SCM 3250

Airline Business
Lecture 1: Introduction
Jan 08/10, 2019
Changmin Jiang

1
Welcome on board!

2
 Course Objectives
• Overview of various aspects in the airline
business
• Focus on economics and management issues
• Industry knowledge as well as analytical tools
that enhance understanding
• Self-learning ability

3
Airline Business and Commerce
Disciplines
Finance

Supply
Marketing
Chain

Airline
Business
Law Operations

Manageme
Economics
nt

4
Why Airlines?

5
6
7
8
 Rapid Growth
• Growth of world air travel has averaged
approximately 5% per year over the past 30
years.
• Annual growth in air travel has been about
twice the annual growth in GDP.
• Expected to double over next 10–15 years.

9
Air Transport Is Resilient to External Shocks
Asian 911 Financial
Oil crisis Oil crisis Gulf war crisis attack SARS crisis

10
 Airbus Fleet Forecast

Source: Airbus Global Market Forecast, 2018-2037

11
 The value proposition for air travel
The value proposition for air travel remains strong
It’s safer, it’s greener remains strong
and it’s still a bargain

Source: Constructed from worldwide data from ICAO and IATA 12

Real price of air transport and real unit cost

13
Average Airfare (roundtrip) between New York and
London, 1946-2012 (in 2012 dollars)

14
Even in the good years airline returns
are inadequate

15
 Poor Profitability
Revenue per passenger exceeds cost by just $2.56 (1%
Excluding $12 ancillaries revenues would have lagged costs by $10 (-5%)
2012 worldwide airline financial results per departing passenger

220 $214.64 $212.04

Ancillary $12.14
200
180

160

140

120 Air fare $171.20

Costs $212.04
100

80

60

40
20 Cargo & other $31.30
$2.56
0
Revenues Costs Net profit 16
Source: Ancillary revenues from Idea Works 2012 estimate, other data IATA. Costs include operating items and debt interest.
Ancillaries are helping

17
Periods of profit short-lived

18
 Corporate
Corporatevs. Airline
v. Airline Profits
Profits
The Performance Improvement in 2011 v. 2008 Is Telling of Progress Made
15% $140
$124.51 $125.85
10%
$120
Corporate Profits (%)
5%
$100
0%

-5% $80

-10% Airline Profits (%)

$60
-15%
$40
-20% Barrel Equivalent
Cost of Jet Fuel /1
-25% $20

2011E
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
/1 West Texas Intermediate plus the implicit crack spread
19
19
Bankruptcies are not rare

20
21
 Air Passenger Travel vs. GDP growth

Source: ICAO and IMF database

22
 How long does it take to build a
commercial jet?
• A couple of years; or more extremely…
• In the case of A380-800
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

Orders 78 0 34 10 10 24 33 9 4 32 2 236

Deliveries - - - - - - 1 12 10 18 15 56

 Still working on the order placed in 2001

23
Macro Scale Drivers
Volatility
US Airline Net Profit

24
Aviation value chain

25
26
Economic profit in the aviation value chain

27
 Risk vs. Return along the value chain

Source: McKinsey & Company for IATA

28