Global Airlines – Fall 2020 “Fly with us to Greatness” Presenters: Stanley Liang, Gurkirat Pandher, Emiri Yoshikawa, Agha Ali Shamyle Presenters: Stanley Liang Gurkirat Pandher Emiri Yoshikawa Agha Ali Shamyle Industry Overview Southwest Airlines Singapore Airlines United Airlines 11/13/2020 BUS 417 [E100] BUS 417 [E100]2 Agenda 1. Industry Overview 2. Southwest Airlines 3. Singapore Airlines 4. United Airlines 11/13/2020 BUS 417 [E100] 3 Industry Overview Terminology ASK: Available Seat Kilometers Yield • [# of seats available] x [# of km flown] • [Revenue] / [RPK] ATK: Available Tonne Kilometers • Represents an aggregate of all the airfare and airline charges; measured on a per • [# of tonnes of capacity available kilometer basis (passenger & cargo)] x [# of km flown] Load Factor RPK: Revenue Passenger Kilometers • [RPK] / [ASK] • [# of passengers] x [# of km flown] • [# of passengers] / [# of seats available] FTK: Freight Tonne Kilometers Break-even Load Factor • [Freight tonnes carried] x [# of km flown] • [Unit Cost] / [Yield] 11/13/2020 BUS 417 [E100] 5 History 1909: Wilbur Wright 1914: The world’s first 1908: First passenger flight: Wilbur establishes College Park 1911: Burgess Co. becomes the scheduled passenger airline Wright takes an employee along for a Airport, making it the longest first licensed commercial service took off, operating ride. continuously operating airport aircraft manufacturer. between St. Petersburg and in the world. DELAG founded. Tampa, Fla. 1919: KLM begins operation, 1922: First permanent airport 1918: National Airmail Service making it the oldest carrier in & commercial terminal used 1923: First transcontinental Inaugurated. the world still operating under solely for commercial flights non-stop flight. its original name. opens at Flughaven Devau. 1935: Boeing designs the 307 Stratoliner, 1936: Pan American 1939: Pan American begins 1979: First frequent flyer the first commercial aircraft with inaugurates passenger flights transatlantic passenger service. program introduced. pressurized cabin. across the Pacific Ocean. 11/13/2020 BUS 417 [E100] 6 Structure • Used by low cost-carriers (Ex. Southwest Airlines) • Used by legacy carriers (Ex. Delta Airlines) • For shorter routes (domestic/regional) • For longer and international routes • Decreased connections and travel times • Greater efficiency and use of transportation • Increase of utilization leads to lower unit cost resource • Avoids the Domino Effect • Centralized model leads to inflexible operation • Requires variety of routes & less flexibility in destination 11/13/2020 BUS 417 [E100] 7 Types of Airlines Network Carriers Low-Cost Carriers Ultra Low-Cost • Focus on service • Focus on cost reduction Carriers differentiation • Simple fare schemes • Focus on cost reduction • Price discrimination • Homogenous fleet aircraft • Simple fare schemes • Various aircraft types • Point-to-point; smaller • Homogenous fleet • Hub & Spoke; major airports aircraft airports, connecting flights • Point-to-point; smaller • Alliance memberships airports 11/13/2020 BUS 417 [E100] 8 Segmentation Cargo Transportation, Other, 17.2% 13.7% 2020 Industry Revenue: $686.0bn International Passenger Transportation, 28.2% Domestic Passenger Transportation, 40.9% Products & Services 11/13/2020 BUS 417 [E100] Source: www.ibisworld.com 9 Segmentation Business & First-Class, 23.7% Economy Class, 76.3% Major Markets 11/13/2020 BUS 417 [E100] Source: www.ibisworld.com 10 Alliances Star Alliance SkyTeam Oneworld • Created in 1997 • Founded in 2000 • Founded in 1999 • 28 member carriers • 19 member carriers • 13 member carriers • 1,317 destinations • 1,150 destinations • 1,100 destinations 11/13/2020 BUS 417 [E100] 11 Alliances Pros: Cons: • Cost sharing • Complex partnerships • Extended network through • Conflicting interests codeshare agreements • Consolidation of market & • Joint sales & marketing reduced competition • Skills and knowledge sharing • More customer options • Stimulated international travels 11/13/2020 BUS 417 [E100] 12 International Air Transport Association IATA is a trade associate for the world’s airlines representing 290 airlines (82% of total air traffic) • Founded in 1945 in Havana, Cuba, IATA is the successor to the International Air Traffic Association • Headquartered in Montreal with over 50 offices globally supporting members in 120 countries • Supports many areas of aviation activity and help formulate industry policy on critical aviation issues • Provides industry stakeholders with a wide range of products and expert services such as financial advice, business intelligence, safety & flight operations solutions 11/13/2020 BUS 417 [E100] 13 International Civil Aviation Organization ICAO is a UN specialized agency established by 52 nations in 1944 to manage the administration and governance of the Convention on International Civil Aviation. • Works with 193 member states and industry groups to reach consensus on international civil aviation Standards And Recommended Practices (SARPs) in support of a safe, efficient, and sustainable civil aviation sector. • Policies are used by ICAO member states to ensure their local civil aviation operations and regulations conform to global norms. 