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 Free Cash Flow Million 441.08 Million Discounted 424.52 408.58 393.26 378.50 364.29 350.63 337.46 324.80 312.62 Present Value: 3,294,660,000 Market Capitalization: 13,281,736, SGD Overvalued: 9,987,076, SGD

Recommendation Moderate Buy
Very Liquid Company (high current ratio and large cash on hand) Great track record for exceptional customer service Constant dividend payout Expanding routes and services Diversified risk through low cost subsidiaries Very low levels of debt (low interest payments)

Southwest Airlines Share Price: USD$15.96

Southwest Airlines (LUV)
Listed on: NYSE Symbol: LUV Index Member: S&P 500, DJTA Market Cap: $12.44B Shares Outstanding: 779.58M Daily Departures: 2,800 flights a day

Company Background Began service June 18, 1971 with flights to Houston, Dallas, and San Antonio. Shorthaul, high-frequency, point-to-point, low-fare service Most airlines use the hub-and-spoke system As of December 31, 2003, Southwest served 337 nonstop city pairs. largest carrier based on scheduled domestic departures. 2003 marked Southwest's 31st consecutive year of profitability.

Growth and Expansion Addition of 16 nonstop flights from Chicago Midway Airport to 13 existing nonstop markets. nonstop service to: Orlando Fort Lauderdale/Hollywood Manchester Las Vegas Raleigh-Durham Tampa Bay will begin in the first quarter of 2005 Oakland Phoenix Seattle Providence Philadelphia, and Columbus Los Angeles International

Cost Reducing Strategies
Restructuring Consolidation of reservations operations Elimination of traditional travel agency commissions Future fleet of Boeing will have fuel-saving Blended Winglets Hedging 70-80% of fuel costs at approx. $24/barrel of crude oil

Mission Statement “…dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.”

Statement of Objectives
to provide safe, low price transportation maximum customer convenience to be the cheapest and most efficient operator In specific domestic regional markets to provide customers with a high level of convenience and service Outstanding customer service through highly motivated employees.

Main Competitors AMR Corp. (AMR) JetBlue Airways Corp. (JBLU)
Delta Airlines Inc. (DAL)

Strengths/Weaknesses
Known for superior customer service Low-cost, no-frills Direct one-way travel Point-to-point efficiency Largest carrier for domestic service One fleet type Hedge against exposure to fuel prices (80%) Only airline rated investment grade Weaknesses Point-to-point creates excessive expenditure Too many locations, administrative costs Risk to shocks in US economy, since it is a domestic carrier

Cost Structure

Market Share & Capacity

System Map

Boeing 737 Fleet 737 Type Seats Average Age (Yrs) # of Aircraft
# Owned # Leased -200 122 21.2 23 21 2 -300 137 12.6 194 110 84 -500 12.7 25 16 9 -700 3.3 146 145 1 Totals 9.6 388 292 96 Plans to retire by end of first quarter 2005.

Operating Data ($’s in millions) 2003 2002 2001 2000 1999 47,943,066
RPM (000s) 47,943,066 45,391,903 44,493,916 42,215,162 36,479,322 ASM (000s) 71,790,425 68,886,546 65,295,290 59,909,965 52,855,467 Passenger load factor 66.78% 65.89% 68.14% 70.46% 69.02% Passenger revenue yield per RPM $0.1197 $0.1177 $0.1209 $0.1295 $0.1251 Size of fleet at year end 388 375 355 344 312

Financial Data ($’s in millions) 2003 2002 2001 2000 1999 $5,937
Operating revenue $5,937 $5,522 $5,555 $5,650 $4,736 Operating expense 5,454 5,105 4,924 4,628 3,954 Operating income 483 417 631 1,022 782 Operating margin 8.14% 7.55% 11.36% 18.09% 16.51% Net income 442 241 511 603 474 Net margin 7.44% 4.36% 9.20% 10.67% 10.02% EPS (basic) $0.56 $0.31 0.67 0.81 0.63 EPS (diluted) $0.54 $0.30 0.76 0.59

Liquidity 2003 2002 2001 2000 1999 Current Ratio 1.34 1.56 1.13 0.64 0.66 NWC (million’s) 590 798 281 (466.5) (329.4)

