Global Airlines

1
Global Airlines

• Presented By
• Parveen Rai
• Dan Wurst
• Amar Leekha
• Aman Sandhu

2
Overview of Presentation

• Industry Overview
• Current State
• Trends
• Key Statistics
• Regional Overviews
• Europe, North America Asia-Pacific
• British Airways
• Singapore Airlines
• SouthWest
• Conclusion

3
Characteristics of the Industry

• Very cyclical, moves with strength of economy
• Low Profit Margins.and falling
• Economic growth
• Asset intensive industry
• Investments in aircraft, facilities equipment
• Labour constitutes largest cost
• Jet fuel costs second largest expense
• Strategic Alliances to defend against competition
• Technology
• E-tickets
• Online Vendors

4
Future Outlook

• Recovery of US economy
• Confidence in President Bush
• Fuel Prices?
• Government Funding
• National security
• Subsidies
• High tax burden Regulations
• Cost structure
• Increase buying power of customers
• Customer demands
• Personal Business customers

5
Employee Cost
6
Profitability
7
Macroeconomic Forces

• Slow Economy
• Airlines lost 2.5 billion in 2003 (IATA)
• Total 2001-2003 losses 23.2 billion
• External Factors Leading to Losses
• September 11th
• Costs of implementing new security measures at
  airports
• Severe Acute Respiratory Syndrome (SARS)
• Increased insurance premiums
• Rising fuel prices in 2003

8
Trends

• Growth in Traffic
• RPMs grew 2.3 in 2003
• Average industry load factor reached record 73.4
  
• Increase in cargo volume
• Large Layoffs
• Increased competition from low-cost carriers
• Westjet, Southwest and other clone airlines
• Increased borrowing to cover losses from
  macroeconomic effects

9
Capacity Utilization
10
Regional OverviewEuropeanNorth American
Asia-Pacific
11
European Market Overview
12
European Market

• Slower growth for major European carriers
• Increase of no frill carriers
• Deregulation
• Worldwide Economic downturn
• Structural problems of overcapacity
• Threats of terrorism
• Carriers exposed to US market

13
Trends Euro Market

• No-frills airlines growing rapidly
• Traffic levels within Europe have remained strong
• Account for 1/3 of UK domestic services and
  routes between the UK and Europe
• Increase in amount of planes routes
• Deregulations reduce barriers to entry
• Likely to be followed by industry consolidation
• Further Growth expected
• Future focus on other Euro hubs
• Alliances and Strategic Partnerships

14
North American Market
15
North American Market

• Most mature market
• 1978 Deregulation emergence of no-frills
  market
• Followed by consolidation of industry
• No-frills make up 20 of US domestic market
• Southwest leading low-cost carrier
• Sending major carriers into bankruptcy

16
North America (cont)

• Major Domestic Airlines expanding international
  presence
• US signing of open skies agreement
• Unrestricted capacity and frequency
• Factors depressing air travel
• September 11
• 2001 Recession
• Fall of US Airways United currently
  restructuring

17
Asia-Pacific Market
18
Asia-Pacific Market

• Relatively immature airline market
• Strong growth in airline travel
• 1997-98 Asian crisis temporarily halted growth
• Restructuring
• Disposal of non core assets
• Termination of loss making routes
• Wide ranging cost reduction programs

19
Asia-Pacific

• Asian carriers look to form alliances with
  European and N. American carriers
• Affected by US economy downturn (2001-2002)
• Less sever on air travel industry compared to US
• Growth rate expected to be greater than that of
  western airline markets
• Rapid growth in large domestic markets (China)
• Most regulated region for air travel
• Competitive Advantage closer to home

20
Key Measures of Performance
21
International Routes (Passengers Carried)
22
International Routes (RPK)
23
Total Passengers Carried (All Routes)
24
Total RPK
25
Past Yields
26
Industry Growth Trends
27
Industry Growth Trends (cont)
28
Industry Growth Trends (cont)
29
Projected Revenue Growth
30
What Does the Future Look Like?
31
Profitable Strategies

• Recovery of airline industry helps other
  industries
• Carriers must demonstrate
• Comfortable Security
• Customer service
• Productivity
• Government Involvement
• Cooperation with airports and airlines
• Encourage travel
• Minimize hassles
• Airport fees
• Alternatives for short Hauls

