Global Airlines: Global Airlines Industry - Raymond and Leo British Airways - Billy Delta Airlines - Trevor Singapore Airlines - Herman


Presentation Agenda: Presentation Agenda Airline Industry Overview State of the Industry Traffic and Economics Regional Summaries Analysis of British Airways Delta Airlines Singapore Airlines


Airline Industry Overview: Airline Industry Overview Economy grows, travel grows Current short-term cycle is severe RPKs negative growth SARS virus Long-term forecast remains healthy Economies will grow 3.2% annually Air travel will be 5.1% Industry deregulation stimulates air travel New routes and more frequencies Economic and traffic growth rates vary by region


State of Industry: State of Industry Air Traffic Cycles Long-term Trend


Air Travel Cycles: Air Travel Cycles Annual negative world traffic growth In 1991 and in 2001-2002


Air Travel Cycles Cont’…: Air Travel Cycles Cont’… Long-term trends remain healthy Drivers for long-term air travel growth Economic growth Globalization of trade Airline network service improvements Declining fares Deregulation and liberalization


Air Travel Cycles Cont’…: Air Travel Cycles Cont’… In short term, air travel is more volatile Consumer confidence Business profits Depressed income High-technology stock market “bubble” September 11 Outbreak of SARS


Long-term Trend: Long-term Trend


Long-term Trend Cont’…: Long-term Trend Cont’… Keys: Forecast shows 5% fewer world RPKs (Revenue per kilos) at the end of 20 years than without this unusual short-term cycle Yet, air travel growth will continue the pace at 5.1% annually


Traffic and Economics: Traffic and Economics


Economic and Traffic Forecast: Economic and Traffic Forecast World GDP is forecast to grow by 3.2% over the next 20 years Mature economies, GDP growth will average between 2~3% Emerging economies, GDP growth may average over 4%


Forecast Cont’…: Forecast Cont’…


Regional Summaries: Regional Summaries


European Airline Industry: European Airline Industry


Companies: Companies Company in focus: British Airways Others: Air France KLM Lufthansa Virgin Atlantic


Slide17: Source: Air Transport Association


Industry Highlights – 2002/03: Industry Highlights – 2002/03 Passengers 13.8 millions reduction Breakeven Load Factor 69.4%; compared to a 69.2% load factor Profit USD$0.87 billions loss


Factors influencing the industry: Factors influencing the industry SARS phenomenon Iraqi War Post 9/11 recovery phrase External Shocks Currency Appreciation Security & Insurance


Slide20: Source: Association of European Airlines


Competition: Competition External The US Airlines in the North Atlantic market Internal Substantially increased of no-frills competition in Europe Ryanair, Easyjet, Go, bmibaby, Virgin Exp, etc Consolidation & Alliances Star, Oneworld, KLM/Northwest, SkyTeam


Regulatory Environment: Regulatory Environment Deregulation is a global trend First stage of liberalization in European Airlines European governments wants: Low fares Consequence Increased demand Increased demand for infrastructure growth


Trends: Trends Slow recovery Mature economies with low growth rates Continuation of liberalization Growing international networks Rise of “No-Frills” carriers


Slide24: Source: Association of European Airlines


N. American Airline Industry: N. American Airline Industry


Companies: Companies Company in focus: Delta Airlines Others: United Airlines American Airlines Southwest Airlines Northwest Airlines


Industry Highlights – 2002/03: Industry Highlights – 2002/03 Passengers 17.4 millions reduction Breakeven Load Factor Increased from 76.7% to 81.4%; compared to 72.1% load factor Profits (Loss) USD$12.1 billions loss


Factors influencing the industry: Factors influencing the industry Post 9/11 recovery/syndrome Customer avoidance of air travel Government tax & Security policies Insurance Escalating fuel prices Economic downturn Iraq War and SARS phenomenon


Slide29: Source: Air Transport Association


Competition: Competition 85% of the passengers have more than 2 or more carriers Growth of hub-and-spoke Increased competition in small markets Alliances Star SkyTeam OneWorld


Regulatory Environment: Regulatory Environment Deregulations Mature liberalization Post 9/11 Financial Effect Increase financial burden for airlines Additional insurance costs Increased tax burden


Slide32: Source: Air Transport Association


Slide33: Source: Air Transport Association


Trends: Trends Slowly recovering Mature economies with low growth rates Low fares Cost-cutting strategies Efficient airline networks


Asian Airline Industry: Asian Airline Industry


Northeast Asia: Northeast Asia Annual GDP growth is forecast at 2.1% This low rate is driven by Japan Korea will grow at a faster rate than Japan Air travel will grow above world average Globalization and liberalization Fully deregulation Air travel growth at 6.2%


Northeast Asia Cont’…: Northeast Asia Cont’… Fragmentation will continue North America will remain popular Europe continues to grow


Southeast Asia: Southeast Asia A mixture of countries at varying stages of economic growth GDP is forecast to grow at 4.7% annually over the next 20 years The region is diverse Economic and cultural interchange


