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Presented By: Zaki Kasmani David Tran Laurence Wong Cecilia Fan. Spring 2006. International Airlines. Business 417. Industry Outlook. Just Kidding!. OR ??. Basic Definitions. ATK (Available Tonne Kilometres) : Used to measure available total capacity (combined passenger and cargo) - PowerPoint PPT Presentation
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International AirlinesPresented By:
Zaki KasmaniDavid Tran
Laurence WongCecilia Fan
Spring 2006Business 417
Industry Outlook
Just Kidding!OR??
Basic Definitions ATK (Available Tonne Kilometres) :
Used to measure available total capacity (combined passenger and cargo) ASK (Available Seat Kilometers):
The number of seats an airline has available multiplied by the number of kilometers they are flown Used to measure airline capacity
RPK (Revenue Passenger Kilometers): The number of passengers multiplied by the number of kilometers they are flown Used to measure actual passenger traffic
PLF (Passenger Load Factor): % of ASK used
FTK (Freight Tonne Kilometers): Used to measure actual freight traffic
UNIT COST: The average operating cost incurred per ATK
YIELD: The average amount of revenue received per RPK, net of taxes Revenue divided by RPK Represents an aggregate of all the airfare and airline charges and measured on a per kilometer
basis LOAD FACTOR:
RPK divided by ASK The percentage of seating or freight capacity that is utilized. Computed as the ratio of RPK to ASK
or in the case of cargo services, RTK to ATK BREAK-EVEN LOAD FACTOR:
The Load Factor when operating revenues is equal to operating costs Unit Cost divided by Yield
Types of Airlines
• Legacy: International & National traditional airlines (ie: British Airways, Delta Airways)
• Discount: Regional (Europe) or National (US) (ie: Easyjet, Southwest)
• Cargo
Airline CharacteristicsCapital intensive industry (highly
leveraged)Largest operating costs: Labour & FuelHistorically low labour productivityVery sensitive to global business
cyclesVery competitiveSensitive to geopolitical events ie: 9-
11, SARS, etc
Types of RoutesPoint to point (linear): direct flight to
destination (low-cost/discount model)Hub and spoke: connection flight
(traditional model) Hub: airport that is used as a transfer point Spoke: routes that airplanes take
Past & Present Injuries Deregulation (October 28, 1978) Terrorist attacks (Sept 11, 2001) The collapse of the dotcom bubble (late 1990) The war in Iraq (2003 - present) The SARS epidemic in Asia (start November
2002) Fiercer competition from new low-cost carriers High taxation Rise in oil price
Future Threats Additional terrorist attacks Future price of oil Further competition from regional airlines Security impact on cost and travel
convenience Decrease in consumer confidence World economy Business cycle Debt (airline industry’s debt load exceeds
the US industry average) Aircraft cost & maintenance
Bankruptcy Protection 2002-2005: Majority of US legacy airlines
entered & emerged from Chapter 11; some still working through restructuring (Delta)
Focus was cost reduction: reduced labour costs, pension restructuring, capital restructuring (fleet overhaul to cheaper, more fuel efficient aircraft – avoid the Jetsgo predicament)
Airlines include: Delta, American Airlines, Northwest, United
Growth Projections
Global Traffic Outlook
Historical Data
-20,000,000
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Total Operating Revenues
SOURCE: Bureau of Transport Statistics
Historical Data
-20,000,000
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Total Operating Revenues Operating Profit or Loss
Total Operating Expenses
SOURCE: Bureau of Transport Statistics
Fuel Costs
Airline Fuel Cost
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Domistic Total Cost ($) International Total Cost ($) All Cost ($)
$ per gallon
SOURCE: Bureau of Transportation Statistics
Fuel Costs
Airline Fuel Consumption
0
5000000000
10000000000
15000000000
20000000000
25000000000
30000000000
35000000000
40000000000
45000000000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Domistic Total Gallons International Total Gallons All Gallons
SOURCE: Bureau of Transportation Statistics
Labour CostsAverage Wages and Salary Accruals per Full-Time Equivalent Employee by Transportation Industry (Current $)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Cumulative Growth
