Global Airlines

Industry - Raymond and Leo

British Airways - Billy
Delta Airlines - Trevor
Singapore Airlines - Herman
 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
• 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
Air Traffic Cycles
Long-term Trend
 Air Travel Cycles

• Annual negative world traffic growth

– In 1991 and in 2001-2002
 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’…

• 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 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
 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’…
Regional Summaries
European Airline Industry
 Companies

• Company in focus: British Airways

– Others:
• Air France
• KLM
• Lufthansa
• Virgin Atlantic
Source: Air Transport Association
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

• SARS phenomenon
• Iraqi War
• Post 9/11 recovery phrase
• External Shocks
– Currency Appreciation
– Security & Insurance
Source: Association of European Airlines
 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

• 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

• Slow recovery
• Mature economies with low growth rates
• Continuation of liberalization
• Growing international networks
• Rise of “No-Frills” carriers
Source: Association of European Airlines
N. American Airline Industry
 Companies

• Company in focus: Delta Airlines

– Others:
• United Airlines
• American Airlines
• Southwest Airlines
• Northwest Airlines
 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

• 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
Source: Air Transport Association
 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

• Deregulations
– Mature liberalization
• Post 9/11 Financial Effect
– Increase financial burden for airlines
– Additional insurance costs
• Increased tax burden
Source: Air Transport Association
Source: Air Transport Association
 Trends

• Slowly recovering
• Mature economies with low growth rates
• Low fares
• Cost-cutting strategies
• Efficient airline networks
Asian Airline Industry
 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’…

• Fragmentation will
continue
– North America will
remain popular
– Europe continues to
grow
 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 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

• 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’…
• 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

• 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’…

• Airline industry is
modernizing
Airline consolidation
Infrastructure investment
Network and fleet
rationalization
Participation in major
alliances
Airlines Analysis
 Stock Price: £ 224
£1=1.68 US Dollar
(Nov 7, 2003)
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

• 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

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

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

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

• Opportunities • Threats
– ‘Open skies’ between – Economic weakness
US and UK – SARS
– Predict growth in – Middle East
Europe market developments
– Price competition with
other airlines in
Europe
Financial Ratio

2003 2002
ROA 0.0253 0.01
ROI 0.00708 -0.0128
ROE 0.0317 -0.0643
P/E 15.45 -17.35
P to BV 0.0455 0.104
Financial Data

• Total Revenue=$12,147  by 7.8%

• Total Expense=$7616  by 10.21
• Net Income=$72  by 2.39
• Net asset=$3,592  by 3%
• Earnings per share=6.7
• Operating margin=3.8%  by 5.1 pts
• Net debt/total capital ratio=60.7%  by 5.3
pts
Operating Data

• RPK= £100,112  by 5.8%

• ASK= £139,132  by 0.9%
• Passenger Load Factor=71.9  by 1.5%
• RTK= £14,213  by 2.9%
• ATK= £21,328  by 6.7%
• Overall Load Factor=66.6  by 4%
• Passengers Carried(000)=38,019  by 5%
• Tonnes of Cargo Carried(000)=764  by 1.2%
Stock Valuation
1 Year Price Chat
1year price range: £85.00 - £215.75
Today’s stock price: £224
Stock Valuation

Last Trade Change Prev Cls Volume Div Date

7 Nov · 224.00 p +10.75 (+5.04%) 213.25 26,714,080 N/A
Day's Range Bid Ask Open Avg Vol Ex-Div
214.00 - 225.50 221 224.25 214 14,566,425 N/A
52-wk Range EPS (ttm) P/E Mkt Cap Div/Shr Yield
85.00 - 215.75 6.7 31.83 2.425B 0 N/A
Sales per activity
Passenger 85.00%
Maintenance 8.00%
Freight and mail 6.00%
Non-scheduled 1.00%
Data as of 31/03/2003
 Geographical analysis of group turnover and operating profit/(loss)
£ million 2003 2002 2001 2000 1999
Turnover
Europe 2,838 3,208 3,388 3,400 3,409
The Americas 2,763 2,863 3,450 3,253 3,272
Africa,Middle East and Indiansub-continent 1,201 1,262 1,304 1,220 1,133
Far East and Australasia 886 1,007 1,136 1,067 1,078
7,688 8,340 9,278 8,940 8,892
Operational profit/(loss)
Europe -117 -244 -172 -310 -166
The Americas 223 144 470 308 451
Africa Middle East and Indiansub-continent 168 91 92 62 124
FarEast and Australasia 21 -101 -10 24 33
295 -110 380 84 442
Sales per geographic
Core Market
United Kingdom 47.00%
Geographic areas
Europe 64.00%
Asia / Pacific 7.00%
Americas 19.00%
Rest of the World 10.00%
Data as of 31/03/2003
Balance Sheet
• Total Asset=12900
• Current Asset=2725
• Total Liabilities=10626
• Current Liabilities=2904
• Total Shareholder Equity=2274