32
Profitable Strategies

• Airport Airline Relationship
• Work together with final customer in mind
• Ticket Prices
• Low cost carriers
• Increased competition
• Price conscious business customers
• Labour Productivity
• Consolidation of Industry
• Mergers/Strategic Alliances

33
Growth Constraints Fuel Costs

• Fuel Efficiency 43.6 pm/gallon
• Hedging

34
Fuel Costs Past
35
Fuel Costs Future
36
Growth Constraints Taxes

• Taxes
• 1972 Taxes 7 of ticket price
• 2004 26 of ticket

37
British Airways
38
British Airlines

• Listed and Traded on the London Stock Exchange
• Trading symbol BAY
• Also Trades as an ADR on the TSX and NYSE
• Symbol BAB
• 1 ADR 10 Shares

39
British Airlines

• As of Market Close on November 2, 2004
• Bid 218.75 Pents (4.93 CDN)
• Ask219 Pents (4.94 CDN)
• Volume 28,551,043
• Outstanding Shares 1,070,077,000

40
Background

• One of the leading airlines in Europe
• Second biggest in Europe by passengers carried
• Operating Bases
• Heathrow
• Gatwick
• British Airways is a public limited company
• Employed approximately 49,072 employees in 2004
• It operates 291 aircraft
• Flies to 550 destinations in 133 countries

41
A Quick History Lesson

• Successors
• Aircraft Transport and Travel Limited (Daimler
  Airways)
• Instone
• Handley Page
• British Air Marine Navigation
• Smaller Airlines (1935 merged into British
  Airways Limited)
• Merged In 1939
• British Overseas Airways Corporation
• Trading of BA shares began in 1987

42
Alliance

• Member of Oneworld
• American airlines
• Qantas
• Cathay Pacific
• Iberia
• Finair
• Aer Lingus
• LanChile

43
Franchises and Holdings

• Franchises
• GB airlines
• British Mediterranean
• British Airlines Citiexpress
• Loganair
• Sun Air
• Holdings
• Air Mauritius
• Qantas
• Spanish Iberia

44
Stated Objectives

• Future size and shape strategy
• Achieve a 10 operating margin
• Operating margin up 1.6 points from 3.8 points in
  2003
• 13,000 reduction in employees since August, 2001
• Fleet and network strategy
• Aircraft replacements
• Reduced fleet by 39 aircraft
• Gatwick moving to point and spoke strategy
• Low fares strategy
• On 180 shorthaul routes
• Compete with no frill competitors
• External cost reductions
• Hedging strategies
• Employee cost saving strategies
• Product and service improvements

45
Main Competitors

• Europe Market
• Lufthansa
• Air France
• North American Market
• United

46
Cost Structure
47
Geographic Revenue Distribution
48
Strengths/Opportunities

• Strong Brand Equity
• Account for over half of flights within UK
• New low fares strategy to compete against no
  frills airlines
• 37.3 increase in operating profit
• Increasing air travel

49
Weaknesses and Threats

• Heavy Competition
• Strict Government Regulations
• Route flying rights
• Fare setting
• Airport access
• Slots availability
• New operational standards (security, safety)
• Jet Fuel Prices
• Terrorism
• Demand for travel affected by economic conditions
  (SARS)
• Increased Insurance Costs
• Increased Security Costs

50
Management

• Rod Eddinghton
• Chief Executive
• May 2000
• John Rishton
• CFO
• September 1994 via controller
• Mike Street
• Director of customer service and operations
• 1997
• Robert Webb QC
• General Counsel
• 1998
• Martin George
• Director Marketing and Communications
• 1987 via director of Marketing

51
Management Cont

• Roger Maynard
• Director of Investments
• 1987 via VP Commercial Affairs N.A
• Alan McDonald
• Director Engineering
• 1966
• Lloyd Cromwell Griffths
• Director of Flight Operations
• 1973 via Chief Pilot
• Paul Coby
• Chief Info Officer
• Robert Boyle
• Director of Commercial Planning
• Neil Roberts
• Director for People