All industries 27,326 28,672 29,444 30,177 31,034 32,087 33,490 35,201 36,754 38,846 42.16%
Transportation, total 30,018 31,575 31,392 31,946 32,283 33,074 34,407 35,907 37,178 38,484
Air 34,487 36,058 35,852 36,257 36,419 36,989 38,691 40,441 42,523 43,820 27.06%
Trucking and warehousing 26,921 28,336 28,293 29,112 29,605 30,342 31,754 32,949 34,007 35,024
Local and interurban passenger transit 18,064 18,950 18,955 19,504 19,980 20,648 21,219 22,008 22,792 23,745
Railroad 45,893 50,267 50,440 51,719 50,465 55,299 57,235 60,632 60,623 62,673
Water 34,703 36,311 36,833 37,357 37,769 38,857 40,329 42,317 43,436 44,980
Pipelines, except natural gas 47,000 51,526 50,421 54,647 58,186 54,782 58,881 64,991 65,379 66,540
Transportation servicesc 27,169 28,534 28,792 29,588 30,801 31,511 32,794 34,603 36,204 38,602
Aggregate Economy 24,565 25,646 26,374 26,936 26,998 27,789 28,808 29,744 30,618 31,949 30.06%
SOURCE : U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Products Accounts, tables 6.6b and 6.6c, Internet site http://www.bea.doc.gov/bea/dn1.htm available as of Feb. 17, 2004
AGGREGATE ECONOMY DATA SOURCE: US Bureau of Labour Statistics
Labour CostsCareer/Industry Group Minimum Salary Average Salary Maximum Salary
Airport $25,000.00 $43,722.70 $79,200.00
AP Mechanic $14,137.20 $44,504.22 $75,000.00
Avionics $18,000.00 $48,191.44 $150,000.00
Computer $35,322.00 $52,957.83 $70,543.00
Dispatch $25,000.00 $32,000.00 $55,000.00
Engineering and Aerospace $20,000.00 $67,484.60 $115,000.00
Executive $60,000.00 $72,500.00 $80,000.00
Flight Attendant $16,800.00 $17,099.00 $24,000.00
Ground-Ramp $50,000.00 $57,500.00 $65,000.00
Management $16,476.00 $62,024.21 $120,000.00
Office and Administrative $14,137.20 $33,479.23 $64,728.00
Other $20,000.00 $36,950.00 $56,800.00
Pilot $14,137.10 $52,061.39 $110,000.00
Sales-Marketing $30,000.00 $52,750.00 $80,000.00
Source: Aviation Career & Salary Ranges - Aviation Jobs (www.avjobs.com)
Labour Cost Implications
More median salaries above average than below = higher overall salary cost than for economy in general
Wide range in salaries, unionized labour; senior international route pilots can earn up to $190,000 USD per year
Majority of pensions are defined benefit: higher salaries = significantly higher pension obligations
Barriers to Operations
Airports: generally locally owned authorities, lease out gates to airlines for long terms
Exclusive use, preferential use, or common use
Signatory airlines receive preferential rates vs. non signatory (most new entrants). ie: Pittsburgh Int’l Airport non signatory rates min. 20% higher
FAA mandates that gate access be granted in a fair and non-discriminatory manner. Regulations should only maintain safety, not encourage dominance
Gate access at airports can be a significant barrier
Barriers to Operations
In practice, established airlines can exercise significant dominance: gates are usually assigned via non market practices (bidding). Ability to bid depends on access. Large airlines can make contributions to/lobby municipal governments to restrict competing airlines’ access to airport
Majority in Interest (MII) clauses grant airlines rights to approve airport capital improvement plans (can restrict expansion to maintain monopoly access to a “hot” airport)
Barriers to Operations
FAA is currently reviewing gate lease practices in an attempt to make access more equitable. However, oversight still lies with the airport owner (local authority)
Therefore, a carrier’s ability to grow may not be determined by its cost efficiency but rather by its ability to land at high traffic destinations
Bottom Line
Airlines MUST reduce costs to achieve a return to sustained
profitability.
Cost Minimization Strategies Oil price forecasted to drop to $45-55 per barrel
range in 2007 (March 22 WTI spot:$60.82)
Cost Minimization Strategies1a) Acquire more fuel efficient aircraft:
Current Long Range Aircraft Fuel Consumption Boeing 747-400 3.5 L/100 passenger KM
(Average)
New Long Range Aircraft Fuel Consumption Boeing 787: 2.4 L/100 passenger KM Airbus A380: 3.0 L/100 passenger KM Airbus A350: 3.0 L/100 passenger KM
Cost Minimization Strategies1b) Acquire more regional jets:
Regional Jets Bombardier CRJ 200 (50 seat): ~3.12L/100
passenger KM Bombardier CRJ 700 (78 seat): ~2.60L/100
passenger KM
All Russian aviation companies now under one banner – United Airplane Company. Focus will now be on Regional Jets, which will be of great demand in Russia.