Balance Sheet
2003 2002
Shareholder's funds £2058 £2016
Total debt and others 10842 11646
Total £12900 £13662

Total assets £12900 £13662

Income Statement

Year 1999 2000 2001 2002 2003

Revenues* 8,892 8,940 9,278 8,340 7,688
Expenses 8,686 8,961 9,164 8,482 7,616
Net Profit* 206 -21 114 -142 72
* in millio n(s ) o f Po und S te rling (EPS in Pe nc e )
Revenue Composition

Revenue Scheduled
8% services-
passenger
1%
Scheduled
6% services-freight
and mail
Non-scheduled
services
85%

Other revenue
Cost Structure

Cost Structure Em plo ye e c o s ts

Ee pre c ia tio n a nd a m o ris a tio n

Airc ra h o pe ra ting le a s e c o s ts

F ue l a nd o il c o s ts

9%
10% 28% Engine e ring a nd o the r a irc ra ft
c o s ts

13% La nding fe e s a nd e n ro ute c ha rge s

10%
8% 8% 11% Othe r o pe ra ting c o s ts
3%
S e lling c o s ts

Ac c o m m o da tio n, gro und

e quipm e nt c o s ts a nd c urre nc y
diffe re nc e s
Profits Over 5 Years
Net Profit*
Net Profit*
300
200
100
Profit

0
-100 1999 2000 2001 2002 2003

-200
Year
Earnings Per Share Over 5 Years
Year 2003 2002 2001 2000 1999
Earnings per share 6.7 -13.2 10.6 -2 19.5

Earnings per share

30
20
10
0
-10 2003 2002 2001 2000 1999
-20
Ye a r
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)

Cash Flow Statement

2003 2002
Net cash provided by operatiing activities £ 1185 £ 866
Net cash used in investing activities -249 -327
Net cash (used in)/ provieded by financing activities 279 75
Net Cash inflow/(outflow) £ 158 £ (4)

Cash and cash equivalents 1215 614

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

Type Qty Price Initial ValueDep'n Current Value

Concorde 5 230.5 1152.5 345.75 806.75
Boeing 747-400 56 184.5 10332 3099.6 7232.4
Boeing 777 43 151.5 6514.5 1954.35 4560.15
Boeing 767-300 21 113.8 2389.8 716.94 1672.86
Boeing 757-200 13 73.5 955.5 286.65 668.85
Airbus A319 33 46 1518 455.4 1062.6
Aorbis A320 24 51 1224 367.2 856.8
Boeing 737-300 21 41.5 871.5 261.45 610.05
Boeing 737-400 27 48 1296 388.8 907.2
Boeing 737-500 10 49 490 147 343
Turboprops 28 42 1176 352.8 823.2
Embraer Rj145 28 43.5 1218 365.4 852.6
Avro Rj100 16 41.5 664 199.2 464.8
British Aerospace 146 5 37.5 187.5 56.25 131.25
Total MV Owned 20992.51
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

Good News Bad News

• Improved net income • Decreased in revenue
• Increased cash inflow • Downturn in
• Reduced net debt passenger demand
• Decreased operating • Assets undervalued
costs
Recommendation:
S-T: buy L-T: hold
Delta Airlines
U.S. Carrier

Nov. 5 / 03
Stock Price: $12.89
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

