Transcript Slide 1

Global Airlines
James Bolegoh
Mauro Horie
Richard Konings
Zhe Liu
Robbie Lydon
Agenda
 Introduction
 Southwest airlines
 Singapore airlines
Airline Products
 Provides fast passenger transportation,
both nationally and internationally
 Freight can also be transported quickly
 Substitutes:
– Car or bus
– Train
– Boat
Industry Characteristics
 Cyclical in nature, with over expansion
during upturns, and large cutbacks during
downturns
 Only marginally profitable
 A special case due to:
– Defense
– Economic
– Flag
Revenue Structure

The two main sources of revenue for
Airlines are from:
– Passenger fares
– Cargo
Cost Structure
DIRECT OPERATING COST (DOC)
Flight Crew
7.1%
Fuel and Oil
12.1%
Landing Fees and En-Route Charges
8.8%
28.0%
Maintenance
10.4%
Depreciation/Rentals/Insurance
13.2%
Total DOC
51.6%
INDIRECT OPERATING COST (IOC)
Station and Ground
11.7%
Passenger Services
Cabin Attendants
7.2%
Other PAX Services
6.7%
Ticketing, Sales and Promotion
General and Administrative
Total IOC
13.9%
16.6%
6.1%
48.4%
World Airline Profits 1992-2002
US $ Billion
20
15
10
5
Operating Profit
Net Profit
0
-5
-10
-15
1992
1995
1998
2001
Adverse Industry Effects
 9/11, SARS, and Iraq war
 The industry was already entering a down
period prior to this catastrophic event
 Increasing fuel costs began late 2000
 Huge losses and layoffs were announced
shortly afterwards
 Large decline in the number of passengers
Industry Outlook
 Recovery from industry shocks
 Expansion into developing markets
 Increased use of Alliances
Strategic Alliances
 Sharing of resources
 Seamless global network
 Competitive advantage
International Air Transport
Association Market Share
One World
18%
SkyTeam
13%
KLM / Northwest
7%
Continental
3%
Japan Airlines
3%
Star Alliance
24%
Other
32%
Regulatory Environment
 Two key organizations that affect the
international airlines are:
– International Civil Aviation Organization
 Composed of representatives from member
countries
– International Air Transport Association
 Comprised of International Airlines
US Regulatory Impact
 Airline Deregulation Act (1978)
– To encourage a competitive air transportation
system
 International Air Transport Competition Act
(1979)
– 3 goals
 Open Skies Agreements
Airline Risk Factors
 Financial risk
– Variability of revenue and costs
 Strategic risk
– Business design choices
 Operational risk
– Tactical aspects of running the business
 Hazard risk
– Safety of physical assets
What Risks are Hedged?




Fuel Costs
Foreign Exchange Risk
Interest Rates
Credit Card Guarantees
Southwest Airlines
Section Overview
 Company background
 Major risks and risk management
 Stock options
Company Background
 Founded in 1971 with flights between Dallas,
Houston and San Antonio
 Has become the forth largest major airline in the
United States in terms of revenues as of Dec.2002
 Has been the number one carrier in terms of
domestic boardings in the U.S. since May 2003
 Transports more than 64 million passengers per
year to more than 58 cities in 30 states
Southwest Route Map
Fact Sheet
Daily Departures: 2,800 flights per day
Employees:
33,000 throughout the system
Common Stock:
Traded under the symbol LUV at NYSE
2003 Financial Statistics:
•
•
•
•
•
Net Income:
Total Passengers Carried:
Total RPMs:
Total Operating Revenue:
Passenger Load Factor:
$442 million
$65.7 million
$47.9 million
$5.9 billion
66.8%
Company Fleet Profile
 Southwest operated 388 Boeing 737 Jets
(as of Dec, 2003)
 Company fleet has an average age of 9.5
years
Type
Number
Seats
737-200
23
122
737-300
194
137
737-500
25
122
737-700
146
137
LUV Financial Position
2003
2002
Change
Operating Revenues (in millions)
$5,937
$5,522
7.5%
Operating Expenses (in millions)
$5,454
$5,104
6.9%
Operating Income (in millions)
$483
$418
15.6%
Operating Margin
8.1%
7.6%
0.5pts
Net Income (in millions)
$442
$241
83.4%
Net Margin
7.4%
4.4%
3.0pts