Southeast Asia Cont’…: Southeast Asia Cont’… Southeast Asia has strong cultural ties with both Europe and North America VRF (visiting friends and relatives) Region with its natural resources and cultural attractions is forecast to develop as a leisure destination for Asia


Southwest Asia: Southwest Asia GDP outlook is forecast to grow at 5.5% Subject to: Privatization Globalization Infrastructure Tourism development Overall traffic growth of the region will average 7.0%


Southwest Asia Cont’…: Southwest Asia Cont’… Traffic within Southwest Asia will average 8.7%, one of the world’s highest Encompasses several air travel markets Middle class travels for business Pilgrimage Tourists and VFR


China: China GDP forecast of 5.9% per year is the highest in the world China is the fastest growing region Air travel expands at 7.6% World Trade Organization Globalization is a major driver


China Cont’…: China Cont’… Airline industry is modernizing Airline consolidation Infrastructure investment Network and fleet rationalization Participation in major alliances


Airlines Analysis: Airlines Analysis


Slide45: Stock Price: £ 224 £1=1.68 US Dollar (Nov 7, 2003)


British Airways: British Airways Background British Airways is a public limited company BA, is the leading airline in Europe One of the biggest in the world It manages almost 330 planes, 550 destinations in 133 countries BA has holdings in other airlines, such as the Australian, Quantas, and the Spanish Iberia. Major destinations are Europe, America, Africa, Australia, South Pacific and Middle East


British Airways: British Airways Strategies Low-cost strategy £650 m in cost saving by March 2003 Reduced manpower by 4446 people Corporate Mission Low fare in UK domestic market Greater use of e-technology for customers, staff and agents Focus on business class passengers


British Airways: British Airways Main Competitors Europe Market Lufthansa and Air France are dominating the market North America Market United Airlines & Delta are dominating the market


British Airways: British Airways Alliance Oneworld alliance 8 airline members: British Airways, Aer Lignus, American Airlines, Cathay Pacific, Finnair, lberia, LanChile and Qantas.


SWOT Analysis: SWOT Analysis Strengths Strong brand name Good reputation Reduce net debt Weaknesses Reduce boeing aircrafts Routes reduced Reduce service and flights Increase insurance cost Increase security cost Downturn in passenger demand cutting flights to the US and the Middle East


SWOT Analysis: SWOT Analysis Opportunities ‘Open skies’ between US and UK Predict growth in Europe market Threats Economic weakness SARS Middle East developments Price competition with other airlines in Europe


Financial Ratio: Financial Ratio


Financial Data: Financial Data Total Revenue=$12,147 i by 7.8% Total Expense=$7616 i by 10.21 Net Income=$72 h by 2.39 Net asset=$3,592 h by 3% Earnings per share=6.7 Operating margin=3.8% h by 5.1 pts Net debt/total capital ratio=60.7% i by 5.3 pts


Operating Data: Operating Data RPK= £100,112 h by 5.8% ASK= £139,132 i by 0.9% Passenger Load Factor=71.9 h by 1.5% RTK= £14,213 i by 2.9% ATK= £21,328 i by 6.7% Overall Load Factor=66.6 h by 4% Passengers Carried(000)=38,019 i by 5% Tonnes of Cargo Carried(000)=764 h by 1.2%


Stock Valuation: Stock Valuation 1 Year Price Chat 1year price range: £85.00 - £215.75 Today’s stock price: £224


Stock Valuation: Stock Valuation


Balance Sheet: Balance Sheet Total Asset=12900 Current Asset=2725 Total Liabilities=10626 Current Liabilities=2904 Total Shareholder Equity=2274


Income Statement: Income Statement


Revenue Composition: Revenue Composition


Cost Structure: Cost Structure


Profits Over 5 Years: Profits Over 5 Years


Earnings Per Share Over 5 Years: Earnings Per Share Over 5 Years


Cash Flow Statement: Cash Flow Statement Cash and Cash Equivalents ( Net cash inflow for capital expenditure and financial investment + Net cash inflow/(outflow) for acquisitions and disposals = Cash used in financing)


British Airways: British Airways Fleet Valuation Avg Fleet age(yrs): 7.5 Avg Life (yrs): 25 Depreciation Method: Straight-Line Avg Salvage Value: 0


Net MVA vs Mkt Cap: Net MVA vs Mkt Cap Net MVA vs Mkt Cap Est fleet value = 21US B Current assets =2.725 B Total debt =5.149 B Net MVA =18.57US B vs Mkt cap=2.425B Therefore, the assets are……undervalued


Recommendation: Recommendation Good News Improved net income Increased cash inflow Reduced net debt Decreased operating costs Recommendation: S-T: buy Bad News Decreased in revenue Downturn in passenger demand Assets undervalued L-T: hold


Delta AirlinesU.S. Carrier: Delta Airlines U.S. Carrier Nov. 5 / 03 Stock Price: $12.89


Background Information: Background Information Founded – 1924 Headquarters: Atlanta, Georgia CEO: Leo F. Mullin Employees: 70,000+ Daily Flights + Partners: 6,130 Destinations: 453 cities in 82 countries


