Download - Global Airlines
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Global Airlines Yue ShiBryan SmythSviatoslav Moldavanov
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Schedule: • Industry Overview• Singapore Airlines• Southwest Airlines
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The Global Airlines Industry
The global airlines industry provides: – Air transportation of passengers, mail, and cargo
over regular routes and on schedules;– Services include any flights that either end or
originate internationally
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Types of Airlines & Models
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Airline Alliances• Passenger alliances: Star Alliance, Sky
Team, Oneworld.• Cargo alliances: WOW Alliance, Sky Team
Cargo, ANA/UPS Alliances. • Advantage:
– Cost reduction; Traveler benefits• Disadvantage:
– Less competition will cause higher prices
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The Global Airlines Industry • High levels of risk• Low levels of profit • High overhead costs• Extremely sensitive
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Costs • Fuel (28.2%)• Wages (25.7%)• Aircrafts (7.8%)• Depreciation and Amortization (7.5%)• Landing fees (6.0%)• Purchased services (5.8%)• Sales costs (3.5%) • Other (13.2%)
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“Today we are downgrading our profit forecast to $8.6 billion from the $9.1 billion that we predicted in December. That means that the 2.7% margin of 2010 will shrink to 1.5% this year.”
“We are constantly walking on a tight rope of very thin margins. And there is no buffer against shocks. So everything that hits us has the potential to knock us over. ” --- Financial Outlook Announcement, Geneva, March 03, 2011
Giovanni Bisignani: Director General and Chief Executive Officer of the International Air Transport Association (IATA)
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Industry Profitability
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Industry Profitability
Total losses from 2001 to 2009: $51 billion
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Load factor
Breakeven: 60% - 65%
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International Air Travel % changes
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Airfares
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Use of Derivatives
• Jet fuel hedging activities• Currency exchange risk management • Interest rate risk management • The use of derivatives does not guarantee
profitability or reduction in risks
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Jet Fuel Prices• Predicted future price of fuel
– Crude oil prices– Difficulties regarding refinery capacity
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Financial highlights and outlook:2001 to 2011F
Source: IATA . ICAO data to 2008. IATA 2009 estimates and 2010-11 forecasts. Excludes exceptional accounting items and mark-to-market fuel hedging losses from net profits
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Jet Fuel Hedging• They enter into hedging contracts to mitigate their
exposure to future fuel prices that may be higher than current prices and to establish a known fuel cost for budgeting purposes.
• A fuel hedge contract allows those airlines to establish a fixed or capped cost by using a commodity swap or option.
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Airlines Without Fuel Hedging
• The company has the ability to pass on any and all increases in fuel prices to their customers, without a negative impact on their profit margins.
• The company is confident that fuel prices are going to fall and is comfortable paying a higher price for fuel if their analysis proves to be incorrect.
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Biofuel • reduce flight-related greenhouse-gas
emissions by 60 to 80 percent• 50:50 "drop-in" mixtures of biofuel and
traditional aviation kerosene• First flight: Feb 24, 2008. Virgin’s Boeing 747
– a mixture of Brazilian babassu nuts and coconuts
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Interest Rate Risk• High leverage, high debt ($200 billion)• Interest rate fluctuations on interest income
generating assets and interest expense incurred on interest bearing liabilities impact the earnings of the company. – Interest rate swaps– Forward rate agreements – Options– Interest rate caps
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Currency Exchange Risk• Revenues and expenses • Borrowings • Tourism demand
o Forward contracts o Currency options o Currency swaps
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Other Risks• Threat of terrorist attacks• Economical instability• Political instability • Natural disasters • Credit risk• Tourism
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Singapore Airlines
Risk Management and Derivatives use
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Agenda
• Company Overview• Major Risk Factors• Financials• Hedging Strategy
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History
• Singapore Airlines Mission Statement
"Singapore Airlines is a global company dedicated to providing air transportation services of the highest quality and to maximising returns for the benefit of its shareholders and employees"
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Singapore Business Model
• Not a low cost carrier• Extensive First Class• Extensive Business Class• “Young Fleet”• Fares will go up from October 1 by as much as
$200 for an economy seat and up to $1,000 more for a premium ticket.
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From Inception to Today• 1 May 1947, Malayan Airways first flight.
• Over the next two decades, the Airline steadily acquired more planes.
• 16 September 1963, the Federation of Malaysia was born and the Airline became known as Malaysian Airways.
• In May 1966, it became Malaysia-Singapore Airlines.
• 1972, Malaysia-Singapore Airlines split up to become two entities - Singapore Airlines and Malaysian Airline System
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The Singapore Girl
• 1968, • The sarong kebaya uniform designed by
French couturier Pierre Balmain was introduced and the internationally recognized image of the Singapore Girl debuted.