Cost Minimization Strategies1b) Acquire more regional jets:
• cost savings: Flights at capacity, lower cost (less people required to maintain and fly aircraft)
SOURCE: Bombardier
SOURCE: Bombardier
Cost Minimization Strategies2) Reduce Labour Costs
a) Increase labour productivity through additional training, performance monitoring
b) Decrease salary/pension costs by: • hiring non-union workers where possible (new
divisions) • renegotiating existing salary contracts• phasing out defined benefit pension plans in favour of
defined contribution pension plans
Cost Minimization Strategies3) Refine Business Model
• Legacy airlines can employ 2 models: point to point low cost model on domestic routes traditional hub model on international routes.
Thus far, traditional airlines (especially US based ones) have been entering bankruptcy protection to enable a restructuring that encompasses all 3 strategies.
However, this is not exactly conducive to increasing consumer and investor confidence
Growth Projections
China Traffic Growth
Growth Strategies
• China & India: burgeoning middle class now has resources to
travel. Increased trade and foreign investment means
increased number of foreign business people visiting, and increased frequency of visits
Focus on regions that are expected to yield the highest rate of RPK growth:
Investment Criteria
1) Cost efficiency: • fuel efficient fleet, appropriate business model,
reasonable labour costs (non union, or balanced union power)
• well funded pension obligations (defined contribution superior)
2) Exposure, or plans to operate in future high growth areas (China, India, Latin America)
3) Healthy financial structure; should not be overly leveraged, reasonable CAPX
4) Enough market power to secure additional airport access; ability to “withstand” competition from other carriers at high traffic airports (dominate?)
Given the investors’ current distaste for airlines, bargains could (?) be found
Southwest Airlines
Company Snapshot Listed on: NYSE Symbol: LUV Industry: Regional Airlines Market Cap: $14.14B Stock Price: $17.65 (Closing 03/24/06) Dividend Yield: .02 (0.10%) P/E: 26.23 Shares Outstanding: 804,661,597
Background 1967: Incorporated in Texas (Rollin King and Herb Kelleher) 1971: Commenced service with 3 Boeing 737s serving
Dallas, Houston, and San Antonio Short to medium-haul point-to-point regional carrier Today: 448 Boeing 737s, 61 cities, 31 states 31,729 employees as of January 1, 2006 Posted 33rd consecutive year of profits in 2005 Largest US carrier based on originating US passengers
boarded and scheduled US departures
Mission “Dedication to the highest quality of
customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.”
“… to provide our employees a stable work environment with equal opportunity for learning and personal growth.”
Key Officers Herbert Kelleher
Position: Founder / Executive Chairman Age: 74 Years of Service: 28
Gary Kelly Position: CEO Age: 50 Years of Service: 20
Colleen Barrett Position: President Age: 61 Years of Service: 28
Quick FactsAverage passenger airfare is $93.68Average passenger trip is 775 milesRanked first in customer satisfactionAdopted the first profit sharing plan in
US airline industry in 1973Employees own at least 10% of stock
Member of fortune 500Received 260,109 resumes and hired
2,766 new Employees in 2005
Destinations
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
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
Operating Expenses2005 Operating Expenses
40%
20%
6%
2%
7%
7%
18%
Wages & Benefits
Fuel
Maintenance
Aircraft rentals
Landing fees
Depreciation &amortization
Other
Fuel CostsFuel Costs
771 762 830
1000
1342
0
200
400
600
800
1000
1200
1400
1600
2001 2002 2003 2004 2005
Year
Co
st
(Mil
lio
ns)
Average Cost Per Gallon
0.71 0.68 0.720.83
1.03
0
0.2
0.4
0.6
0.8
1
1.2
2001 2002 2003 2004 2005
Year
Do
lla
rs
