AIRLINES Leo Margarita Miki Vincent Wylie BUS 417 Security Analysis Industry amp Company Analysis Agenda Industry Overview Leo Market Analysis Wylie Singapore Airline Vincent ID: 324403
Download Presentation The PPT/PDF document "GLOBAL" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
GLOBAL
AIRLINES
Leo | Margarita | Miki | Vincent | Wylie
BUS 417 | Security Analysis
Industry & Company AnalysisSlide2
Agenda
Industry Overview – LeoMarket Analysis – Wylie
Singapore Airline – Vincent Cathay Pacific – Miki
Southwest – Margarita Slide3
Terminology
ATK – Available Tonne Kilometer (Capacity)Passenger and cargo capacityASK – Available Seat Kilometer (Capacity)[number of seats] * [kilometers flown]
RPK – Revenue Passenger Kilometer (Traffic)[number of paying passengers] * [kilometers flown]FTK – Freight Tonne Kilometer (Traffic)
[Freight tonnes carried] * [kilometers flown]Yield – Revenue per Kilometers Flown by Paying Passengers[Revenue] / [RPK]LF – Load Factor (Capacity Utilization)[RPK] / [ASK] = [Number of Passengers] / [Number of Seats]Break Even LF – Operating Costs = Operating Revenue[Unit Cost] / [Yield]Slide4
History
1909
1910
1914
1925
1938
1945
1949
2001
1970
2007
2014
1909
DELAG (Deutsche
Luftschiffahrts-Aktiengesellschaft
) becomes the world’s first airline
1910
First jet propelled aircraft (
Coandă
) produced
1914
Tony
Jannus
conducted United States’ first scheduled airline flight on 1 January 1914 for the St. Petersburg-Tampa Airboat Line
1925
Passenger service is established on the mail routes through the development of the Ford Trimotor, the first successful American airliner with a 12 passenger capacity
1938
Civil Aeronautics Act – Delegating federal responsibilities to Civil Aeronautics Authority
1945
World War II brought new life to the airline industry. Many airlines in the Allied countries were flush from lease contracts to the military and foresaw a future explosive demand for civil air transport.
1949
First production commercial aircraft (de Havilland DH 106)
1970
1970s was the era of revolution for airlines. Introduction of large multi-aisle, wide body planes (Boeing 747). Southwest launches era of low-cost airlines.
2001
Following the 9/11 incident, air travel decreased nearly 20% in air travel capacity. Passenger sentiment remained low despite airport security improvements. Stock exchange remained closed until September 17, and fell by 684 points (7.1%) according to the Dow Jones Industrial Average, a record one day point decline. US stocks lost $1.4 trillion in valuation in the following week.
2007
The airline industry heavily depends on global economic conditions. Decline in disposable income and business sentiment due to the recession severely crippled demand for air travel.
2014
Plunge in crude oil prices have alleviated stress on operating costs for airlines, enjoying peak profit margins.Slide5
Regulation
1925 – Contract Air Mail ActPrivate ownership of air mail (TWA, American, United)Air mail carriers soon expanded to carrying passengers1926 – Air Commerce Act
Established aviation safety standards1934 – Federal Aviation Administration (FAA)Formed by Bureau of Air Commerce, improved and built additional airfields
1940 – Civil Aeronautics Administration (CAA) & Civil Aeronautics Board (CAB)CAA in oversee air traffic control and safety regulationsCAB oversee air service, regulating fees and schedulesPost 1945 – Air Transport AgreementOpen skies competition for international routesLiberalized rules for international aviation markets and minimizes government interventionSlide6
Regulation
1978 – Airline Deregulation ActElimination of the CAB which previously regulated entry, exit, routes, and pricingMergers of local carriers permitted
Implementation of the “Hub and Spoke System”Effect
Removed government control over commercial aviationExpose airline industry to market forcesSlide7
Business Structure
Hub and Spoke
Used by legacy carriers
Allows more distant and international routes
Utilize main airports as hubs
Lead to more efficient use of transportation resource
Centralized model result in inflexible operationSlide8
