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This comprehensive guide provides insights into Global Airline Industry Overview along with terminology explanations such as ASK/M, AFTK, RPK, Passenger Yield and more. Understand the Impact of External Factors, Business Models, Profitability, Cost Structure, and Risks in the aviation industry. Learn about key Industry Characteristics, Route Structures, and the Influence of External Factors post 9/11. Explore the Performance Metrics of Passenger and Cargo sectors, Fuel Efficiency, M&A trends, and Types of Risks faced by airlines. Stay informed on industry trends, challenges, and strategies.
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Global Airlines Levi Jenkin Yeshen Sam
Agenda • Global Airline Industry Overview • American Airlines • Southwest Airlines • Singapore Airlines
Terminology ASK/M: Available Seat Kilometre/Miles • Measure of a flight’s passenger carrying capacity • [Number of Available Seats] * [Number of Kilometres (Miles) Flown] AFTK: Available Freight Tonne Kilometre/Miles • Measure of a flight’s freight carrying capacity • [Number of Tonnes Carried] * [Number of Kilometres (Miles) Flown] RPK: Revenue Passenger Kilometres/Miles • Measure of the volume of passengers carried by an airline • [Number of Passengers] * [Number of Kilometres (Miles) Flown] Revenue per Available Seat Kilometres/Miles • Unit of measurement commonly used to compare the efficiency of various airlines • [Revenue] / [ASK]
Terminology Passenger Yield • Average amount that a passenger pays to fly one mile/kilometers • [Revenue] / [RPK/M] Passenger breakeven load factor • Average percent of seats that must be filled on an average flight at current average fares for the airline's passenger revenue to break even with the airline's operating expenses • [Unit Cost] / [Yield] • Operating Cost = Operating Revenue Average Stage Length • Average distance of a non-stop flight leg between take-off and landing Load Factor • Assess how efficiently a transport provider fills seats and generates fare revenue • [RPK] / [ASK] OR [number of passengers] / [number of seats available]
Industry Characteristics • high competition -arising from low barriers to entry and excess industry capacity; • cyclicality – very sensitive to the economic cycle • high overhead and operation costs - particularly for the legacy firms, including fixed costs, such as capital and labour, as well as variable costs, such as fuel; • regulation - focused on safety, maintenance, hours of operation per month for personnel and restrictions on routes, landing rights and slots • Sensetive to External Factors – like political and social influences (9/11)
Types of Risks • Basis Risk • Exchange rate Risk • Counterparty Risk • Liquidity Risk • Credit Risk • Interest Rate Risk • Other Risks • Fuel Risk
Basis Risk Basis Risk describes the relation (correlation factor) between the value of the commodity being hedged and the value of the derivative contract used to hedge the price risk. Basis risks can be divided into 3 for airline companies: • Product basis risk • Time basis risk • Locational basis risk
Exchange Rate Risk • Revenues and expenses in multiple currencies for international airlines • Largest exposures are from $, €, £, CHF, AUD, NZD, ¥, ₹ , HKD, CNY, ₩ and MYR • Companies usually generates a surplus in all of these currencies, with the exception of $ • The deficit in $ is attributable to capital expenditure, fuel costs and aircraft leasing costs – all conventionally denominated and payable in $US • Contract used to hedge currency exchange risks: Forward contracts, Currency swaps, Currency options
Counterparty Risk Counterparty risk describes a financial risk whereby the other party in a financial contract is unable to meet their obligations For example, the risks of bankruptcy of an airline and/or trading partner
Market Price & Liquidity Risk • Liquidity risk is a financial risk related to the ability of an airline company to meet its short-term financial obligations • Usually occurs when an airline company is facing a difficulty in converting hard asset or security to cash without taking any losses • Market Price determine the competitiveness of company
Credit Risk Credit risk is a financial risk related to the risk of default that arise from the failures of borrowers unable to make their require payments Ways to decrease credit risks would include: • Thorough credit check on borrowers • Establish credit limits • Clarify credit terms in sales agreements • Use credit and/or political insurance • Develop a standard process for handling overdue account
Interest Rate Risk • Change in interest rates impact interest income and expenses from short-term deposits and other interest-bearing financial assets and liabilities • Use interest rate swaps, forward rate agreements, interest rate caps, and options can be used to manage interest risk
Economic Risk • Airline industry is particularly sensitive to changes in economic conditions • Affects customer travel patterns and related revenues • In harsh economic times, customers will cut back on both leisure and business travel • Hampers the ability of airlines to raise fares to counteract increase in fuel, labor and other costs
Fuel Risk Jet Fuel has been one of the largest expense categories for domestic airlines • Airlines are inherently dependent upon jet fuel to operate • Unpredictable price movements • Cannot easily compensate for these increases with increases in fare prices due to competitive nature of airline industry • Fuel usually makes up at least 1/3 of operating expenses
Fuel Hedging It is used to reduce or eliminate a company’s exposure to fluctuating fuel costs The use of derivatives does not guarantee profitability or reduction in risks
Larger Airlines Smaller Airlines Small vs Large Airlines More active hedgers of fuel costs Lacked sufficient resources Highest costs of financial distress Lacked strategic foresight
Hedging Practices • Hedging stabilize fuel prices and therefore overall costs, cash flows, and profits. • Advantage of investment opportunities arises when fuel prices are high and airline operating cash flows and values are down. • The value premium associated with hedging increases with the level of the firm’s capital investment.
Singapore Airlines Board of Directors Chairman: Peter Seah Lim Huat -Chairman of DBS Bank Ltd, DBS Group Holdings Ltd. -Former Vice-Chairman and CEO of Overseas Union Bank -Former President & CEO of Singapore Technologies Pte Ltd.
Singapore Airlines Board of Directors Director & Chief Executive Officer : Goh Choon Phong -Joined the company in 1990 -Previously served as President of SIA (2006 to 2010) -Senior Vice President of Information Technology (2003 to 2004) -Member of the MIT Presidential CEO Advisory Board