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Singapore Airlines' Passenger Fleet
SINGAPORE AIRLINES’ PASSENGER FLEET AS AT 1 FEBRUARY 2011
Aircraft Type Engine In Fleet On Firm Order/Lease On Option/Purchase Right
A380 - 800 Rolls-Royce Trent 900 11 8 6
A340 - 500 Rolls-Royce Trent 553 5
A330 - 300 Rolls-Royce Trent 700 19
B747 - 400 PW4056 7
B777 - 300ER GE90-115B 19
B777 - 300 Rolls-Royce Trent 892 12
B777 - 200ER Rolls-Royce Trent 892 9
B777 - 200 Rolls-Royce Trent 884 26
A350 XWB - 900 0 20 20
B787 - 9 0 20 20
Total 108 48 46
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SIA Group of CompaniesAs At Mar 31 2010
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SIA Group
• Suffice it to say, SIA has many Subsidiaries• 22 Active • Many more Associated Companies• 3 Joint Ventures• In last fiscal year SIA disposed of a major
group of companies: SATS. Non core activities (food prep).
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Stock Info
Stock Symbol SIA
Listed and Traded: Singapore Stock Exchange
Share Price (SGD) : for 12 months ending 31 December 2010
High Low Closing
16.50 13.50 15.30
on 6 October 2010 on 27 January 2010 on 31 December 2010
Total issued shares (excluding treasury shares) : as at 31 December 2010
1,196,217,221
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The Directors
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List of Major Shareholders
Major Shareholders (as at 31 December 2010)
Number of shares %
1 Temasek Holdings (Pte) Ltd 657,306,600 54.95
2 Citibank Nominees (Singapore) Pte Ltd 126,425,194 10.57
3 DBS Nominees Pte Ltd 100,499,709 8.40
4 DBSN Services Pte Ltd 55,013,959 4.60
5 HSBC (Singapore) Nominees Pte Ltd 44,865,487 3.75
6 United Overseas Bank Nominees 23,312,209 1.95
7 BNP Paribas Securities Services Singapore 21,057,490 1.76
8 Raffles Nominees (Pte) Ltd 19,445,031 1.63
9 DB Nominees (S) Pte Ltd 6,453,099 0.54
10 DBS Vickers Securities (S) Pte Ltd 4,406,277 0.37
Total 1,058,785,055 88.52
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Temasek Holdings
• Temasek Holdings is an investment company owned by the Government of Singapore
• International staff of 380 people, • Portfolio of S$186 billion (US$142 billion), • Golden Share
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Statement of Risk Management
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Highlights
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Board Safety and Risk Committee
• James Koh Cher Siang (Chairman) • Dr Helmut Gunter Wilhelm Panke• Christina Ong
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Risk Management Team
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Risk Management Team
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Risk Management Team
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Identified Risks
• Fuel• FX• Employee (Marginal)• Interest Rates• Anti-Trust
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Financials
1 Singapore dollar = 0.785484 U.S. dollars
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Operating Statics
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Highlights
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Highlights
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Scale and Scope
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Profit and Loss
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Operating Performance
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Revenue per Passenger
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Passenger sensitivity
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Income
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Expenses
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Cash Flow
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Hedging
• Direct Hedges
• Using Hedging Accounting
• Jet Kerosene, Currency and Interest Rates
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Accounting of Hedging Strategy
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Fair Value Determination
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MOPS and PLATTS
• Mean of PLATTS Singapore• Direct Market for Commodities• Jet Kerosene• Following is a sample Platts Order form• Market price for MOPS is then the average of
the Sum of Platts orders for the day
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Fuel Impact
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Jet Fuel Sensitivity Analysis
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Jet Kerosene
• Net Fuel Costs– 08-09 4277M– 09-10 3077M
• Fuel Hedge Outcomes– 08-09 -306.25M– 09-10 -460
• Average BBL price $120. • Bought options – call options at below $10 for a
strike price of $80
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Quote from our Sponsor
• The intention is to continue hedging, but at a minimum of 1/5th, 20%, of our projected volume uplift of 33 million barrels of jet fuel, jet fuel. Our hedging is on direct jet fuel which means our hedges are, what in accounting terms, are called effective hedges and therefore are not subject to flowing through our P&L until they are materialized, although we do take in mark-to-market adjustments as a reserve, to the reserve on our balance sheet.
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Summary on Jet Kero Hedging• …So we will stay with our policy of using hedging as a tool
to mitigate the volatility of our input price of jet fuel. • We deem it worthwhile still to keep some hedges in place
to protect us against the swings that can come around. But we are doing it very judiciously, and the high end of the mandate that we have from the Board is up to 60%.
