Qualitative review The Airline Industry

1
Qualitative review The Airline Industry

• Group 1
• Caroline Petit
• Sebastian Duque
• Nazli Ozgur
• Rand Gerges Yammine
• Constanze Zenker

2
The Airline Industry

• Variations in oil prices
• -gt to hedge or not to hedge?
• U.S. currency depreciation
• Decreasing passenger traffic
• Airlines leaving planes parked to reduce costs of
  unprofitable routes
• New aircraft buying agreements

3
The Airline Industry

• Accelerations of mergers
• Reinforcement of strongest players
• Airlines bankruptcies
• Players at risk
• Big fleet carriers
• Over-hedged Airlines
• Companies without strong hubs

4
A tendency of the industry

• http//www.youtube.com/watch?vQ-nX6g148mA

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The companies
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Selection criteria
COMPANY Clarity / Transp. Financial Position Corporate gov. Social resp. Human resources Business strategy Auditor Indepdce Shareholder friendly info
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7
British Airways
8
British Airways

• UK's largest international scheduled airline
• 2 core businesses
• Passenger transport
• Cargo
• During 2007 the key events where
• Solving union problems
• Development of Terminal 5 Heathrow
• Consolidation Merger Strategy

9
Corporate Governance

• Combined Code on Corporate Governance UK
• Unitary Board - All directors are involved in
  Companys strategy
• Objectives Controlling use of assets Proper
  accounting
• Internal control through
• The Nomination committee (only independent
  directors)
• The Remuneration committee (Executives
  remuneration plan)
• Safety review committee (Safety for passengers
  and employees)
• The Audit committee (non-executive directors
  EY only auditing)

10
Corporate social responsibility

• Pioneer Greenhouse gas emissions reduction (2002)
• Members of Sustainable Aviation (Boeing)
• Reducing Carbon emissions from aircraft
• Fuel efficiency
• Sustainable suppliers wherever possible
• 100 Rainforest Alliance Certified coffee
  onboard
• Recycling
• Half of the disposed waste by 2010

11
Human Resources

• Training First airline recognised as Training
  Centre by government
• 3.100 new employees last year
• Terminal 5 training
• Brand refreshment
• Yearly organisational climate survey Speak Up!
• Leadership development

12
Companys strategy

• Close relations with customers (CRM Service)
• Terminal 5 London Heathrow
• Multi-Brand Strategy (British Airways Open
  Skies)
• Merger Alliance Strategy (Iberia, Quantas,
  American)
• Cost savings
• Non fuel Costs reduction
• Currency Hedging
• Oil hedging

13
Clear and transparent financial statements

• Historical information since 1996
• Working on building relations with Stakeholders
• Investor relations WEB
• Press Centre WEB
• A wide variety of reports
• gt Very clear and friendly results ?

14
Ratios analysis
2006 2007 2008
Gross Profit Margin 8,45 6,55 10
Assets Turnover 0.69 cents 0.72 cents 0.78 cents
Earnings per Share 0,4 0,25 0,4
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(No Transcript)
16
Lufthansa

• Core business
• Passenger transportation (65 of revenue)
• Positioned as premium carrier in the world
• Market leader in international airfreight

17
Corporate Governance
Dual Management System
Supervisory Board - appoints
- advises - supervises
Executive Board (Independent)
18
Corporate Governance

• Supervisory board committees
• Arbitration committee
• Steering committee
• Nomination committee
• Audit committee
• 3 employee representatives
• 3 independent executives

19
Corporate social responsibility

• Reduce CO2 emissions per flown km by 25 by 2020
  vs. 2006
• Supports ecologically-oriented incentive systems
  e.g. emission-based landing fees
• Miles to help Climate Care Contribution

20
Human Resources

• 2nd place in the business ranking of German
  Graduate Survey 2007
• Invests each year 300m in training measures
• ? offers 40 different vocational courses

21
Clear business strategy - Objectives

• Leading Carrier in Europe
• Increase global Market Access
• Underline Positioning as Premium Carrier

22
Clear and transparent financial statements

• Historical information since 1993
• Reports
• Annual Reports
• Monthly reports / Investor information
• Shareholder information
• gt Very clear and friendly results ?

23
Ratios analysis
2005 2006 2007
Gross Profit Margin 3.98 5.43 7.07
Assets Turnover 0.97 cts 1.02 cts 1.07 cts
Earnings per Share 0.99 1.75 3.61
24
American Airlines
25
American Airlines

• We know why you fly, we're American Airlines
• Subsidiary of AMR corporation
• The world's largest in passenger miles
  transported
• Second largest in operating revenues
• Core businesses
• American Airlines (passenger world)
• American Eagle (passenger regional)
• American Airlines Cargo

26

27
Corporate Governance

• 14 Directors all independent except CEO
  
• Internal control through
• The Compensation Committee
• The Nominating / Corporate Governance Committee
• Audit committee (The Committee) independent
  auditor financial management staff of AMR
• A code of ethics promote the culture of honesty,
  accountability and integrity

