BOOK REVIEW

Aerlines

Airline Finance
By Peter S. Morrell
It is always tempting to skip a book’s preface and
jump right to the first chapter to begin reading. In
the case of Airline Finance, this would be a mistake,
as it is in the preface where Peter Morrell clearly
lays out the purpose of the book and renders a
caveat to all readers. The purpose is to provide
“a broad understanding of all areas of airline fi-
nance,” and in that regard, the book succeeds in
its goal. As such, it appeals to both the financial
executive wishing to learn something about the
airline industry, as well as to the aviation expert
wanting to know more about finance.
Review by Steve Swidler Given the recent swings in both exchange rates and oil prices,
the risk management chapter is one of the most important
sections in the book, yet it is here that the discussion falls
That said, it is important to understand that while coverage
short on details. Aside from giving only a cursory review of
of topics is good, for some readers, it may be necessary to
derivative instruments, including options, swaps and futures
find additional references to satisfy their professional needs.
and forward contracts, the actual discussion of hedging is
Moreover, there are some important topics that are largely left
somewhat confusing. For example, in comparing an option
untreated, as noted below.
hedge strategy to forward hedging to no hedging at all, the
author states on page 186 that “(I)n retrospect, the option
The book begins with a nice introduction to the airline industry
strategy is never the best strategy, regardless of how the spot
and its economic performance over the last two decades. Of
market actually moves over the year.” After reading this
interest to both sets of readers is the explanation of idiosyncratic
entry, the feeling left with the reader is that airlines (investors
characteristics in the industry and how they affect financial
in general) should never hedge with options as it is always
decisions. Some of the unique or uncommon business
suboptimal. However, this misses the point of what hedging,
characteristics include inventory issues (once a flight leaves,
and more generally, risk and return is all about. Hedging at its
empty seats generate zero revenue), significant operating costs
core is about managing risk. Thus, another way to think about
coming from one source (fuel), leasing of aircraft as a substitute
the relative merits of the different strategies is to consider the
for issuing debt, and regulatory matters such as landing rights.
risk-and-return spectrum from no hedging to being completely
These and many more industry-specific characteristics are
hedged using forward contracts. Within this range falls option
described in the opening pages and subsequent chapters.
hedging whose risk-and-return characteristics depend upon the
option’s strike price. In the case of hedging oil prices with a call
Chapters 2 and 3 include financial statements and financial
option, the lower (higher) the strike price, the closer hedging
ratios, and mainly provide the airline expert with the necessary
with options is to the case of forward (no) hedging. In a future
tools to understand basic business strategies and valuation
edition, the author would do well to revisit this chapter on risk
techniques. In chapter 4, the author presents airline valuation
management, both expanding the discussion and revising the
analysis, with the remaining chapters in the book focusing
analysis to better delineate the costs and benefits of hedging.
on financing of operations and financial planning issues. Of
particular importance is the chapter on risk management that
Another industry specific topic that receives little or no attention
covers hedging of foreign currency exposure as well as fuel
is the practice of entering into option agreements to purchase
prices.
new airplanes in the future. More generally, it would be nice to

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 Aerlines
add a section that describes the buyer-supplier relation between About the Book
airlines and the major airplane manufacturers, Boeing and Author: Peter S. Morrell
Airbus. The author does explain extendible operating leases, Title: Airline Finance, Thrid Edition
but here, too, there is no discussion of the costs and benefits Publisher: Ashgate
of these real options owned by the airlines. Still, one more Date of publication: May 2007
topic of potential interest is the economic significance of labor ISBN: 978-0-7546-7000-1 (hbk); 978-0-7546-7134-3 (pbk)
unions and collective bargaining agreements. Labor unions
affect the operating costs of the airlines and pension liabilities.
Ultimately, these issues directly impact the financial health Cartoon: Courtesy of Businessweek/ Traveler’s Check Blog
of airlines and have led to the numerous bankruptcies in the
industry over the last two decades.

Despite a few shortcomings, the book does a very nice job

of giving an overview of the airline industry’s idiosyncrasies
that affect financial decision-making. Moreover, the self-
contained material in each of the chapters makes it easy to pick
and choose sections of interest to the reader. Airline Finance is
a handy resource guide for either the security analyst assigned
to follow the airline industry or for an aviation executive who
needs to implement financial strategies intended to increase
shareholder wealth.

About the Author

Peter S. Morrell graduated in economics from Cambridge University
and subsequently gained a Masters in air transportation from the
Massachusetts Institute of Technology. He has lectured on numerous
industry courses, and directs the Airline Finance course at Cranfield.

About the Reviewer

Steve Swidler is the J. Stanley Mackin Professor of Finance. Prior
to joining the faculty at Auburn, Professor Swidler taught at the
University of Texas at Arlington, Southern Methodist University,
the University of Wisconsin-Milwaukee and Rice University. His
teaching and research interests include investments, security analysis
and financial engineering, and he has published in a number of
professional journals including the Journal of Finance, the Journal
of Money, Credit and Banking, the Journal of Financial Research and
Aerlines Magazine (www.aerlinesmagazine.com)

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