1 / 93

Canadian Airlines BUS 419

Explore the Canadian airlines industry analysis, revenue sources, cost structures, regulatory influences, current challenges, and business strategies of Air Canada and WestJet. Learn about market segmentation, financial strategies, risk management, and the importance of hedging in the airline sector. Get insights into fuel price risk exposure, hedging ratios, and interest rate risk mitigation.

kbetts
Download Presentation

Canadian Airlines BUS 419

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Canadian AirlinesBUS 419 Presented by: Lin Chiu Wilson Lam JotiMuker Xueming Yang Cindy Yu

  2. Agenda • Airline Industry Analysis • Services • Revenue • Cost Structure • Regulations • Current Challenges • Air Canada Business Strategy • West Jet Strategy • Risks • Air Canada • West Jet

  3. Industry Segmentation

  4. Industry Analysis

  5. Services • Scheduled Flights / Chartered Flights: • Transnational • Regional • International • Cargo

  6. Revenue • There are two sources of revenue for Airlines: • Passengers • Charters and cargos

  7. Cost structure • Fuel Expenses • Wages & Salaries • Airport / Navigation Fees • Depreciation & Amortization • Maintenance • Food, Beverages, Supplies • Communications and Information Technology • Aircraft Rentals

  8. Regulations • In the past few decades, government deregulation has dramatically increased competition and allowed the emergence of “low-cost carriers” • Some regulations still in place: • Federal Aviation Authority (FAA) • Airline Safety and Security • Environmental Concerns

  9. Challenges • In recent years, the airline industry has been affected by: • Terrorism attacks & increased security costs • Epidemic diseases (SARs, Swine Flu) • Economic Crisis • Fuel Prices

  10. Canadian Market • The industry is slowly recovering from its decline in 2009 • The compound annual growth rate of the industry volume in the period 2008-2013 is predicted to be 4.7%.

  11. Market Value Forecast

  12. Strategies • Implementing cost reduction initiatives • Reducing company sizes • Reducing operations • Entering into agreements with supplier • Airline alliances • Apply hedging programs

  13. Air Canada Strategies • Cost Reduction: • Corporate downsizing • Capacity management • Fleet renewal programs • Customer Driven Revenue: • Multi-tiered Fares • Web Platforms • Employee Incentives

  14. WestJet Strategy • Four-pillars: • People and Culture • Guest Experience and Performance • Revenue and Growth • Cost and Margins

  15. Risks • Operational • Strategic • Financial: • Fuel Prices • Foreign Exchange Rates • Interest Rates • Hazards

  16. Airline Risk Factors

  17. Founded April 11, 1936 (as Trans-Canada Airlines) • David Richardson (Chairman) • CalinRovinescu (President & CEO) • Headquarters in Montreal, Quebec • Subsidiaries • Air Canada Cargo (operating division) • Air Canada Jetz(operating division) • Air Canada Vacations • Destinations: 178 • Company slogan: GO FAR

  18. Profitability in 4 year Interval In thousands of Canadian dollars

  19. Financial Statements

  20. Reasons to Hedge • Should the Company Hedge ? YES! • WHY? • Fuel price changes have a significant impact on income • Foreign exchange rate impact earnings and operating costs • Interest rate changes effect borrowing costs

  21. Risk Management

  22. Hedging Strategy • Michael RousseauExecutive Vice President & CFO, since 2007 • Prior Position: • Executive Vice-President & CFO in Hudson’s Bay Company (HBC) Since 2001 • Executive Financial positions in Moore Corporation, Silcorp Limited & The UCS Group • Education background: • BBA degree from York University • Member of the Ontario Institute of Chartered Accountants since 1983

  23. Risk Exposures & Strategy

  24. Fuel Price Risk

  25. Air Canada’s Cost Structure

  26. Fuel Price Risk Exposure

  27. Sensitivity on Operating Income • Estimated operating income impact from US$1/barrel increase in WTI – ($25 Million) estimates are derived from 2008 levels of activity and make use of management estimates. • A 1% increase in Jet fuel prices (CAD cents/litre) has an estimated operating income impact of ($35 Million) • Fuel Expenses – 31% of 2008 total operating expense, 25% of 2007 total operating expense

  28. Hedging Ratio For 2009: • 35% of anticipated purchases of fuel • The contracts to hedge anticipated jet fuel purchases over 2009 is comprised of jet fuel, heating oil and crude oil – based contracts For 2010: • 14% of of anticipated purchases of fuel

  29. Hedging Strategy Dec 2008

  30. Hedge Strategy Jan 2009

  31. How much did they make/lose off fuel hedges?

  32. Comprehensive Income (Loss)

  33. Operating Income/Expenses

  34. Gain (Loss) on Financial Instruments

  35. Interest Rate Risk

  36. Interest Risk Section of Balance sheet: High level of Leveraging rate of 2008==$4691/$762 =615.616% Section of Cash Flow:

  37. Interest Risk: Contractual Obligations:

  38. Sensitivity Analysis

  39. Interest Risk Exposure • Fixed rate debt • Floating rate debt • Lease on assets based on changes in short-term interest rates • Aircraft financing agreements

  40. Interest Rate Risk • Objectives: • Minimize the potential changes in cash flows from changes in interest rates • Long term objective: 60% fixed and 40% floating debt • Dec 31,2009 – 59% fixed and 41% floating • Dec 31,2008 – 58% fixed and 42% floating • Designed to maintain flexibility in the Air Canada’s capital structure

More Related