52
Operations

2004 2003 2002 2001 2000
Passenger Load Factor .73 .719 .704 .714 .696
RPK (Millions) 103,092 100,112 106,270 123,970 127,425
Passengers Carried 36,103,000 38,019,000 40,004,000 44,462,000 18,315,000
ASK (Millions) 141,272 139,172 151,046 17,2524 183,158
Breakeven Load Factor .636 .639 .65 .644 .659
RTK (Millions) 14,771 14,231 14,362 16,987 17,215
Tons Cargo Carried 796,000 764,000 755,000 914,000 909,000
53
Liquidity Analysis

Q1-2004 2004 2003 2002 2001 2000 1999
Current .922 0.922 .773 .799 .813 .777 .847
NWC -242 -231 -818 -642 -562 -774 -465
54
Capital Structure Analysis

Q1-2004 2004 2003 2002 2001 2000 1999
Debt/Equity 4.21 5.54 6.15 5.16 4.44 4.53 3.04
Interest Coverage 2.1 1.6 .3 1.7 1
55
Capital Market Analysis

Q1-2004 2004 2003 2002 2001 2000 1999
Price Earnings 7.58 7.62 -10.7 -21.35 14.99 -7.85 3.96
Market to Book 1.56 1.52 .62 1.16 1.34 1.42 1.44
Dividend Yield 0 0 0 .057 .054 .042
Dividend Payout 0 0 0 .852 -.427 .164
56
Profitability Analysis

Q1-2004 2004 2003 2002 2001 2000 1999
ROA 4.38 3.05 -.87 -.88 1.64 -3.28 .9
ROE 20.53 19.96 -6.21 -5.42 8.92 -18.11 3.64
Profit Margin 5.23 3.84 -1.32 4.1 .94
EPS .370 -.103 -.114 .210 -.420
57
Cash Flow Analysis

2004 2003 2002 2001 2000
Free Cash Flow 676,000,000 942,000,000 213,000,000 491,000,000 316,000,000
58
Stock Valuation

• Discount Rate
• Beta 1.98459
• Market Return 7.48 (FTSE 20 yr average return)
• Risk Free 2.47 (1 Year LIBOR)
• Discount Rate 12.22
• Average Cash Flow 527,600,000

59

Stock Valuation
2004 2005 2006 2007 2008 2009 2010 2011 2012
Free Cash Flow 527.6 527.6 527.6 527.6 527.6 527.6 527.6 527.6 527.6
Discounted 470.23 419.1 373.53 332.91 296.72 264.45 235.7 210.07 187.23

• PV 7,789,940,000
• Market Capitalization 3,032,128,400
• Undervaluation 4,757,811,600

60
Pricing Chart
61
Pricing Chart (5 Year)
62
Recommendations

• Poor operating statistics
• Liquidity Problems
• Barely covering interest
• Poor earnings
• ThereforeSell

63
Singapore Airlines

• Listed and traded on the Singapore Stock Exchange
• Share price as of Nov 3 10.90 SD
• Also traded in the US as an ADR Symbol SPAAF
• Exchange Rate 1.37414 SD 1 CAD (As of Nov 3rd)
• Number of shares issued 1,218,149,660

64
Brief History

• SIA began in May 1947, when Malaysian Airways
  first operated a twin-engined Airspeed Consul
  between Singapore, Kuala Lumpur, Ipoh and Penang.
• 1963 Changed to Malaysian Airlines with
  formation of federation of Malaysia
• 1966 Became Malaysian-Singapore Airlines
• 1972 Restructured itself into 2 airlines
  (Malaysian Singapore Airlines)

65
Stated Objectives

• Continue to offer innovative promotions to
  attract new customers and maintain competitive
  advantage
• Create new non-stop routes which will connect the
  East to West. These flights offer quick and
  efficient non-stop service utilizing SIAs new
  Airbus A340-500s
• After implementing the longest flight in the
  world from Singapore to Los Angeles and recently
  creating a new non-stop route from Singapore to
  New York, SIA plans to create new routes to
  decrease flight and stop-over time
• Provide competitive fares through their low-cost
  subsidiaries (Tiger, SilkAir and Virgin Airways)
• Build new terminal in strategic locations to
  cater for low-cost airlines (i.e. new terminal
  built in Changi Airport)

