Financial Statement Analysis Prem Kurumoju

Airline Industry

CFRA analysts have given a positive outlook to the airline industry after assessing some of the
key themes – Increasing oil prices and airfare prices, China trade tensions, decreasing focus on
economy fares, Boeing 737 MAX grounding and the increasing demand that impacts the entire
industry. There is a slower revenue growth over the next couple years as the global economic
uncertainty (less cargo revenue growth) outbalanced the increase in air fares and demand.

Looking at the porters five forces, I don’t see this as a profitable industry to dive into. It has high
degree of competition and a low threat of new entrants due to high investments. The key industry
drivers/ macro factors that influence the entire industry are consumer confidence index, fuel cost
and consumption, Airline traffic statistics and travel volume growth. The key factors to analyze an
airline includes pricing and air traffic, capacity utilization, revenue vs operating costs, market
share, balance sheet stability, customer service, safety measures and evaluating equity.
Some of my key takeaways are:

 When we do comparative analysis for revenue related factors for different carriers using
revenue passenger miles (RPM) over a small period will give a distorted picture as
seasonality is involved (summer vs winter). In addition, we must consider the right mix of
flights (ex: short haul vs long haul) or domestic vs international travel in a carrier mix.
 Safety measures of airlines – The recent ban of Boeing 737 MAX incurred a huge loss
(interests, parking and maintenance fee, lower capacity) to major airlines.
 Market share is determined by the total enplanements at their hubs as that would drive the
competition on the fares for carriers with low market share.
 Economic growth and spending differ from region to region and airlines increase their foot
stamp where best growth opportunities lie.
 Evaluating labor, fuel and maintenance cost plays a major. Firstly, planning the staffing
needs effectively on the plane, ground, check in counter, booking agents could reduce the
labor cost (Ex: having multiple kiosks would reduce the staffing need in the check in
counter). Secondly, rising fuel cost is always a threat to the industry and airlines should
manage it wisely by hedging fuel at the right time, fuel efficient aircrafts, short haul vs
long haul consumption. Lastly, maintenance cost would differ based on the life of aircraft
(If an airline has lot of old air crafts, maintenance cost could skyrocket).
 One of the key profitability measures when comparing airlines are comparing Revenue per
ASM (Available seat miles) with costs per ASM. This is closely watched by the analysts.
 The key Financial metrics to look at are topline (revenue), Debt to Capital ratio, Debt to
Equity ratios, Cash on hand, Enterprise value to forward EBITDA and Operating cost.

Bibliography: Corridore, James, June 17 2019, Airline Industry, CFRA Equity Research

Summer 2, 2019