Business Structure
Point to Point
Used by low cost (discount) carriers
Shorter routes, usually regional/domestic
Decreased connection and travel times
Increased utilization leads to lower unit cost
Avoid domino effect
Require more routes, less flexibility in destinationSlide9
Airline Types
Network Legacy Airlines
Low Cost Airlines
Cargo Airlines
Service differentiation
Different service classes
Luxury aircrafts
Hub and spoke system
Serve major airport with connecting flights
Price leadership
Fewer services
Medium sized aircrafts
Point to point system
Serves smaller airports to maximize air time
Dedicated to transport of air cargo
Division or subsidiary of passenger airlines
(US) Forbidden from carrying passengersSlide10
Airline Alliance
An agreement between two or more airlines to cooperate on a substantial level
Advantages
DisadvantagesIncreased traffic/revenue per seat mile
Improved frequent flyer program
Cost savings from economies of scale
Brand prestige
Violation of fair competition standards/antitrust rules
Consolidation of market, eliminating competition
Complex partnershipsSlide11
Current Environment
Economic value of industryGrowing since the global recessionRecent dip due to rise in the US dollar, devaluing foreign goods and tourist spendingSlide12
Industry Economic Sensitivity
Key external success driversGlobal per capita incomeGlobal tourist arrivals
World GDPWorld price of crude oilConsumer demand determinants
Travel optionsPriceConsumer preferencesSlide13
Global Economy
Reviving economic activity in key global markets
Europe and Japan monetary policy stimulus
Emerging markets in Asia Income levels and consumer spending on upward trajectorySlide14
Passenger Traffic Demand
Steady growth since 2010China and Middle East lead all regions with double-digit traffic growthConsumer spending on the rise in alignment with increasing disposable incomeSlide15
Industry Productivity
Historically high airplane utilization and passenger load factors Airlines matching demand without oversupplying capacityAchieve all time high 80% load factor in 2014Slide16
Revenue and Cost StructureSlide17
Revenue and Cost Structure
Profit Margin – 6%Historically low due to a mature industry with heavy competitionImproving from cost cutting, lower fuel prices, and mergers and acquisitionsSlide18
Revenue and Cost Structure
Regional Profit MarginsUS airlines experience largest improvement due to post-financial crisis restructuringConsolidation of US airlines and adding capacity
Strong US economy, rising US dollar, falling fuel pricesOther regions did not experience consolidationSlide19
Revenue and Cost Structure
Purchases (fuel, food, etc.) – 45.5%Fuel experienced drastic dips in 2014 and 2015, decrease in 25% airline costs, profit margins nearly doubled to US$20B in 2014Newer aircrafts are more fuel efficient
Long term is uncertain due to high oil price volatilityOil hedging tactics can help smooth the effectsSlide20
Revenue and Cost Structure
Wages – 21.8%High union participation rates keep industry labour costs highDeclined in proportion to revenue due to industry consolidation and technological improvements to labour productivitySlide21
Revenue and Cost Structure
Aircraft – 12.4%Fleet forecasted to increase by 900 to a total of 27000 aircraft to satisfy growth in demandPressure to replace aircrafts due to fuel efficiency higher capacitySlide22
Equity Investors
Return on invested capital lower than Weighted Average Cost of CapitalMarginally low due to slim profitsIntensity of competition and challenges of the industry make it a risky investment
Forecasted ROIC at 7.5% for 2015, higher than WACC for onceSlide23
Market Analysis
Power of suppliers – HighDominated by two major suppliers, Boeing and AirbusPossibility of vertical integration of supplier is low
Power of buyers – HighThere is low product differentiation across airlinesConsumers are price conscious