• But right now, given the very unpredictable direction and movements of jet fuel prices and the fact that they remain at historically high levels, we deem it prudent not to hedge too much.
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Share Based Compensation
Total Shares Outstanding 1.196B
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Currency
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Covering Aircraft Purchases FX
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Foreign Currency Sensitivity Analysis
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Interest Rate Hedging
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Interest Rate Sensitivity Analysis
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Anti- TrustAKA Price Fixing
• USA Plea Deal 199M USD• EU 74.8M €• Korea 3.6M SGD• Australia Undeterminable• New Zealand Undeterminable
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Note to Risk Managers:
• In related cases, the cartel described has seen 17 Executives sent to prison for price fixing
• None from SIA
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Southwest Airlines
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Agenda General Information Financial Statements Risks and Risk
Management
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Company Overview Dallas, Texas based low cost carrier airline Founded in 1967
Grown since then to be the largest airline in the United States, based on domestic passengers carried
Southwest is the most successful low-fare, high frequency, point-to-point carrier in the United States with more than 3,200 flights a day As of January 2011 operates more than 3,200 flights a day, with
a fleet of 549 Boeing 737 aircraft with service to 72 destinations in 37 states
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Company History 1967: Incorporated as Air Southwest Co. 1971:
Change name to Southwest Airlines Co. Begin service to Dallas, San Antonio and Houston with fleet of
three Boeing 737s 1973: First Yearly Profit 1977: Carries its 5 millionth passenger and is listed on the
NYSE 1978: Flight to New Orleans (First flight outside Texas) 1990: Yearly revenue exceeds $1 Billion 2010: 38th consecutive year of profit
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Management Herbert D. Kelleher - Founder and Chairman Emeritus
Gary C. Kelly: Chairman, President, CEO
Scott E. Topping: Vice President Treasurer Responsible for fuel hedging program and interest rate risk
management Background: B.S. in Agriculture/Economics and an MBA.
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Size of Southwest Airlines Passengers Carried Fleet Size
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Route Map
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Business Model
Lowest cost producer (average ticket price of $114) Point to point service Secondary Airports Employee empowerment and respect Use only one type of aircraft No first class No in flight video/audio programming
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Customer Satisfaction
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Financial Overview2010 Net income: $459 million
Profitable for the 38th consecutive year Net income, excluding special items: $550
million Total passengers carried: 88 million Total RPMs: 78 billion Average passenger load factor: 79.3 percent Total operating revenue: $12.1 billion
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Stock Information (NYSE:LUV) Last Trade: 11.85 (march 17th) Change: 0.17 (1.41%) Prev Close:12.02 1y Target Est: 16.36 Day's Range: 11.81 - 12.25 52wk Range: 10.42 - 14.32 Avg Vol (3m): 7,611,840 Market Cap: 8.86B P/E (ttm): 19.43 EPS (ttm): 0.61 Div & Yield:0.02 (0.10%)
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5 Year Stock Performance
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Competitor Comparison JetBlue (JBLU) American Airlines (AMR) United Airlines (UAL)
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Financial Statements
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Operating Data
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Fair Value The majority of their financial derivative instruments are
not traded on a market exchange so they must estimate their fair values.
The values are determined based on assumptions about commodity prices observed in underlying markets.
Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as crude oil, heating oil, and unleaded gasoline) and adjusted based on variations of those commodities to the ultimate expected price to be paid for jet fuel at the specific locations in which they hedge.
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Fair Value of Derivatives
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Risks
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General Risk Factors1) Fuel prices
2) Economic condition
3) Company’s low cost structure
4) Labour intensive business
5) Security concerns
6) Dependency on one supplier (Boeing)
7) Global Conditions
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1) Jet Fuel Risks Airlines are inherently dependent upon energy to
operate Unpredictable price movements Cannot easily compensate for these increases with
increases in fare prices due to competitive nature of airline industry
Southwest expects to consume 1.5 Billion gallons of jet fuel in 2011
Therefore a 1 cent increase in fuel price per gallon would increase their fuel and oil expense by $15 million
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2) Economic Condition 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 increased fuel, labor, and other costs
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3) Company’s low cost structure
Their low cost structure is Southwest's main competitive advantage. It enables them to offer low fares and drive traffic volume.
However, if oil, fuel, and labor costs increase, the company can loose its competitive advantage.
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4) Labour Intensive Business
Salaries, wages, and benefits represented approximately 33 percent of operating expenses in 2010.
