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Global Airlines Industry Analysis and Forecast

Explore the current market environment, demand trends, profitability challenges, and regional summaries of the global airline industry. Discover insights on competition, financial performance, and future outlooks for major airlines.

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Global Airlines Industry Analysis and Forecast

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  1. PRESENTATION LOADING…

  2. Global Airlines • Presented by • Iris • Jonathan • Caroline • Sean

  3. Global Airlines Contents • Industry Analysis - Iris • American Airlines - • British Airways - • Singapore Airlines -

  4. Industry Outlines 1. ASIA and CENTRAL EUROPE hold the greatest revenue potential 2. Divergent regional financial performances 3. Alliances between airlines: rationale & benefits 4. Regional low-cost carriers

  5. Focus on Costs Globalization More challenge to become a low cost industry Labor cost Higher Fuel price Emerging economies International tourism Re-engineering processes The need to cut costs Traffic Recovery • Hubs key to new routes success • Expansion through both fragmentation and consolidation Improve fuel efficiency • Traffic rebounded strongly in 2004 • Recovery strongest in Asia • Freight traffic led the recovery • Passenger traffic to grow 5.3% • ASK - available seat-kilometers • (a measure of airline capacity) • RPK – Revenue passenger-kilometers Current market environment 1. Traffic Recovery 1. Traffic Recovery 3. Globalization 2. Focus on Costs 3. Globalization 2. Focus on Costs

  6. Demand-Air Travel

  7. Demand- Cargo • Higher growth than the passenger market • Significant future demand • Asian freighter fleet to grow the quickest • Large demand for new large freighters

  8. Profitability - The challenge of living with a high oil price - Yields continue to fall in deregulated markets

  9. Costs Management • The challenge of living with ahigh oil price • Labour costsremain a major challenge

  10. Forecast highlights

  11. Regional Summaries

  12. North America • Economic growth in North America is driven by strong increases in productivity and continuing population growth. • Air travel growth or the region's carriers should average 4.1% annually through 2024. • 85% of deliveries to North American airlines over the next 20yrs are forecast to be in regional jet and single-aisle airplanes. • The international market will continue to fragment as more point-to-point service and additional city pairs and frequencies are added.

  13. Europe • Europe is a blend of smaller developing economies and larger mature ones. • The rise of low-cost carriers continues to generate new travel growth in Europe. • Mainline network carriers will growth their international networks largely operating hub-and-spoke systems. • More than ¾ of the European fleet will continue to be regional jets and other single-aisle airplanes. • The share of midsize twin-aisle airplanes will increase from 15% to 20% over the nest 20yrs.

  14. Northeast Asia- Japan & Korea • GDP growth in Northeast Asia is forecast at 1.8% over the next 20 yrs. • Airline deregulation in Japan, gradual liberalization, and globalization stimulate traffic. • Travel is often distant, for example, to Europe, North America, and Oceania. • The % of the Northeast Asia fleet consisting of midsize twin-aisle airplanes will rise from 40 % to nearly 50% over the next 20yrs.

  15. Current Stock Infromation As of November 4, 2005 • Stock Price: $14.19 • Symbol: AMR • Exchange: NYSE • 52-week Range: 7.83 – 14.49 • Avg Vol: 4,643,270 • Market Cap: 2.374B • Shares Outstanding: 164M • Div Date: 15 March 2005

  16. 1-Year Performance

  17. 5-Year Performance Sept 11 SARS

  18. Company Information • AMR is the parent company of American Airlines and American Eagle Airlines. • American Airlines is the world's largest carrier. • AMR serves more than 250 cities in more than 40 countries and territories with approximately 3,900 daily flights • The combined network fleet numbers more than 1,000 aircraft. • Major Shareholders:

  19. Management Team Gerard J. Arpey – Chairman, President & CEO of AMR and American • CEO since 2003, Chief Operating Officer from 02-03, Executive Vice President of Operations from 2000-02, CFO from 95-00, Senior Vice President of Planning 92-95, various management positions since 1982. Daniel P. Garton – Executive Vice President of Marketing • Executive Vice President of Customer Service from 2000-02, Senior Vice President of Customer Service from 98-00, various management positions since 1984. James Beer – Senior Vice President of Finance & CFO • Vice President of American from 98-03 and various management positions since 1991. Gary F. Kennedy – Senior Vice President & General Council • Vice President of Corporate Real Estate from 96-03, attorney and various management positions since 1984. Charles D. MarLett – Corporate Secretary • Joined American as an attorney in 1984.

  20. Qualitative Analysis:Recent Developments and AMR Specifics COMPETITION • Intense competition domestic and international. • Increased competition from low cost carriers. • “Indefinite” reduction in pricing power. • Weak revenues have resulted in persistent large operating losses in recent years. • Competing carriers reorganizing in or out of Chapter 11 may be successful in lowering operating costs through renegotiated labor, supply, and financial contracts. • Founding member of the oneworld alliance with British Airways. • Aim is to enhance customer service and smooth connections.