Competitive Rivalry – High Intense price competitions, multiple airlines offers the same routes and servicesAirlines need to compete on additional services and quality of services offeredAvailability of Substitutes – LowThe distance covered by long-haul flights are not feasibly achieved by any other means currentlyThreat of New Entrants – LowHigh competition, low industry concentration, mature industry life cycle, capital intensity, heavy regulation, high technology changes all act as barriers to entrySlide24
Future Outlook
Growing demand
Traffic growth expected to increase in alignment with improving economic conditions, namely, world GDPSlide25
Future Outlook
Diversifying marketLess concentration on North America and Europe marketsBooming emerging markets make expected revenues from airline industry less susceptible to region specific economic conditionsSlide26
Industry Forecast
Year Revenue IVA Revenue IVA IVA/Revenue
($B) ($B) ∆ (%) ∆ (%)
(%)2010 625.3 206.3 17.1 28.3 33.02011 697.3 211.3 11.5 2.4 30.3 2012 753.0 220.7 8.0 4.4 29.32013 754.0 227.7 0.1 3.2 30.2
2014 773.8 244.7 2.6 7.5 31.6
2015 783.0 256.7 1.2 4.9 32.8
2016 814.0 254.1 4.0 -1.0 31.2
2017 836.0 269.0 2.7 5.9 32.2
2018 865.0 282.9 3.5 5.2 32.7
2019 881.0 285.1 1.8 0.8 32.42020 897.0 291.2 1.8 2.1 32.5
*Industry GDP (IVA) = revenue + change in stock – purchases – transfers in and selected expenses*Extracted from IBISWorld Industry Report
“Global Airlines” March 2015Slide27
Singapore Airlines Ltd. (SIA)Slide28
Stock information
Source: BloombergSlide29
1 year Stock Price Movements
Source: BloombergSlide30
1 year vs S&P 500
Source: BloombergSlide31
5 years Stock Price Movements
Source: BloombergSlide32
5 years vs S&P 500
Source: BloombergSlide33
10 years Stock Price MovementsSlide34
10 years vs S&P 500Slide35
Share Price and Turnover
Source: Annual report FY2014/15 of Singapore AirlineSlide36
Share Price and Turnover
Source: Annual report FY2014/15 of Singapore AirlineSlide37
Company informationSlide38
Company Profile
Founded in 1972 - from a regional airline to one of the most respected travel brands around the worldBased at Singapore Changi Airport, Singapore Airlines is the national carrier of SingaporeRanking amongst the top 15 carriers worldwide in terms
of revenue passenger kilometres10th in the world for international passengers carried
One of the largest airlines in AsiaSlide39
Subsidiaries for the groupSlide40
Corporate StructureSlide41
Information on Shareholdings
Source: Annual report FY2014/15 of Singapore AirlineSlide42
Company MissionSlide43
Company HistorySlide44
Management Team
STEPHEN LEE CHING YENChairman of Singapore Airlines Ltd, SIA Engineering Company Ltd and NTUC Income Insurance Co-operative Limited. Managing Director of Shanghai Commercial & Savings Bank Ltd (Taipei) and GMT Investments Pte LtdGraduated from Northwestern University, Illinois, USA in 1973 with a Master of Business
AdministrationSlide45
Management Team
Goh Choon PhongChief Executive Officer (CEO) of Singapore Airlines LtdAppointed the CEO of the airline on 3 September
2010Worked for the SIA group for more than 20 years for the airlines' operations in China and Scandinavia
Has held numerous senior positions during his career at the airline Slide46
Fleet Profile
Source: Annual report FY2014/15 of Singapore AirlineSlide47
Company Routes
Singapore Airlines operates passenger services to more than 60 cities in over 30 countries around the world. Within Asia, passengers can connect to over 30 cities served by SilkAir, our regional wing. Use the interactive route map to view our flight itinerariesSlide48
Company Routes
Source: Annual report FY2014/15 of Singapore AirlineSlide49
Operation AnalysisSlide50
Operation Analysis
Source: Annual report FY2014/15 of Singapore AirlineSlide51
Revenue
Source: Annual
report FY2014/15 of Singapore AirlineSlide52
Expenditure
Source: Annual
report FY2014/15 of Singapore AirlineSlide53
Net profit
Source: Annual
report FY2014/15 of Singapore AirlineSlide54
P
rofit margin
Source: Annual report
FY2014/15 of Singapore AirlineSlide55
Risk ManagementOver the course of the period under review, the
following were the more significant risk management activities carried out:(a) Review of Compliance Risks from Outsourced Activities(b) Review of strategies for managing Information Technology Risks