66
Route Map
67
Star Alliance Members

• Air Canada
• Air New Zealand
• ANA
• Asian Airlines
• Austrian
• BMI
• LOT Polish Airlines
• Lufthansa

• Singapore Airlines
• Spanair
• Thai Airways
• United
• US Airways
• VARIG
• SAS

68
Subsidiaries of SIA

• Silk Air
• SIA Engineering Co.
• Tradewinds
• SIA Cargo
• SATS

69
Main Competitors

• Cathay Pacific
• Japan Airlines
• Malaysian Airlines

70

• Strengths
• Great Reputation for quality service
• Low Debt Structure (low interest costs)
• Addition of new Airbus A340-500s
• New non-stop routes
• Partners Alliances
• Profit Sharing Plans
• Excellent in flight-service (fleet)

• Weaknesses
• Terrorism
• Jet Fuel Prices
• SARS
• War in IRAQ
• Decrease in load factor
• Decline in EPS

71
Cost Structure
72
Geographic Distribution Of Revenue
73
Operating Data
04-03
03-02
02-01
01-00
00-99
Pax Carried 13278000 15326000 14765000 15002000 13872000
ASK 88252700000 99565900000 94588500000 92648000000 87728300000
RPK 64685200000 74183200000 69994500000 71118400000 65718400000
Pax Load Factor 73.30 74.50 74.00 76.80 74.90
Pax Break/ Even Factor 72.80 73.60 71.10 70.20 66.2
74
Liquidity Analysis
2004 2003 2002 2001 2000
Current Ratio 0.9177 0.6871 0.9243 0.8925 0.9432
Net Working Capital Ratio -0.013 -0.0596 -0.0128 -0.0237 -0.0129
75
Capital Structure Analysis
2004 2003 2002 2001 2000
D/E 0.3900 0.3952 0.3937 0.3619 0.3547
Interest Coverage Ratio 13.333 15.159 21.811 50.792 39.352
76
Capital Market Analysis
2004 2003 2002 2001 2000
P/E 15.638 10.011 27.746 10.751 17.505
Market-Book 11.802 11.286 10.951 10.738 9.537
Dividend Yield 0.01376 0.01142 0.01597 0.02573 0.01250
Dividend Payout 0.12904 0.17064 0.33528 0.20861 0.19716
77
Profitability Analysis Ratio
2004 2003 2002 2001 2000
ROA 4.336 5.639 3.462 9.017 6.923
ROE 6.038 7.863 4.770 12.25 9.172
Profit Margin .08700 0.10126 0.06740 0.15772 0.13077
EPS 0.697 0.874 0.519 1.265 0.914
78
Quarterly Financial Data
2004
Q1 April June Q2 July Sept
ROE 0.017679754 0.024443137
ROA 0.012441246 0.01693934
P/E 52.830 37.201
D/E .42105 .44297
EPS 0.212 0.293
P/BV 11.99111 11.98700
79
Cash Flow Analysis
2004 2003 2002 2001 2000
Free Cash Flow (SGD) 1153.7 Million 94.4 Million -472.7 Million 756.2 Million 87.3 Million
80
Stock Valuation

• Discount Rate
• Beta 0.631
• Market Return 5.36 Strait Times Index (10 Yr
  Average)
• Risk Free Rate 1.4 (5 Year Bond)
• Discount Rate 3.8988
• Average Cash Flow 441.08 Million SGD

81
Stock Valuation
2004 2005 2006 2007 2008 2009 2010 2011 2012
Free Cash Flow 441.08 Million 441.08 Million 441.08 Million 441.08 Million 441.08 Million 441.08 Million 441.08 Million 441.08 Million 441.08 Million
Discounted 424.52 408.58 393.26 378.50 364.29 350.63 337.46 324.80 312.62

• Present Value 3,294,660,000
• Market Capitalization 13,281,736,011.48 SGD
• Overvalued 9,987,076,011.48 SGD

82
Recommendation

• Moderate Buy
• Very Liquid Company (high current ratio and large
  cash on hand)
• Great track record for exceptional customer
  service
• Constant dividend payout
• Expanding routes and services
• Diversified risk through low cost subsidiaries
• Very low levels of debt (low interest payments)

83
Southwest Airlines

• Share Price USD15.96

84
Southwest Airlines (LUV)

• Listed on NYSE
• Symbol LUV
• Index Member
• SP 500, DJTA
• Market Cap 12.44B
• Shares Outstanding
• 779.58M
• Daily Departures
• 2,800 flights a day

85
Company Background

• Began service June 18, 1971 with flights to
  Houston, Dallas, and San Antonio.
• Shorthaul, high-frequency, point-to-point,
  low-fare service
• Most airlines use the hub-and-spoke system
• As of December 31, 2003, Southwest served 337
  nonstop city pairs.
• largest carrier based on scheduled domestic
  departures.
• 2003 marked Southwest's 31st consecutive year of
  profitability.