Net Income per Share (basic)
$0.56
$0.31
80.6%
Net Income per Share (diluted)
$0.54
$0.30
80.0%
Stockholders’ Equity
$5,052
$4,422
14.2%
8.7%
5.7%
3.0pts
Return on Equity
LUV Financial Position
2003
2002
Change
Revenue Passengers Carried
65,673,945
63,045,988
4.2%
Revenue Passengers Miles (RPMs) (000s)
47,943,066
45,391,903
5.6%
Available Seat Miles (ASMs) (000s)
71,790,425
68,886,546
4.2%
Passenger Load Factor
66.8%
65.9%
0.9pts
Passenger Revenue Yield per RPM
11.97¢
11.77¢
1.7%
Operating Revenue Yield per ASM
8.27¢
8.02¢
3.1%
Operating Expenses per ASM
7.60¢
7.41¢
2.6%
388
375
3.5%
32,847
33,705
(2.5%)
Size of Fleet at Yearend
Number of Employees at Yearend
5-Year Stock Price Evolution
9/11
SARS
Revenue Source
(In Millions)
Years Ended December 31
2003
Passenger
Freight
Other
Total
2002
2001
$5,741
$5,341
$5,379
94
85
91
102
96
85
5,937
5,522
5,555
Growth
 For the five years ended 2001, the average
annual capacity growth was 10%
 2002 - over 5%
 After 2002, the estimated annualized
growth rate over the next 10 years is
roughly 8%
Cost Structure
OPERATING EXPENSES:
Salaries, wages, and benefits
Fuel and oil
Maintenance materials & repairs
Depreciation
Landing fees and other rentals
Aircraft rentals
Agency commissions
Other operating expenses
Interest expenses
2003
41%
15%
8%
7%
7%
3%
0.9%
18%
1.7%
2002
39%
15%
8%
7%
7%
4%
1%
20%
2.1%
2001
38%
16%
8%
6%
6%
4%
2%
20%
1.4%
Major Types of Risk
Market risk
–Fuel price risk
–Financial market risk
 Interest rate risk
 Credit risk
 Liquidity and financing risk
Fuel Price Risk
 Fuel price risk
– Estimated 1.2B gallons of jet fuel for 2004. A change of $0.01 in
fuel prices would impact fuel expenses by $12M
– Makes cash flow and earnings unpredictable
 Southwest solution - fuel hedging
–
–
–
–
Not for trading purposes
Effective commodities - crude oil and heating oil
Short-term and long-term
Mixture of call options, collar structures, and fixed price swap
agreements
– Hedged 80% of 2004 fuel requirement, 60% of 2005, and portions
of 2006-2007 as of Dec. 31, 2003
Fuel Price Risk
Fuel hedging results
– Recognized gains of $171M in fuel expense (Table 1)
and unrealized gains of $123M, net of tax
– A net asset of $251M at the end of 2003 (Table 2)
– Sensitivity analysis: 10% change in commodity prices
would change fair value of derivative instruments by
approximately $125M and more or less than $125M of
changes in cash flows (as of Dec. 31, 2003)
Fuel Price Risk
Fuel hedging results - Table 1
In Millions
2003
2002
2001
Gains in fuel expense
171
44.5
79.9
Total fuel expense
830
762
771
Fuel Price Risk
Fuel hedging results - Table 2
Financial Market Risk
 Financial market risk
– Interest Rate Risk
– Credit Risk
– Liquidity and Financing Risk
 Southwest strategy
–
–
–
–
Capitalize conservatively
Grow capacity steadily and profitably
Strong B/S and modest financial leverage
High credit rating - “A” with S&P’s rating; “Baa1” with
Moody’s rating on senior unsecured fixed-rate debt
Interest Rate Risk
 Debt
 Short-term investment
 Leasing
Interest Rate Risk
 Interest rate risk (debt)
– Changes in interest rate affect I/S and cash flow; may
result in insolvency and bankruptcy
 Southwest solution
– Low debt strategy
 Total debt - $1.55B; low D/E ratio:0.30 (AMR:12.86,
DAL:16.33, JBLU:1.65)
– Market sensitive instruments
 Fixed rates and modest financial leverage ($475M)
 Interest rate swaps ($760M)
 Prepayment, redemption or termination for floatingrate debt ($222M)
Interest Rate Risk
 Interest rate swap agreements (2003)
– Agreement 1: pay LIBOR + a margin
every 6 month and receive 6.5% every 6
month on $385M senior unsecured
notes; due Mar-2012
– Agreement 2: pay LIBOR + a margin
every 6 month and receive 5.496% every
6 month on $375M, 5.496% passthrough certificates; due Nov-2006
Interest Rate Risk
 Interest rate risk (short-term investment)
– Total cash and cash equivalents of $1.87B as of Dec.