11/13/2020 BUS 417 [E100] 14 Regulation • Air Mail Act - 1925: allowed air mail routes to be independent of the U.S. post office for up to four years. • Air Commerce Act -1926: organized federal regulations of aircraft, airmen, navigational facilities, air traffic, and more. • Civil Aeronautics Act - 1938: the Civil Aeronautics Board (CAB) was formed to increase regulations on airlines. The CAB regulated most of what the consumer saw regarding airlines. • The Chicago Convention on International Civil Aviation - 1944: establishment of the International Civil Aviation Organization (ICAO) as a unit of the United Nations devoted to overseeing civil aviation. • Federal Aviation Act - 1958: The act empowered the FAA to oversee and regulate safety in the airline industry and the use of American airspace by both military aircraft and civilian aircraft. • The Tokyo Convention - 1963: enacted new international standards for the treatment of criminal offenses on or involving aircraft • Airline Deregulation Act - 1978: United States federal law that deregulated the airline industry in the United States, removing the federal government control over such areas as fares, routes, and market entry of new airlines. • The Montreal Convention of 1999: updated the carrier liability provisions of the Warsaw Convention, while the Cape Town Treaty of 2001 created an international regime for the registration of security interests in aircraft and certain other large movable assets. • EU-US Open-skies Agreement – 2007: The agreement allows any airline of the European Union and any airline of the United States to fly between any point in the European Union and any point in the United States. 11/13/2020 BUS 417 [E100] 15 Open-Skies Agreement • Bilateral agreements signed by two parties (e.g. countries, regions) to liberalize international air transportation. • Minimize government restrictions and roles in industry operation. • Significantly increased passenger and cargo traffic among countries/regions involved. • Promoted the international and long-haul markets, stimulating mutual economic benefits. 11/13/2020 BUS 417 [E100] 16 Industry Characteristics & Success Factors Industry Characteristics Key Success Factors • Highly competitive due to • Prompt delivery to market deregulation • Effective cost controls • Low concentration • Ability to pass on cost increases • Capital & labor intensive • Well-developed internal processes • Sensitive to business cycle • Access to the latest available and • Subject to business cycle most efficient techniques • Slim profit margin • Ability to expand and curtail operations rapidly in line with market demand 11/13/2020 BUS 417 [E100] 17 Revenue Drivers • Capacity • Creates potential for passenger revenue • Load Factor • Passenger demand relative to available capacity • Passenger Yield • Passenger fare per mile traveled • Cargo • Freight & mail • Fees/Other • Ancillary: Bag fees, change fees, services 11/13/2020 BUS 417 [E100] 18 Arca Airlines Index 11/13/2020 BUS 417 [E100] 19 Arca Airlines Index 11/13/2020 BUS 417 [E100] 20 Global Air Traffic - Flights 11/13/2020 BUS 417 [E100] 21 Global Air Traffic - Passengers 11/13/2020 BUS 417 [E100] 22 Global Air Traffic 11/13/2020 BUS 417 [E100] 23 Financial Results 11/13/2020 BUS 417 [E100] 24 Financial Results 11/13/2020 BUS 417 [E100] 25 Yields and Premium Revenues 11/13/2020 BUS 417 [E100] 26 Fuel vs. Labour 11/13/2020 BUS 417 [E100] Source: IATA 27 Fuel Hedging Airlines invest in financial derivatives and use fuel surcharges to mitigate fuel price volatility. 1. Purchasing Current Oil Contracts 2. Purchasing Call Options 3. Implementing a Collar Hedge • Requires a company to purchase both a call option and a put option. 4. Purchasing Swap Contracts • Like a call option, but with more stringent guidelines. • Locks in the purchase of oil at a future price at a specified date. • If fuel prices decline instead, the airline company has the potential to lose much more than it would with a call option strategy. 11/13/2020 BUS 417 [E100] 28 Effects of COVID-19 • Global GDP expected to contract by 5% in 2020. • Significant impact on international trade (13% decline) which has been suffering from the US-China trade war. • 2020 will be the worst year in history for airlines (net loss of $84.3bn) • 32 million jobs supported by