86
Growth and Expansion
Addition of 16 nonstop flights from Chicago
Midway Airport to 13 existing nonstop markets.

• nonstop service to
• Orlando
• Fort Lauderdale/Hollywood
• Manchester
• Las Vegas
• Raleigh-Durham
• Tampa Bay
• will begin in the first quarter of 2005

• Oakland
• Phoenix
• Seattle
• Providence
• Philadelphia, and Columbus
• Los Angeles International

87
Cost Reducing Strategies

• Restructuring
• Consolidation of reservations operations
• Elimination of traditional travel agency
  commissions
• Future fleet of Boeing 737-700 will have
  fuel-saving Blended Winglets
• Hedging 70-80 of fuel costs at approx.
  24/barrel of crude oil

88
Mission Statement

• dedication to the highest quality of Customer
  Service delivered with a sense of warmth,
  friendliness, individual pride, and Company
  Spirit.

89
Statement of Objectives

• to provide safe, low price transportation
• maximum customer convenience
• to be the cheapest and most efficient operator
• In specific domestic regional markets
• to provide customers with a high level of
  convenience and service
• Outstanding customer service through highly
  motivated employees.

90
Main Competitors

• AMR Corp. (AMR)
• JetBlue Airways Corp. (JBLU)
• Delta Airlines Inc. (DAL)

91
Strengths/Weaknesses

• Strengths
• Known for superior customer service
• Low-cost, no-frills
• Direct one-way travel
• Point-to-point efficiency
• Largest carrier for domestic service
• One fleet type
• Hedge against exposure to fuel prices (80)
• Only airline rated investment grade

• Weaknesses
• Point-to-point creates excessive expenditure
• Too many locations, administrative costs
• Risk to shocks in US economy, since it is a
  domestic carrier

92
Cost Structure
93
Market Share Capacity
94
System Map
95
Boeing 737 Fleet
737 Type Seats Average Age (Yrs) of Aircraft Owned Leased
-200 122 21.2 23 21 2
-300 137 12.6 194 110 84
-500 122 12.7 25 16 9
-700 137 3.3 146 145 1
Totals 9.6 388 292 96

• Plans to retire 23 737-200 by end of first
  quarter 2005.

96
Operating Data
(s in millions) 2003 2002 2001 2000 1999
RPM (000s) 47,943,066 45,391,903 44,493,916 42,215,162 36,479,322
ASM (000s) 71,790,425 68,886,546 65,295,290 59,909,965 52,855,467
Passenger load factor 66.78 65.89 68.14 70.46 69.02
Passenger revenue yield per RPM 0.1197 0.1177 0.1209 0.1295 0.1251
Size of fleet at year end 388 375 355 344 312
97
Financial Data
(s in millions) 2003 2002 2001 2000 1999
Operating revenue 5,937 5,522 5,555 5,650 4,736
Operating expense 5,454 5,105 4,924 4,628 3,954
Operating income 483 417 631 1,022 782
Operating margin 8.14 7.55 11.36 18.09 16.51
Net income 442 241 511 603 474
Net margin 7.44 4.36 9.20 10.67 10.02
EPS (basic) 0.56 0.31 0.67 0.81 0.63
EPS (diluted) 0.54 0.30 0.63 0.76 0.59
98
Liquidity
2003 2002 2001 2000 1999
Current Ratio 1.34 1.56 1.13 0.64 0.66
NWC (millions) 590 798 281 (466.5) (329.4)
99
Capital Structure
2003 2002 2001 2000 1999
Interest Coverage 5.31 3.93 9.01 14.59 1.45
D/E 0.96 1.02 1.24 0.93 0.99
100
Capital Market Analysis
2003 2002 2001 2000 1999
P/E 28.82 44.84 27.58 27.60 17.13
MV/BV 2.52 2.44 3.51 4.82 2.87
Dividend Yield 0.11 0.13 0.10 0.07 0.13
101
Profitability
2003 2002 2001 2000 1999
ROA 4.69 2.68 6.53 9.79 9.15
ROE 9.33 5.71 13.69 19.19 18.13
Profit Margin 7.44 4.36 9.20 10.67 10.02
EPS 0.54 0.30 0.63 0.76 0.59
102
Cash Flow Analysis
(dollars in millions) 2003 2002 2001 2000 1999
Cash Flow From Operations 1,336 520 1,485 1,298 1,029
Free Cash Flow 98 (83) 487 163 (139)
103
Cash Flow Analysis