31, 2003
– Parallel closely with floating interest rates
– Affects earnings and cash flow
 Southwest solution
– Invests in certificates of deposit, highly rated money
markets, and investment grade commercial paper
– No additional actions to cover interest rate market risk
and other material market interest rate risk
management activities
Interest Rate Risk
 Interest rate risk (leasing)
– Total PV of leasing payments (2004 after):
 Capital leasing - $91M
 Operating leasing - $2.5B
– Aircraft leases can be renewed at the end of the
lease term for one to five years
– However, leases are not considered market
sensitive financial instruments and not included in
the interest rate sensitivity analysis
Interest Rate Risk
 Results
– No significant exposure to changing interest rates
on fixed-rate debt
– A liability of $18M - interest rate swap
– Sensitivity analysis: 10% percent change would
affect net earnings and cash flows by less than
$1M (floating-rate debt, invested cash, and shortterm investments)
– An increase in rates has a net positive effect
Credit Risk
 Credit risk
– Nonperfomance by the counterparties associated with
outstanding financial derivative instruments
– Results in credit loss
 Southwest solution
– Selects and periodically reviews counterparties based on credit
ratings
– Limits the exposure to a single counterparty
– Monitors the market position
– Agreements with seven counterparties (early termination rights,
bilateral collateral provisions, security requirements)
 Results
– No counterparties fail to meet their obligations
Liquidity and Financing Risk
 Liquidity and financing risk
–
–
–
–
Agreements with financial institutions (credit card transactions)
Credit facility
Outstanding debt agreements
May reduce the availability of cash or increase the costs to keep
the agreements
 Southwest responsibility
– Maintaining minimum credit ratings
– Maintaining minimum assets fair values
– Achieving minimum covenant ratios for available or outstanding
debt agreements
 Results
– The company met or exceeded the minimum standards set forth
in the agreements
Risk Management Governance
 No specific committee or RMO for Southwest’s
risk management.
Other Potential Risks and
Uncertainties
 War risk
 Competitive factors
 General economic conditions
 Factors to control costs
 Operational disruptions
Stock Options
 Stock-Based Employee
Compensation covers:
– Majority of employee groups
– Board of directors
– Plans related to certain contracts with
certain executive officers of the
company
Stock Options
 Two classes of employee stock plans:
– Collective bargaining plans
 Subjective to collective bargaining agreements
 Granted at or above pair value
 Normally have 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
Stock Options
– 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
Stock Options
Options Outstanding
Options Exercisable
Range of Exercise
Prices
Options
outstanding
at 12/31/02
(000s)
Weighted
average
exercise
price
Options
exercisable
at 12/31/02
9000s)
Weighted
average
exercise
price
$3.30 to $4.99
50,811
$4.05
38,717
$4.01
$5.11 to $7.41
3,341
5.85
2,586
5.91
$7.86 to $11.73
14,247
9.84
6,548
9.94
$12.11 to $18.07
61,369
13.85
14,738
14.01
$18.26 to $23.94
8,404
19.65
3,068
19.91
$3.30 to $23.94
138,172
9.99
65,657
7.67
Stock Options
Options Outstanding
Options Exercisable
Options
outstanding
at 12/31/02
(000s)
Weighted
average
exercise
price
Options
exercisable
at 12/31/02
(000s)
Weighted
average
exercise
price
Collective
Bargaining Plans
104,020
$9.51
52,733
$6.77
Other Employee
Plans
34,152
$11.47
12,924
$11.33
$3.30 to $23.94
138,172
9.99
65,657
7.67
Option Plan
Shares Outstanding: 790 million
Stock Price: $14.33