(c) Review of Risks from Critical Supplier(d) Jet fuel pricesSlide56
Fuel Price and Fuel Cost
Source: Annual
report FY2014/15 of Singapore AirlineSlide57
Financial
AanalysisSlide58
Balance Sheet (Annual)
Source: Annual report FY2014/15 of Singapore AirlineSlide59
Balance Sheet Continued (Annual)
Source: Annual report FY2014/15 of Singapore AirlineSlide60
Consolidated Profit and Loss Account
Source: Annual report FY2014/15 of Singapore AirlineSlide61
Consolidated Profit and Loss Account
Source: Annual report FY2014/15 of Singapore AirlineSlide62
Consolidated Statement ofComprehensive Income
Source: Annual report FY2014/15 of Singapore AirlineSlide63
Statement of Cash flow
Source: Annual report FY2014/15 of Singapore AirlineSlide64
Statement of Cash flow
Source: Annual report FY2014/15 of Singapore AirlineSlide65
Statements of Changes in Equity
Source: Annual report FY2014/15 of Singapore AirlineSlide66
Quarterly Results of the Group
Source: Annual report FY2014/15 of Singapore AirlineSlide67
Five-Year Financial Summary of the Group
Source: Annual report FY2014/15 of Singapore AirlineSlide68
Five-Year Financial Summary of the Group
Source: Annual report FY2014/15 of Singapore AirlineSlide69
Five-Year Financial Summary of the Group
Source: Annual report FY2014/15 of Singapore AirlineSlide70
Financial Summary
For the fiscal year ended 31 March 2015, Singapore Airlines Ltd. revenues increased 2% to SP$15.57B. Net income increased 2% to SP$367.9M. Revenues reflect Passenger Carried increase of 1% to 18.7M. Net income also reflects Impairment of Freighters decrease of 98% to SP$7M (expense), Provision for penalties and costs incur decrease of 71% to SP$25.1M (expense). Dividend per share increased from SP$0.21 to SP$0.22.Slide71
Recommendation
BUYSlide72
Cathay PacificSlide73
Stock InformationSlide74
1
Y
ear Stock Price MovementsSlide75
5
year stock price movementsSlide76
10 year stock price movementsSlide77
10 year stock price movements compare with indexSlide78
Shareholding Structure Slide79
Company Profile
Registered and based in Hong Kong, founded in 1946Owned by the Swire Group.Cathay Pacific and its subsidiaries employ more than 32,900 people worldwide,
of whom around 25,400 are employed in Hong Kong.Listed
on The Stock Exchange of Hong Kong Limited, as are its substantial shareholders Swire Pacific Limited (“Swire Pacific”) and Air China.Offering scheduled passenger and cargo services to 203 destinations in 50 countries and territoriesCarry approximately one million passengers each monthSlide80
Subsidiaries Slide81
AssociatesSlide82
Company MissionSlide83
Company HistorySlide84
Company HistorySlide85
Management TeamSlide86
Management Team
John Slosar Became Chairman of Cathay Pacific on 14 March 2014.
Joined the Swire group in 1980 and has worked with the group in Hong Kong, the United States and Thailand.Holds degrees in Economics from Columbia University and Cambridge University.
Has been a Director of the airline since July 2007. Was appointed Chief Operating Officer in July 2007 and Chief Executive in March 2011. Is also Chairman of John Swire & Sons (H.K.) Limited, Swire Pacific Limited, Swire Properties Limited and Hong Kong Aircraft Engineering Company Limited.Slide87
Ivan Chu
Appointed as Chief Executive of Cathay Pacific on 14 March 2014. Joined the Swire group in 1984 and has worked with the group in Hong Kong, Mainland China, Taiwan, Thailand and Australia. Holds a Bachelor of Social Science degree from the University of Hong Kong and a Master of Commerce degree from the University of New South Wales.
Was appointed Director Service Delivery for Cathay Pacific in September 2008 and Chief Operating Officer in March 2011. I
s also Chairman of Hong Kong Dragon Airlines Limited and a Director of John Swire & Sons (H.K.) Limited and Swire Pacific Limited.
Management TeamSlide88
Rupert Hogg
Became the Director and Chief Operating Officer on 14 March 2014.Joined the Swire group in 1986 and has worked with the group in Hong Kong, Southeast Asia, Australia and the United Kingdom. Holds a Master of Arts degree in History from Edinburgh University.