• increase in operating cash flows in 2003 a result
  of
• due to higher net income
• 271 million government grant from the Wartime
  Act
• increase in accrued liabilities
• decrease in accounts and other receivables
• Heavy investments result in FCF of 98Mill for
  2003
• Large cash increase due to exercise stock options
• Use increase in cash flow to repurchase up to
  300 million of common stock in the open market

104
Stock Valuation

• Discount Rate
• Beta 0.852
• Market Return 9.98 Average Return SP 500
  Index (22 Yr Average)
• Risk Free Rate 4.85 (30 Year Bond)
• Discount Rate 9.2105
• Average Discounted Cash Flow96,318,685.20

105
Discounted Cash Flow

• Present Value 528,970,792
• Market Capitalization 12.44B

106
Net Market Value of Assets
737 Type Seats Average Age (Yrs) of Aircraft Owned Leased
-200 122 21.2 23 21 2
-300 137 12.6 194 110 84
-500 122 12.7 25 16 9
-700 137 3.3 146 145 1
Totals 9.6 388 292 96
107
Competitor Comparison
LUV AMR DAL JBLU Industry
Market Cap 12.44B 1.33B 713.46M 2.45B 635.40M
Employees 32,847 96,400 70,600 4,704 5.30K
Rev. Growth 7.50 0.80 -0.00 57.20 10.10
Revenue 6.36B 18.50B 14.54B 1.19B 1.46B
Gross Margin 29.01 21.18 7.02 39.34 20.71
EBITDA 902.00M 1.30B 158.00M 206.19M 158.97M
Oper. Margins 7.56 -0.09 -7.37 12.56 4.24
Net Income 284.00M -482.00M -2.86B 64.61M N/A
EPS 0.349 -3.027 -22.958 0.585 N/A
PE 45.73 N/A N/A 40.50 15.03
PEG 2.53 N/A N/A 2.69 0.81
PS 1.90 0.07 0.05 1.93 0.31
As of Sept. 30, 2004 for trailing twelve months
108
Quarterly Financials
3rd Q Sept 30/04 2nd Q June 30/04
ROE 2.21 4.30
ROA 1.06 2.09
D/E 1.13 1.06
EPS 0.15 0.14
P/B 2.14 2.58
P/E 90.80 119.79
109
Market Trend
110
Commitments Contingencies

• contractual obligations and commitments
• future purchases of aircraft
• payment of debt
• lease arrangements
• primarily of scheduled aircraft acquisitions from
  Boeing
• 28 scheduled for delivery in 2005, 22 in 2006, 25
  in 2007, and 6 in 2008
• 650Mill worth of accrued liabilites in 2003

111
Profitability
112
Valuation

• Investment grade rating
• P/E ratio gt industry
• PEG ratio gt industry
• EPS gt industry
• Low D/E ratio (not highly leveraged)
• Market Cap gt DCFCF
• Current ratio, interest coverage, D/E gt industry
  average

113
Recommendation

• HOLD
• Showing of strong future growth
• Cash Flows are not consistent
• Seasonal, so expect price to go up during spring
• Pretty consistent stock
• 31st consectutive year of profitability
• Steady dividend for common shareholders
• Not very leveraged, hedging of fuel costs limit
  exposure to risk
• Safety in the Stock
• Current ratio, interest coverage, D/E gt industry
  average
• Senior unsecured debt considered investment
  grade
• SP, Moodys and Fitch