Singapore Airlines
Section Overview




Background
Financials
Risks
Stock options
SIA Facts
 Founded in 1972
 SIA’s passenger network covers 60 cities in 33
countries
 Singapore Airlines Cargo offers a network linking
68 cities in 36 countries, making it the 2nd largest
international cargo airline
 Average number of employees: 14,418
 Passengers carried: 15,326,000
The Group
 Subsidiaries and Associated Companies
– Singapore Airlines Cargo
– SIA Engineering Company (SIAEC)
– Singapore Airport Terminal Services (SATS)
– SilkAir
– Singapore Flying College
– Singapore Aircraft Leasing Enterprise (SALE)
Awards and Accolades
 Forbes
– Made the world’s best companies ranking
– Top 10 travel and transport companies
 Fortune
– Ranked 21st in world’s most admired
companies
– Most admired airline
Group Fleet Profile
Group Fleet Profile
Owned
Total in
use
Leased
On
order
On option
Aircraft operated by SIA
78
18
96
31
51
Aircraft operated by SIA
Cargo
9
3
12
5
9
Aircraft operated by
SilkAir
8
1
9
7
2
95
22
117
43
62
Group Total
Average Fleet Age
Revenue Composition
10.0%
32.3%
16.3%
East Asia
Americas
Europe
South West Pacific
West Asia and Africa
20.1%
21.3%
Cost Structure
The Group
2002-03
2001-02
EXPENDITURE
Staff costs
22.9%
21.0%
Fuel costs
19.0%
20.9%
Depreciation
11.1%
11.5%
Provision for impairment of fixed assets
0.4%
0.0%
Aircraft maintenance and overhaul costs
8.0%
6.6%
Commission and incentives
6.9%
6.9%
Landing, parking and overflying charges
5.9%
6.3%
Handling charges
5.3%
6.5%
Rentals on lease of aircraft
3.7%
3.7%
Material costs
3.2%
3.7%
Inflight meals
2.2%
2.6%
Advertising and sales costs
2.1%
2.3%
Insurance expenses
1.8%
1.2%
Company accommodation and utilities
1.4%
1.7%
Other passenger costs
1.3%
1.4%
Crew expenses
1.0%
1.2%
Other operating expenses
3.7%
2.6%
Passenger and Cargo Carried
Company Revenue and Expenditure
5-Year Stock Price Evolution
SIAL.SI
9/11
SARS
Major Shareholders
Major Shareholders
Number of
shares
%
1)
Temasek Holdings (Private) Limited
691,451,172
56.76
2)
Raffles Nominees Pte Ltd
138,233,298
11.35
3)
DBS Nominees Pte Ltd
103,163,701
8.47
4)
HSBC (Singapore) Nominees Pte Ltd
44,419,799
3.65
5)
Citibank Nominees Singapore Pte Ltd
41,961,826
3.44
6)
DB Nominees (S) Pte Ltd
24,130,937
1.98
7)
United Overseas Bank Nominees Pte Ltd
21,890,687
1.8
8)
Oversea-Chinese Bank Nominees Pte Ltd
6,917,092
0.57
9)
Morgan Stanley Asia (Singapore) Securities Pte Ltd
6,661,881
0.55
10)
Chang Shyh Jin
3,929,000
0.32
1,082,759,393
88.89%
Total
Financial Risk Management
Objectives and Policies
 Financial and commodity risk
– Market risk
 Jet fuel price risk
 Foreign currency risk
 Interest rate risk
 Market price risk
– Counterparty risk
– Liquidity risk
 Other possible risk
Market Risk
 Jet fuel price risk
– A change in price of US$0.01 per
American gallon of jet fuel affects the
Group’s annual fuel costs by US$13.1
million
 Jet fuel price risk management
– Swaps and options contracts hedged up
to 24 months forward
Market Risk cont.
 Foreign currency risk
– Foreign currency 78.4% of total revenue
– Largest exposures are from USD, UK Sterling
Pound, Japanese Yen, Euro, Swiss Franc,
Australian Dollar, New Zealand Dollar, Indian
Rupee, Hong Kong Dollar, Taiwan Dollar,
Chinese Yuan, Korean Won, Thai Baht and
Malaysian Ringgit (surplus)
– Exposure from USD (deficit) due to capital
expenditure, leasing costs and fuel costs
Market Risk cont.
 Foreign currency risk management
– Matching policy, as far as possible,
receipts and payments in each individual
currency
– Surpluses of convertible currencies are
sold, as soon as practicable, for USD and
SGD
– Forward foreign currency contracts to
hedge
Market Risk cont.