Was appointed Director Cargo in September 2008 and Director Sales & Marketing in August 2010. Is also Chairman of AHK Air Hong Kong Limited and a Director of Hong Kong Dragon Airlines Limited.
Management TeamSlide89
Martin Murray
Appointed as Finance Director of the Company since November 2011.
Joined the Swire group in 1995 and has worked with the group in Hong Kong, the United States, Singapore and AustraliaGraduated
from the University of Glasgow with a Bachelor of Accountancy degree. Also a director of Hong Kong Dragon Airlines Limited. Was previously Deputy Finance Director of Swire Pacific Limited
Management TeamSlide90
Fleet ProfileSlide91
Aircraft
66 Owned81 Leased (Most of them are with purchase option)Had 16 new aircraft in 2014 and expecting 9 new aircrafts to be delivered in 2015.Have 79 new aircraft due for delivery
up to 2024 as at 31st December 2014 . Slide92
Company RouteSlide93
Operation AnalysisSlide94
Composition of AssetsSlide95
Revenue CompositionSlide96
Revenue and Break-evenSlide97
Geographical RevenueSlide98
Composition of ExpensesSlide99
Key StatisticsSlide100
Key StatisticsSlide101
Risk Management
The company is exposed to the fluctuations in:
Foreign exchange rate
As the company’s revenue streams are denominated in various foreign currencies.Strategy: Financed their assets in
those foreign currencies in which net operating surpluses are anticipated, thus establishing a natural hedge.
Also uses
currency derivatives to reduce anticipated foreign currency surpluses.
Interest rate
The company’s long term borrowings are at floating rates
Strategy: Use interest rate swaps to maintain appropriate fixed and floating rates.
Jet fuel prices
Fuel cost accounts for over 35% of the total operating expensesStrategy: Use fuel derivativesSlide102
Fuel price and consumptionSlide103
Fuel Expenditure and HedgingSlide104
Hedging Fuel PricesSlide105
Financial StatementsSlide106
Balance Sheet(Semi-annual)Slide107
Balance Sheet(Annual)Slide108
Income Statement(Annual)Slide109
Income Statement(Semi-annual)Slide110
Statement of Cash Flow
(Annual)Slide111
Statement of Cash Flow
(Semi-annual)Slide112
Statement of
Changes in EquitySlide113
Recommendation
BUYSlide114Slide115
STOCK INFORMATIONSlide116
1YEAR STOCK PRICE MOVEMENTSSlide117
5 YEARS STOCK PRICE MOVEMENTSSlide118
10 YEARS STOCK PRICE MOVEMENTSSlide119
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
-SOUTHWEST AIRLINES CO., -S&P 500 INDEX,
- NYSE ARCA AIRLINE INDEX Slide120
Company OwnershipSlide121
Company Profile
Headquarters in Dallas, TexasSouthwest is a major domestic airline that provides primarily short-haul, high-frequency, point-to-point, low-fare
servicesHas among the lowest cost structures in domestic airline industry
Southwest offers a relatively simple fare structure. . Southwest bundles fares into three major categories: “Wanna Get Away ” “Anytime ” and “Business Select”
Uses a single aircraft type – Boeing 737
Southwest’s
use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training
activities
#4 Fuel Efficiency U.S Domestic airline
Provides services in 93 destinations in 40 states, the District of Columbia, the Commonwealth of
Puerto Rico, and five near-international countries including Mexico (Cancun, Mexico City, and Cabo San Lucas/Los Cabos)Slide122
Company History
1971 – Air Southwest Co. changes its name to Southwest Airlines Co. Begins its service to Dallas, San Antonio and Houston.1975 – Southwest Airlines common stock is listed for trading on the American Stock Exchange under the ticker symbol "LUV
".1979 – Begins its service to New Orleans.
That is the first destination outside the State of Texas.1993 - Acquires Morris Air and Arizona One1995 – Becomes one of the first airlines to have a websiteSlide123
Company History
1996
-
Online booking site is
launched
2009
–
Becomes
largest carrier in the US with 545 Boeing 737 aircrafts servicing 68 airports in 35 states and able to offer more than 3,300 flights a day
2011
–
Integration of Air Tran.