Strategies: Strategies Build adequate liquidity Significant reduction in costs Become more competitive in the “low-fare” sector Song, a highly competitive, wholly owned subsidiary


Competitors / Alliances: Competitors / Alliances Competitors American Airlines United Airlines International Airline companies (minimal) Alliances Atlantic Southeast Airlines Comair, Inc. Other Delta connection carriers Skyteam Alliances Codeshare partners


SWOT: SWOT Strengths Well positioned hub networks Partners & Alliances Good Employee Relations Technological Innovation Weaknesses Lower fairs due to high competition Less demand due to 911 Higher Expense


Map of Hub Network: Map of Hub Network


SWOT Analysis: SWOT Analysis Opportunities Boston airport terminal project More international flights and coverage Threats Low-fare airline companies Demand for air travel does not increase


Balance Sheet - Assets: Balance Sheet - Assets


Balance Sheet - Liabilities: Balance Sheet - Liabilities


Fleet / Net MV Assets: Fleet / Net MV Assets


NMV Asset Evaluation: NMV Asset Evaluation Total Market Value of Owned Fleet (in millions) $14186 Less: Total LT Debt 9576 Add: Current Assets 3902 Total NMV of Assets (Not including investments) $8512 Delta’s market capitalization is sitting at 1.65 billion, which is less than total NMV of assets which sits at 8.5 billion. This shows that Delta’s equity is undervalued.


Income Statement - Revenue: Income Statement - Revenue


Revenue Allocation (2002): Revenue Allocation (2002)


Income Statement - Expense: Income Statement - Expense


Slide84: Expense Allocation (2002)


Earnings Trend: Earnings Trend Operating Income Net Income


EPS Trend: EPS Trend


Cash Flow Statement: Cash Flow Statement Net Cash from Operations $285 Less: Net Cash from Investments (1109) Add: Net Cash from Financing 583 Net Cash Inflow / Outflow $1977 Major Changes Operations – Flight equipment less spending (2321)  (922) Investing – Boston Airport Terminal (485)  58 Financing – Short Term Obligations 701  (1144)


Ratios: Ratios


Operating Data: Operating Data


Stock Valuation: Stock Valuation Delta Air Lines (NYST: DAL)


Stock Price Chart: Stock Price Chart


Recommendation: Recommendation Undervalued according to NMV assets High market share No dividends & negative earnings Very volatile industry Hold – Moderate Buy


Slide93: Today’s stock price: S$12.50 Exchange rate: S$1 to US$0.57


Background: Background Found in Oct. 1972 Separated from Malaysian Airways Started from 10 aircrafts flying 22 cities Right now, spans over 90 cities globally with about 95 aircrafts Singapore government owned 57% of shares


Background con’t: Background con’t Ranking in 2002 World 4th largest airline in RPK World 2nd largest airline in freight carried


Alliances: Alliances Equity partner acquired 49% shares of Virgin Atlantic Airways in March 2000 Star Alliances Joined in April 2000, become 11th members with such as Air Canada, United Airline, Lufthansa, Thai Airline, ANA Airways.


Competitors: Competitors Cathay Pacific Japan Airlines Malaysian Airlines


SWOT Analysis: SWOT Analysis Strengths: Low debt (debt to equity traditionally <0.1) Encourage employees’ motivation Profit-sharing program Young aircraft , average age of 5 years old Excellent in-flight services e.g.: free drinks, complimentary headsets…


SWOT Analysis con’t: SWOT Analysis con’t Weakness: Relied on long haul flight Located in SARS outbreak area


SWOT Analysis con’t: SWOT Analysis con’t Opportunities: Work with partners Demand increase Competitors’ struggle


SWOT Analysis con’t: SWOT Analysis con’t Threats: Global economic weakness SARS comeback again Fuel cost increase terrorism


Strategies: Strategies Cost cutting No-pay leave Wage cuts Reduction in staff Less flying allowance paid Postpone profit-sharing bonus Assets selling sold 5 Pratt and Whitney engines finance corp.


Strategies con’t: Strategies con’t New route developing Bangalore Shenzhen L.A. Re-Fleeting plans Combination of Air-Bus and Boeing Price cutting, promotion, flights adding


Balance sheet: Balance sheet


Earning per share: Earning per share


Operating profit: Operating profit


Cost structure: Cost structure


Income statement: Income statement


Income statement con’t: Income statement con’t


Cash flow statement: Cash flow statement


Operating data: Operating data


Operating data con’t: Operating data con’t


Operating data con’t: Operating data con’t


Ratios: Ratios


Stock valuation: Stock valuation Ticker: SIAL.SI Trade in Singapore Stock Exchange Shares issued (as at 30SEP03): 1.22B


Stock valuation con’t: Stock valuation con’t


5-year price chart: 5-year price chart


1-year price chart: 1-year price chart


Recommendation: Recommendation Moderate Buy Good management Recover so fast Low debt Volatile stock, but upward trend