Fuel Strategies Consumed 1.3B gallons of jet fuel in 2005
Hedge on short and long term basis
2005: 85% at $26/barrel crude oil Savings of $892 Million
2006: 65% at $32 2007: 45% at $31 2008: 30% at $33 2009: 24% at $35
Competition and Challenges Increasing low fare and lower cost
competitionRising fuel costsCompetition from surface
transportation in short-haul markets
Risk FactorsBusiness very sensitive to price of fuelBusiness is labour intensive
82% of employees are unionizedRelies heavily on technology for daily
operationsChanges in government regulation can
have a major impact on businessAirline industry is very competitive
Labour UnionsEmployee Group Union CBA Expiry
CSRs AFL-CIO November 2008
Flight Attendants TWU June 2008
Field agents TWU June 2008
Pilots SWPA September 2006
Plane Technicians AMFA February 2009
Mechanics AMFA August 2008
Flight simulator technicians
Teamsters November 2011
Flight instructors SWPIA December 2012
Flight dispatchers SWEA December 2009
Stock clerks Teamsters August 2008
Aircraft Data737 Type Seats Average
Age (Yrs)# of
Aircraft# Owned # Leased
300 137 14.7 194 110 82
500 122 14.7 25 16 9
700 137 3.8 229 224 2
Totals 9.1 448 352 93
Operating Data
($’s in millions) 2005 2004 2003 2002 2001
RPM (000s) 60,223,100 53,418,353 47,943,066 45,391,903 44,493,916
ASM (000s) 85,172,795 76,861,296 71,790,425 68,886,546 65,295,290
Load factor 70.07% 69.50% 66.78% 65.89% 68.14%
Financials
Revenue Composition
Revenue Composition 2005
Passenger
FreightOther
Income StatementIncome Statement (Millions)
2005 2004 2003 2002 2001
Operating Revenues
Passenger 7,279 6,280 5,741 5,341 5,379
Freight 133 117 94 85 91
Other 172 133 102 96 85
Total operating revenues 7,584 6,530 5,937 5,522 5,555
Operating Expenses
Salaries and benefits 2,702 2,443 2,224 1,993 1,856
Fuel and oil 1,342 1,000 830 762 771
Maintenance materials and repairs 430 457 430 390 398
Agency commissions - - - 55 103
Aircraft rentals 163 179 183 187 192
Landing fees and other rentals 454 408 372 345 311
Depreciation and amortization 469 431 384 356 318
Other operating expenses 1,204 1,058 1,031 1,017 976
Total operating expenses 6,764 5,976 5,454 5,105 4,925
Operating income 820 554 483 417 630
Net interest and other 54 (65) 225 (24) 197
Income before taxes 874 489 708 393 827
Taxes 326 176 266 152 317
Net Income 548 313 442 241 510
Income Statement HighlightsProfits increase 75% from 2004
33rd consecutive year for profitseffective cost control measuresSuccessful fuel hedging program
Net income fairly erratic
Balance Sheet (1/2)Assets (Millions)
2005 2004 2003 2002 2001
Current Assets
Cash and cash equivalents 2,280 1,048 1,865 1,815 2,279
Short-term investments 251 257 - - -
Accounts receivables 258 248 132 175 71
Inventories of parts and supplies 150 137 93 86 70
Deferred income taxes - - - - 46
Fuel hedge contracts 641 428 164 113 -
Prepaid expenses and other current assets 40 54 59 43 52,114
Total current assets 3,620 2,172 2,313 2,232 2,520
Non-current assets
Flight equipment 10,999 10,037 8,646 8,025 7,534
Ground property and equipment 1,256 1,202 1,117 1,042 899
Deposits on flight equipment purchase contracts 660 682 787 389 468
Less depreciation and amortization (3,488) (3,198) (3,107) (2,810) (2,456)
Total non-current assets 9,427 8,723 7,443 6,646 6,445
Other assets 1,171 442 122 76 31
Total Assets 14,218 11,337 9,878 8,954 8,997
Balance Sheet (2/2)Liabilities and Stockholder's Equity
2005 2004 2003 2002 2001
Current liabilities
Accounts payable 524 420 405 362 505
Accrued liabilities 2,074 1,047 650 529 548
Air traffic liability 649 529 462 412 450
Aircraft purchase obligations - - - - 222
Short-term borrowings - - - - 475
Current maturities of long-term debt 601 146 206 131 40
Total current liabilities 3,848 2,142 1,723 1,434 2,240
Long-term debt less current maturities 1,394 1,700 1,332 1,553 1,327