The purchase adds 25 additional destinations previously not served by
Southwest
in
Mexico and the
Caribbean , Atlanta, Georgia 2014 –AirTran and Southwest are fully integrated. Southwest introduces new branding, including a new livery and logoSlide124
MISSION Slide125
FLEET Slide126
SYSTEM MAPSlide127
Route Map (Dallas)Slide128
Management TeamSlide129
Management Team
In 1986
began his career at Southwest Airlines as Controller, moving up to Chief Financial Officer and Vice President Finance, then Executive Vice President and CFO, before being promoted to CEO and Vice Chairman in July 2004.
He received a B.B.A. in Accounting from the University of Texas at Austin. He is a Certified Public Accountant and serves on the Board of Directors of the Lincoln National Corporation and Airlines for America, the airline industry advocacy group (serving as Chairman from 2012 - 2014).Chairman of the Board, President & Chief Executive Officer
Gary C. KellySlide130
Management Team
Mike received a B.B.A. from the University of Texas at Austin. He is also a Certified Public Accountant
Joined Southwest in 1993
Mike has held several positions at Southwest such as Executive Vice President of Aircraft Operations, Senior Vice President of Planning, Vice President Financial Planning & Analysis, Senior Director of Financial Planning & Analysis, Director of Financial Planning, and Director of Internal Audit
Executive Vice President & Chief Operating Officer
Mike Van de
VenSlide131
Management Team
Before joining Southwest Airlines, Ron was a partner in the San, where Ron worked extensively on the Southwest Airlines' account.
Ron has represented Southwest since 1981
Ron has an undergraduate degree from the University of Texas at Austin, and, earned a law degree from George Washington University, in Washington, D.C
Executive Vice President & Chief Legal & Regulatory Officer
Ron RicksSlide132
Management Team
Prior to joining Southwest Airlines, Jeff worked 12 years at Mesa Petroleum from 1981 to 1993.
Following Belo, Jeff joined The
Staubach Company as their Executive Vice President Corporate Operations and was also President of Staubach Lease Administration Company until 2004 when he came to Southwest Airlines.
Joined Southwest in 2004
Jeff completed his undergraduate work at West Texas State University - Canyon, Texas (now West Texas A&M) in 1986
Executive Vice President & Chief People & Administrative Officer
Jeff LambSlide133
OPERATIONS ANALYSISSlide134
Air Tran Integration:Two Approaches to Low Cost
Southwest and AirTran may share a low-cost philosophy, but they deliver a significantly different product. Among the differences: AirTran operates two aircraft types - Boeing 717-200 and Boeing 737-700. Southwest only flies Boeing 737s.AirTran flies to five international cities. Southwest is domestic only.
AirTran offers business class seating. Southwest is strictly coach..AirTran has assigned seating. Southwest offers open seating.AirTran sells food. Southwest is limited to peanuts and pretzels.
AirTran charges for checked bags. Southwest does not.Slide135
What Makes AirTran an Attractive Partner?
Atlanta. The combined airline can give Delta a serious competitive challenge.New York LaGuardia. Southwest is a recent entrant but will grow with AirTran's slots and gates.Washington Reagan. Southwest flies out of nearby BWI and Dulles.Newark International. Additional New York metro area presence.Miami International. Southwest serves Fort Lauderdale and West Palm Beach.
International destinationsBoston, Fort Lauderdale, Los Angeles, Washington Dulles, Philadelphia, Orlando, Tampa and Las Vegas are among the cities with an AirTran and Southwest presence.Slide136
Routs after integrationSlide137
Operating RevenuesSlide138
Performance DataSlide139
Performance DataSlide140
Annual Return of CapitalSlide141
Performance Data Slide142
Operating ExpensesSlide143
Operating Expenses excluding FuelSlide144
Fuel CostsSlide145
Fuel Hedging StrategySlide146
Performance DataSlide147
FINANCIAL ANALYSISSlide148
BALANCE SHEET (10-Q)Slide149
BALANCE SHEET (10-K)Slide150
INCOME STATEMENT (10-K)Slide151
INCOME STATEMENT (10-Q)Slide152
STATEMENT OF CASH FLOW (10-K)Slide153
STATEMENT OF CASH FLOW (10-Q)Slide154
BUY!