  21. LABOR • Reduced workforce by 20,000 since 2001. • Reduced operating expenses by 1.8 billion in 2003 through a combination of changes in wages, benefits, and work rules • Wages, salaries and benefits currently represent about 36% of operating expenses down from 41% in 2002. • Average full-time equivalent number of employees for the year ended Dec 31, 2004 was 92,100. • Majority of employees are represented by labor unions and covered by collective bargaining agreements. • Current agreements with AMR’s three major unions do not become amendable until 2008.

  22. REGULATIONS • Liability for numerous suspected and confirmed cases of environment contamination (approximately $150 million). • Security: imposed minimum $2.5 per enplanement security service fee to pay for enhanced security measures. • Proposed increase to $5.50 with no assurance that fees may be passed on to consumers. FREQUENT FLYER PROGRAM • American established AAdvantage to develop customer loyalty by offering awards to travelers for continued patronage. • Members earn mileage credits for flights on participating airlines or by using services of other program participants, including hotels and car rental companies. • American reserves the right to change the program at any time without notice and may end the program with six months notice. • Company believes this program is “one of its competitive strengths.”

  23. FUEL • Fuel price increase negatively impacted expenses by $1.1 billion during 2004. • Fuel hedging program reduced expense by approximately $99 million in 2004. • Liquidity problems are expected to negatively impact hedging abilities in the future. INSURANCE • The U.S. government no longer provides commercial war-risk insurance to U.S. based airlines covering losses to employees , passengers, third parties, and aircraft. • Liability of $1.9 billion for Terrorist Attacks (September, 2001) and $500 million related to flight 587 (November 2001). • One of the Company’s insurance carriers that covers approximately 5 per cent of the Company’s coverage has entered liquidation.

  24. Quantitative Analysis:Financial Statements • Operating Statistics • Earnings • Cash Flow Analysis • Balance Sheet • Profitability • Historical Multiples • Intrinsic Value

  25. Operating Statistics

  26. Earnings

  27. 2004 Revenue Breakdown

  28. Operating Expenses

  29. 2004 Operating Expense Breakdown

  30. Cash Flow Analysis

  31. Balance Sheet Summary

  32. Balance Sheet Summary: Trend Lines

  33. Financial Leverage Examined

  34. Future Debt Obligations

  35. Profitability

  36. Historical Multiples

  37. Intrinsic Value

  38. Management Discussion and Analysis(2004 Annual Report) • “It will be very difficult, absent continued restructuring of its operations, for the Company to continue to fund its operations on an ongoing basis or for the Company to become profitable if the overall industry revenue environment does not improve and fuel prices remain at historically high levels for an extended period.”

  39. AMR Summary • Historically weak revenues and high operating costs • High fuel prices • Reduced credit rating (significantly belowinvestment grade) • Significant debt and severe liquidity problems Negative impact on firms ability to sustain operations over the long term. Recommendation: Sell

  40. Current Stock Information As of November 4, 2005 • Price: 306.00 pence • Symbol: BAB & BAY (ADR) • Exchange: LSE & NYSE • Exchange rate: ₤1 = CAD$2.08 • 52-week range: 215.00 - 321.00 pence • Average vol: 13,606,800 • Share outstanding: 1,082,903,000 • Market capitalization: ₤3,316,683,180

  41. Company History • 1919 – Aircraft Transport & Travel • 1924 – Imperial Airways • 1939 – British Overseas Airways Corp. • 1949 – British European Airways • 1974 – British Airways • 1987 – Privatization of British Airways

  42. Company Information • BA is the leading international airline • Main activity: operation of international & domestic scheduled passenger airline services • Operating bases: Heathrow & Gatwick • Extensive international route networks: 149 destinations in 72 countries (as of March 31, 2005) • Major institutional shareholders: • Barclays Global Investors (UK) – 9.59% • Franklin Templeton Investment Management – 5.68% • Fidelity Investment Services – 3.91% • Subsidiary: BA CitiExpress • Franchises: Comair, GB Airways, British Mediterranean, Loganair and Sun-Air of Scandinavia

  43. Management Team Martin Broughton - Chairman Non-executive director since May 2000, Deputy Chairman from November 2003 becoming Chairman in July 2004 Willie  Walsh - Chief Executive Designate Executive Board Member from May 2005 John Rishton - Chief Financial Officer Executive Board member since September 2001 Martin George – Commercial Director He joined British Airways in 1987 and was appointed Commercial Director in August 2004

  44. Alliances & Partnerships

  45. Qualitative Analysis • Competition • Market dynamics • Regulations • Firm strategy • Risks

  46. Competition • Lufthansa • Air France-KLM • Small domestic & European carriers • Delta • United • Alliances

  47. Market Dynamics • 1997 – to launch low-fare, no-frills airline • May 2001 – e-ticketing • Post 9/11 • Business Response Scheme • Heavy promotions • Club World seat / flat bad • Cut European air fairs • Feb 2002 – implemented the FSAS program • Dec 2002 – switched to Airbus • Oct 2003 – withdrew Condorde • 2008 – new Terminal 5 at Heathrow

  48. Regulations • IATA • Single European sky • Regulation of monopoly suppliers • Equal treatment of air and rail • Elimination of outdated regulations • EU & US • Transatlantic air treaty • BA & AA • Codesharing

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