• 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
• American Airlines • Atlantic Southeast
• United Airlines Airlines
• International Airline • Comair, Inc.
companies (minimal) • Other Delta
connection carriers
• Skyteam Alliances
• Codeshare partners
SWOT
Weaknesses
Strengths
• Lower fairs due to high
• Well positioned hub competition
networks
• Less demand due to
• Partners & Alliances 911
• Good Employee • Higher Expense
Relations
• Technological
Innovation
Map of Hub Network
SWOT Analysis
Opportunities Threats
• Boston airport • Low-fare airline
terminal project companies
• More international • Demand for air travel
flights and coverage does not increase
Balance Sheet - Assets
Period Ending Dec 31, 2002 Dec 31, 2001

Cash & Cash Equivalents $1,969 $2,210

Total Current Assets $3,902 $3,567

Property & Equipment $16,524 $16,097

Other Assets $4,294 $3,941

Total Assets $24,720 $23,605

Balance Sheet - Liabilities
Period Ending Dec 31, 2002 Dec 31, 2001

Total Current Liabilities $6,455 $6,403

Non-current Liabilities $16,530 $12,349

Total Liabilities $22,985 $18,752

Common Stock $271 $271

Retained Earnings $1,639 $2,930

Accumulated income (loss) ($1,562) $25

Total Equity $893 $3,769

Fleet / Net MV Assets
Aircraft Type Owned Capital Lease Operating Lease Total Average Age
B-727-200 18 - 3 21 23.5
B-737-200 - 42 10 52 17.8
B-737-300 - - 26 26 16.1
B-737-800 71 - - 71 2.2
B-757-200 77 3 41 121 11.3
B-767-200 15 - - 15 19.6
B-767-300 4 - 24 28 12.9
B-767-300ER 51 - 8 59 6.9
B-767-400 21 - - 21 1.8
B-777-200 8 - - 8 2.9
MD-11 8 - 7 15 8.9
MD-88 63 - 57 120 12.5
MD-90 16 - - 16 7.1
EMB-120 29 - - 29 11.8
ATR-72 4 - 15 19 8.5
CRJ-100/200 73 - 122 195 3.7
CRJ-700 15 - - 15 0.3
Total 473 45 313 831 9.0
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
Period Ending Dec 31, 2002 Dec 31, 2001

Passenger $12,321 $12,964

Cargo $458 $506

Other $526 $409

Total Operating $13,305 $13,879

Income
Revenue Allocation (2002)

3% 4%

Passenger
Cargo
Other

93%
Income Statement - Expense
Period Ending Dec 31, 2002 Dec 31, 2001

Salaries $6,165 $6,124

Aircraft Fuel $1,683 $1,817

Depreciation $1,148 $1,283

Contracted Services $1,003 $1,016

Other Expenses $3,306 $3,639

Total Operating Expense $13,305 $13,879

Expense Allocation (2002)

25%

45%

8%

9%
Salaries
13% Fuel
Depreciation
Contract Service
Other
Earnings Trend
1803 1637
1318

Operating -1602 -1309

Income

1998 1999 2000 2001 2002

1196
1067
815
Net Income

-1230 -1287

1998 1999 2000 2001 2002

EPS Trend
8 6.34 7.2 7.05
6
4
2 -9.99 -6.69
0
-2
-4
-6
-8
-10
1998 1999 2000 2001 2002
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
Year 2002 Delta American United
Valuation Ratios
P/E Ratio N/A N/A N/A
P/BV Ratio 2.37 N/A N/A
Internal Liquidity
Current Ratio (MRQ) 0.798 0.712 0.783
Management Effectiveness
ROA (TTM) -3.28% -5.49% -16.26%
ROE (TTM) -66.72% -351.26% N/A
Profitability Ratios
Profit Margin (TTM) -6.12% -9.60% -27.85%
Operating Margin (TTM) -8.75% -7.56% -21.02%
Operating Data
Year 2002 2001
Revenue Passenger Miles (mill) 102,029 101,717
Available Seat Miles (mill) 141,719 147,837
Passenger Load Factor 72.0% 68.8%
Breakeven Passenger Load Factor 79.0% 77.3%
Cargo Ton Miles (mill) 1,405 1,583
Fuel Gallons Consumed (mill) 2,514 2,649
Number of Aircraft in Fleet 831 814
Average Age of Aircraft (years) 9.0 9.1
Employees 75,100 76,300
 Stock Valuation
Delta Air Lines (NYST: DAL)