Derivative Financial Instruments
2003
2002
6 months or less
524.4
268.6
Over 6 months to 24 months
363.0
314.4
887.4
583.0
6 months or less
399.5
304.3
Over 6 months to 24 months
233.9
176.8
633.4
481.1
(33.4)
14.4
Foreign currency contracts
Jet fuel swap/option contracts
(Losses)/gains not in FSs
Market Risk cont.
 Interest rate risk
– Changes in interest rates impact interest
income and expense from short-term
deposits and other interest-bearing
financial assets and liabilities
Market Risk cont.
 Interest rate risk management
– Interest-bearing financial liabilities with maturities above
one year have predominantly fixed rates of interest
– If this is not the case they are hedged by matching
interest-bearing financial assets in which case interest
rate swaps are used to convert interest income into the
same floating interest rate basis as interest expense
– Interest swap agreements are in place with notional
amounts ranging from $50.8 million to $70.2 million
whereby SIA pays a fixed rate of interest and receives a
variable rate linked to LIBOR
Market Risk cont.
 Market price risk
– Potential loss resulting from a decrease in
market prices
– The Group owned $454.6 million (down 1.5%
from 2002) in quoted equity and non-equity
investments
– Estimated market value of these investments
was $522.9 million
Counterparty Risk
 Surplus funds invested in interest-bearing bank
deposits and other high quality short-term liquid
investments
 Counterparty risks are managed by limiting
aggregated exposure on all outstanding financial
instruments to any individual counterparty, taking
into account its credit rating
 These exposures are regularly reviewed, and
adjusted as necessary
Liquidity Risk
 The Group had cash and short-term deposits of
$819.9 million (down 25% from 2002)
 Available short-term credit facilities of $1,550
million (down 8.8% from 2002)
 These are expected to be sufficient to cover the
cost of all firm aircraft deliveries due in the next
financial year
 Additional financing through structured leases,
bank borrowings, or public market funding
Financial and Commodity Risk cont.
Derivative Financial
Instruments
Total carrying
amount
on Balance Sheet
Aggregate net
fair value
2003
2002
2003
2002
Long-term investments
569.6
590.4
637.8
631.1
Short-term investments
148.3
34.2
148.4
37.4
1,100.0
1,100.0
1,197.8
1,086.2
Financial assets
Financial liabilities
Notes payable
Derivative financial
instruments
Foreign currency contracts
*
*
(31.1)
(3.4)
Jet fuel swap contracts
*
*
9.2
17.6
Jet fuel options contracts
*
*
(11.5)
0.2
* No balance sheet carrying amounts are shown as these are commitments as at year end.
Other Possible Risk
 Risk management committee’s of the
different subsidiaries and associated
companies create the ability to react to
unforeseen events such as
– 9-11
– SARS
– Iraq war
– Bali bombing
Risk Management Governance
SIA Board of Directors
Board Audit and Risk
Committee
SIA Group
Risk Management
Committee
SIA
SIAEC
SATS Group
SilkAir
SIA Cargo
Other
Subsidiary
RMC
RMC
RMC
RMC
RMC
RMC
Stock Options
 SIA Share Option Plan
– Employee Share Option Scheme
 99.1% of options offered in 2002
– Senior Executive Share Option Scheme
 0.9% of options offered in 2002
Stock Options cont.
 All Stock Options
– Terms no longer than 10 years
– Price is determined by average 5 days prior to
date of grant
– Timing
 Employee – must wait 2 years to exercise
 Senior Executive – 1 year wait for access to 25%,
and an additional 25% per year thereafter
Stock Options cont.
Date of Grant
Exercisable Period
Balance
(Dec 31. 03)
Exercisable
Price
March 28, 2000
March 28, 2001 –
March 27, 2010
13,126,430
$15.34
July 3, 2000
July 3, 2001 –
July 2, 2010
11,868,350
$16.65
July 2, 2001
July 2, 2002 –
July 1, 2011
13,173,990
$11.96
July 1, 2002
July 1, 2003 –
June 30, 2012
13,658,152
$12.82
51,826,922
$14.17
Total Outstanding & Average Price
 609,072,000 shares in the market
Stock Options cont.
 SIA Subsidiaries Share Option Plan
– SATS
 61,799,200 outstanding
 100,588,000 shares in the market
– SIAEC
 60,301,000 outstanding
 100,444,000 shares in the market
Summary
 Industry overview
 Firm specific examples
– Southwest Airlines
– Singapore Airlines
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