28
Corporate social responsibility

• CARE team carries out the airline's
  Survivor/Family Assistance Plan
• Commitment to environmental responsibility
• Fuel and energy use and conservation
• Environmental Responsibility Report (ERR) to
  measure Greenhouse Gas (GHG) emissions on an
  annual basis and report this data to shareholders
  and the community

29
Human Resources

• Top colleges recruitment
• Human Resources support -24/7
• Job-based and personal enrichment trainings
• Financial and travel benefits

30
Strategy survival in the difficult worldwide
situation

• Focus on CRM
• 2009 A-la-carte pricing strategy (airfare plus
  many smaller fees) gt boost revenue and defray
  sky-high fuel prices
• Growth Strategy through agreements (possibility
  of a joint-venture with British Airways)
• Fuel expense and hedging control strategy

31
Clear and transparent financial statements

• Historical information since 1997
• Reports
• Annual and quarterly financial statements
• Annual and quarterly highlights
• Very clear and friendly results ?
• Investor home
• Investment calculator
• Investor contact
• Investor FAQ

32
Ratios analysis
2005 2006 2007
Gross Profit Margin -0.43 4.70 4.21
Assets Turnover 0.71 cents 0.77 cents 0.79 cents
Earnings per Share (5.18) 1.13 2.06
33
Air France - KLM
34
Air France KLM

• Merger in 2004
• 3 core businesses
• Passenger transport
• Cargo
• Aircraft maintenance services
• Worldwide leader in revenue for passenger
  transport

35
Lets relax

• http//www.youtube.com/watch?vgQfsrO32lVU

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Corporate Governance

• 16 Directors. 44 independent
• Internal control through
• The Nomination committee (only independent
  directors)
• The Remuneration committee (auditors attend the
  meetings)
• The Audit committee (independent directors and
  financial expert) The Charter of external Audit
  gt to ensure auditors independence
• The professional ethics code rules for share
  transactions, protection against conflicts of
  interest

37
Corporate social responsibility a concern for
AF-KLM

• Graded in the Dow Jones sustainability index
• Objectives for reducing CO2 (fleet renewal,
  lighter cabin equipment)
• Sponsorship of NGO Air France Foundation
  (assists sick and disabled children)

38
A clear and ambitious strategy

• A balanced business
• Wide range of service offer -gt Launching of a
  new class in 2009-2010 (mid-price)
• A380 to increase long-haul traffic
• Cost savings programme 990m in 08-09 1,400m
  in 09-10
• Hedging policy to soften the impact of oil price

39
Clear and transparent financial statements

• Historical information since 2004
• Reports on
• Traffics
• Quarterly results, Annual presentation
• Information on merger, evolution of corporate
  governance, progress in cost cutting
• gt Very clear and friendly results ?

40
Shareholder friendly information

• Shareholders page in the website
• Shareholders newsletter
• Consultative committee for quality communication
  with shareholders

41
Ratios analysis
2006 2007 2008
Gross Profit Margin 4.36 5.37 5.82
Assets Turnover 0.86 cents 0.87 cents 0.84 cents
Earnings per Share 3.47 3.35 2.63
42
RYANAIR
43
Ryanair

• World leader in number of passengers transported
• Europes
• Largest lower fares airlines
• Best punctuality
• Fewest cancellations
• Least lost bags

44
Corporate Governance

• 7 non-executive and 1 executive directors
• Independent directors fully complied to 2006
  Combination Code
• Internal control through
• Executive committee
• Remuneration committee
• Nomination committee
• Air Safety committee
• The Audit committee

45
Corporate Social Responsibility

• Fuel Emissions Industry leader in terms of
  environmental efficiency
• Noise nuisance Minimising the number of people
  affected by noise
• Waste Low cost business model that does not
  include free meals, drinks and newspapers

46
Human Resources

• Policy towards promotion
• In 2007, 23 of the employees have been promoted
• Highest employee payment among European airlines
• Share option scheme which allows employees to win
  a piece of the airline and share its success

47
Strong Business Strategy

• Leading low fares airlines around the world
• Replacement of older Boeing 737-200 by new Boeing
  737-800
• Superior fuel burn to passenger kilometre ratio
• Reduction of fuel consumption and COS2 emission
  per passenger kilometre by 45
• Europes youngest and most fuel efficient
  aircraft fleet

48
Clear and transparent financial statements

• Historical information since 1999
• Reports on
• Traffics
• Quarterly results, annual information
• Evolution of corporate governance, progress in
  cost cutting

49
Ratios analysis

2005 2006 2007
Gross Profit Margin 25.78 22.16 19.79
Assets Turnover 0.39 cts 0.40 cts 0.50 cts
Earnings per Share 10.05 8.86 9.89
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Ratios Analysis
51
Ratios Analysis
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Ratios Analysis
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Our recommendations

• Not attractive industry to invest at the moment
• 3 options of investment
• Ryanair
• Best gross profit margin (twice the others)
• Best EPS
• British Airways
• Second gross profit margin
• is a strong currency
• Lufthansa
• Hedge position - Options
• Asset turnover

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Thank you for your attention!

• Any questions?