Last Trade 12.89 Day’s Range 12.68 – 13.04

Trade Time Nov 5 / 03 52wk Range 6.56 – 16.05

Change -0.06 (0.46%) Volume 2,421,300

Prev Close 12.95 Avg Vol (3m) 2,505,181

Open 12.95 Market Cap 1.59B

Bid N/A P/E (TTM) N/A

Ask N/A EPS (TTM) -6.741

1y Target Est 19.40 Div & Yield N/A (N/A)

Stock Price Chart
Recommendation

Hold – Moderate Buy

• Undervalued according to NMV assets

• High market share
• No dividends & negative earnings
• Very volatile industry
Today’s stock price: S$12.50
Exchange rate: S$1 to US$0.57
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

• Ranking in 2002
– World 4th largest airline in RPK
– World 2nd largest airline in freight carried
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

• Cathay Pacific
• Japan Airlines
• Malaysian Airlines
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

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

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

• Threats:
– Global economic weakness
– SARS comeback again
– Fuel cost increase
– terrorism
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

• 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
(in S$million)
30-Sep-03 30-Jun-03 31-Mar-02 30-Sep-02
Shareholders' funds $10,614.0 $10,397.7 $10,708.8 $10,480.5
Total debt + others 8,798.7 8,380.5 8,475.2 8,387.0
Total $19,412.7 $18,778.2 $19,184.0 $18,867.5

Total assets $19,412.7 $18,778.2 $19,184.0 $18,867.5

 Earning per share
EPS over 5 years

140
120
EPS (cents)

100
80
60
40
20
0
FY 98-99 FY99-00 FY 00-01 FY 01-02 FY 02-03
Financial year
 Operating profit
Operating profit over 5yrs

1,600.0
1,400.0
1,200.0
1,000.0
S$million

800.0
600.0
400.0
200.0
-
FY 98-99 FY99-00 FY 00-01 FY 01-02 FY 02-03
Financial year
Cost structure
Cost structure in Q2/03

3%
4% fuel
5% 22% s taff

6% aircraft depreciation and rental

6% aircraft maintenance and

overhaul
handling

9% 17% s ales

landing and parking

11% inflight meal and other

17% pas s enger cos ts
communication and IT

others
Income statement
Income statement con’t
 Cash flow statement

(in S$million) Q2/03 Q2/02 H1/03 H1/02

Net cash provided by operating activities $ 456.8 $ 459.0 $ 168.9 $ 1,178.3
Net cash used in investing activities (218.1) (219.2) (365.4) (581.7)
Net cash (used in)/provided by financing activities (139.4) (123.9) 163.2 (379.9)
Net cash inflow/(outflow) $ 99.3 $ 115.9 $ (33.3) $ 216.7

Cash and cash equivalents at end period $730.3 $1,241.0 $730.3 $1,241.0
 Operating data
Passanger Q2/03
Passengers carried (000's) 3,644.0
Revenue passanger-km (million) 17,772.8
Available seat-km (million) 22,379.8
Passenger load factor (%) 79.4

Cargo
Cargo and mail carried (M kg) 264.7
Cargo load (M tonne-km) 1699.6
Operating data con’t
Operating data con’t
 Ratios
As at As at
30SEP03 30JUN03
ROA 0.02 -0.02
ROE 0.03 -0.03
ROI 0.54 -0.47
Net debt to equity 0.10 0.12
Price to book equity 1.44 1.46
Stock valuation

• Ticker: SIAL.SI

• Trade in Singapore Stock Exchange

• Shares issued (as at 30SEP03): 1.22B

Stock valuation con’t
SIA LTD (SES:SIAL.SI)
Last Trade Change Prev Cls Open Volume
7 Nov ?12.50 0.00 (0.00%) 12.5 12.5 1,089,000

Day's Range Bid Ask P/E Mkt Cap Avg Vol

12.50 - 12.70 12.4 12.5 14.3 N/A N/A
52-wk Range Bidize Askize P/S Div/Shr Div Date
8.25 - 12.90 N/A N/A N/A 0.15 11-Aug
1y Targetst EPS?ttm) EPSst PEG Yield Ex-Div
N/A 0.874 0 N/A 1.2 29-Jul
5-year price chart
1-year price chart
Recommendation

• Moderate Buy
– Good management
– Recover so fast
– Low debt
– Volatile stock, but upward trend