Capital Structure 2003 2002 2001 2000 1999 Interest Coverage 5.31 3.93
9.01 14.59 1.45 D/E 0.96 1.02 1.24 0.93 0.99

2003 2002 2001 2000 1999 P/E 28.82 44.84 27.58 27.60 17.13 MV/BV 2.52 2.44 3.51 4.82 2.87 Dividend Yield 0.11% 0.13% 0.10% 0.07%

Profitability 2003 2002 2001 2000 1999 ROA 4.69% 2.68% 6.53% 9.79%
9.15% ROE 9.33% 5.71% 13.69% 19.19% 18.13% Profit Margin 7.44% 4.36% 9.20% 10.67% 10.02% EPS $0.54 $0.30 $0.63 $0.76 $0.59

Cash Flow Analysis (dollars in millions) 2003 2002 2001 2000 1999
Cash Flow From Operations 1,336 520 1,485 1,298 1,029 Free Cash Flow 98 (83) 487 163 (139)

Cash Flow Analysis increase in operating cash flows in 2003 a result of: due to higher net income $271 million government grant from the Wartime Act increase in accrued liabilities decrease in accounts and other receivables Heavy investments result in FCF of $98Mill for 2003 Large cash increase due to exercise stock options Use increase in cash flow to repurchase up to $300 million of common stock in the open market

Market Return = 9.98% Average Return S&P 500 Index (22 Yr Average) Risk Free Rate = 4.85% (30 Year Bond) Discount Rate = % Average Discounted Cash Flow=$96,318,685.20

Discounted Cash Flow Present Value: $528,970,792
Market Capitalization: $12.44B

Net Market Value of Assets
737 Type Seats Average Age (Yrs) # of Aircraft # Owned # Leased -200 122 21.2 23 21 2 -300 137 12.6 194 110 84 -500 12.7 25 16 9 -700 3.3 146 145 1 Totals 9.6 388 292 96

Competitor Comparison
LUV AMR DAL JBLU Industry Market Cap: 12.44B 1.33B 713.46M 2.45B 635.40M Employees: 32,847 96,400 70,600 4,704 5.30K Rev. Growth: 7.50% 0.80% -0.00% 57.20% 10.10% Revenue: 6.36B 18.50B 14.54B 1.19B 1.46B Gross Margin: 29.01% 21.18% 7.02% 39.34% 20.71% EBITDA: 902.00M 1.30B 158.00M 206.19M 158.97M Oper. Margins: 7.56% -0.09% -7.37% 12.56% 4.24% Net Income: 284.00M M -2.86B 64.61M N/A EPS: 0.349 -3.027 0.585 PE: 45.73 40.50 15.03 PEG: 2.53 2.69 0.81 PS: 1.90 0.07 0.05 1.93 0.31 As of Sept. 30, 2004: for trailing twelve months

Quarterly Financials 3rd Q Sept 30/04 2nd Q June 30/04 ROE 2.21% 4.30%
ROA 1.06% 2.09% D/E 1.13 1.06 EPS $0.15 $0.14 P/B 2.14 2.58 P/E 90.80 119.79

Market Trend

Commitments & Contingencies
contractual obligations and commitments future purchases of aircraft payment of debt lease arrangements primarily of scheduled aircraft acquisitions from Boeing 28 scheduled for delivery in 2005, 22 in 2006, 25 in 2007, and 6 in 2008 $650Mill worth of accrued liabilites in 2003

Profitability

Valuation Investment grade rating P/E ratio > industry
PEG ratio > industry EPS > industry Low D/E ratio (not highly leveraged) Market Cap > DCFCF Current ratio, interest coverage, D/E > industry average

Recommendation HOLD Showing of strong future growth
Cash Flows are not consistent Seasonal, so expect price to go up during spring Pretty consistent stock 31st consectutive year of profitability Steady dividend for common shareholders Not very leveraged, hedging of fuel costs limit exposure to risk Safety in the Stock Current ratio, interest coverage, D/E > industry average Senior unsecured debt considered investment grade: S&P, Moody’s and Fitch

Global Airlines Presented By: Parveen Rai Dan Wurst Amar Leekha

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