Approximately 82 percent of their employees were represented for collective bargaining purposes by labor unions
Therefore, they are particularly exposed in the event of labor-related job actions (strikes)
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5) Security Concerns
Terrorist attacks or the threat of terrorist attacks
Reduced demand for air travel
Increased safety and security costs for airline and industry in general
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6) Dependency on one supplier (Boeing)
Boeing is the only aircraft supplier for Southwest. Therefore, if they are unable to acquire additional
aircraft from Boeing, or Boeing were unable or unwilling to provide adequate support for its products, the Company's operations would be materially adversely affected.
Southwest believes their years of experience with this one type of aircraft and the efficiencies they are able to achieve outweigh this risk.
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7) Global Conditions Adverse weather and natural disasters Outbreaks of disease Government regulations Changes in consumer preferences, perceptions,
spending patterns, or demographic trends. Actual and potential disruptions in the air traffic
control system Changes in the competitive environment due to
industry consolidation, industry bankruptcies, and other factors.
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Risk Management
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Risk Management Policy
“The Company utilizes various derivative instruments to attempt to reduce the risk of its exposure to jet fuel price increases.”
“The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program.”
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Hedging Governance Structure
(i) create and maintain a comprehensive risk management policy
(ii) provide for proper authorization by the appropriate levels of management
(iii) provide for proper segregation of duties
(iv) maintain an appropriate level of knowledge regarding the execution of and the accounting for derivative instruments
(v) have key performance indicators in place in order to adequately measure the performance of its hedging activities.
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Risk Management Committee?
• A part of Southwest’s Audit Committee charter deals with risk management• “discuss the Company’s major financial risk exposures and
its policies with respect to risk assessment and risk management and the steps management has taken to monitor and control or mitigate such exposures”
Scott E. Topping: Vice President Treasurer Responsible for fuel hedging program and interest rate
risk management
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Types of Risks Market Risk
Commodity price risk (Jet Fuel) Financial Market Risk
Interest Rate Risk Credit Risk Liquidity Risk
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Risk Factor: Jet Fuel Expense
For the sixth consecutive year, Fuel and oil expense represented the Company's largest or
second largest cost
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Jet Fuel Hedging
“Jet fuel is not widely traded on an organized futures exchange, therefore there are limited opportunities to hedge directly in jet fuel”
Instead Southwest cross-hedges in the OTC market using:
Crude oil Heating oil Unleaded gasoline
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Derivatives Used Call Options Collars (buy call option, write put option) Call Spreads (buy call option and write call
option) Swaps
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Fuel Hedging Policy
When Southwest perceives that prices are lower than historical or expected future levels, they prefer to use fixed price swap agreements and purchased call options.
However, at times when they perceive that purchased call options have become too expensive, they choose to use more collar structures and call spreads.
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Fuel Hedging
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Fuel Hedging for 2011
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Interest Rate Risk Fluctuations of interest rates affect the firm’s interest obligation on their long term debt
-Can potentially have impact on the firm’s liquidity position
Southwest's strategy is to reduce the volatility of net interest income by better matching the repricing of its assets and liabilities Methods: -Prepayment, redemption or termination for
floating-rate debt
-Interest rate Swaps
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Contractual Obligations
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Interest Rate HedgingFixed to Floating:
The company also has floating-to-fixed interest rate swap agreements associated with its $600 million floating-rate term loan agreement and its $332million term loan agreement that are accounted for as cash flow hedges.
Fixed the interest rate on the $600 million floating rate term loan agreement at 5.223 percent until maturity, and for the $332 million term loan agreement at 6.64 percent until maturity.
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Credit RiskTo manage credit risk, the company selects and will periodically
review counterparties based on credit ratings
They also try to limit their exposure to a single counterparty with collateral support agreements, and monitor the market position of the program and its relative market position with each counterparty.
The Company had agreements with several counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels
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Liquidity Risk
• Liquidity and Financing– Agreements with financial institutions– Outstanding debt agreements– Potential to reduce availability of cash or increase costs to
maintain agreements
• Southwest strategy goals– Maintain minimum credit ratings, asset fair values and
covenant ratios for outstanding debt agreements• Results: Company has met or exceeded standards
set forth in all their agreements
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Stock OptionsTwo classes of employee stock plans:
1) Collective bargaining plans
Subjective to collective bargaining agreements Granted at or above pair value Terms ranging from 6 to 12 years No executive nor member of the Board of Directors are
eligible to participate in this plan Not required to be approved by Shareholders
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Two Types of Plans
2) Other employee plans
Not subjective to collective bargaining agreements
Granted at fair market value Have 10-year terms and become fully exercisable
after three, five or ten years Need to be approved by shareholders
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Stock Options
Shares Outstanding: 747.56M
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Thank You !!!