Deferred income taxes 1,896 1,610 1,420 1,227 1,058
Deferred gains from sale and leaseback of aircraft 136 152 168 184 192
Other deferred liabilities 269 209 183 134 166
Total Liabilities 7,543 5,813 4,826 4,532 4,983
Stockholder's equity
Common stock 802 790 789 777 767
Capital in excess of par 424 299 258 136 50
Retained earnings 4,557 4,089 3,883 3,455 3,228
Accumulated other comprehensive income 892 417 122 54 (32)
Treasury stock - (71) - - -
Total stockholders equity 6,675 5,524 5,052 4,422 4,013
Total liabilities and equity 14,218 11,337 9,878 8,954 8,996
Cash Flow Statement (1/2)Cash flow from operations (millions) 2005 2004 2003 2002 2001
Net Income 548 313 442 241 511
Adjustments to net income:
Depreciation and Amortization 469 431 384 356 318
Deferred income taxes 257 184 183 170 208
Amortization of sale and leaseback of aircraft (16) (16) (16) (15) (15)
Amortization of scheduled airframe inspections 49 52 49 46 43
Income tax benefit from stock options exercises 65 35 41 38 54
Changes in assets and liabilities:
Accounts and other receivables (9) (75) 43 (103) 67
Other current assets (59) (44) (19) (10) (9)
Accounts payable and accrued liabilities 855 231 129 (149) 203
Air traffic liability 120 68 50 (38) 73
Other (50) (22) 50 (16) 32
Net cash flow from operations 2,229 1,157 1,336 520 1,485
Cash Flow Statement (2/2)Cash flow from investing (millions) 2005 2004 2003 2002 2001
Purchases of property and equipment (1,210) (1,775) (1,238) (603) (998)
Change in short-term investment 6 124 (381) - -
Payment for assets of ATA airlines (6) (34) - - -
Debtor in possession loan to ATA airlines - (40) - - -
Other - (1) - - -
Net cash flow from investing (1,210) (1,726) (1,619) (603) (998)
Cash flow from financing
Issuance of long-term debt 300 520 - 385 614
Proceeds from revolving credit facility - - - - 475
Proceeds from trust arrangement - - - 119 266
Proceeds from employee stock plans 132 88 93 57 44
Payments of long-term debt (149) (207) (130) (65) (111)
Payments of trust arrangement - - - (385) -
Payments of revolving credit facility - - - (475) -
Payments of cash dividends (14) (14) (14) (14) (13)
Repurchase of common stock (55) (246) - - -
Other (1) (8) 3 (4) (5)
Net cash flow from financing 213 133 (48) (382) 1,270
Net change in cash 1,232 (436) (331) (465) 1,757
Cash at beginning of period 1,048 1,484 1,815 2,280 523
Total cash at end of period 2,280 1,048 1,484 1,815 2,280
Cash Flow Analysis
(dollars in millions)
2005 2004 2003 2002 2001
Cash Flow From Operations
2,229 1157 1,336 520 1485
Free Cash Flow
1,019 (569) 98 (83) 487
Cash Flow AnalysisErratic free cash flowCF from operations increased 83%
increase in accounts payableHigher net income in 2005
CF from investing used mainly to purchase new planes33 new planes in 2005
$300M in debt issued in 2005$520M in debt issued in 2004
Stock Chart (1 Year)
Stock Chart (5 Year)
Price Comparison
Profitability ComparisonSouthwest
2005 2004 2003 2002 2001
ROE (%) 8.21 5.67 8.75 5.45 12.71
ROA (%) 3.85 2.76 4.47 2.69 5.67
Profit Margin (%) 7.23 4.79 7.44 4.36 9.18
Discount Airlines
2005 2004 2003 2002 2001
ROE (%) 5.83 10.98 5.56 -10.09 24.73
ROA (%) -14.36 -54.38 -14.89 -11.66 -3.45
Profit Margin (%) 6.73 11.6 8.51 10.5 2.46
Industry
2005 2004 2003 2002 2001
ROE (%) -2.14 -3.37 0.74 27.03 -149.58
ROA (%) -14.36 -54.38 -14.89 -11.66 -3.45
Profit Margin (%) -4.46 1.64 -4.55 -5.82 0.06
Other RatiosSouthwest
2005 2004 2003 2002 2001
Current Ratio 0.94 1.01 1.34 1.55 1.13
Debt/Equity 0.21 0.31 0.26 0.35 0.33
Discount Airlines
2005 2004 2003 2002 2001
Current Ratio 1.53 1.81 1.74 1.62 1.33
Debt/Equity 98.33 86.96 97.69 -174.02 -29.77
Industry
2005 2004 2003 2002 2001
Current Ratio 1.15 1.22 1.15 1.18 1.09
Debt/Equity -77.15 86.72 234.36 -27.41 2,626.20
Recommendation
HOLD
+ Excellent management Proven business strategy 33 consecutive years of profit Steady dividends
- Intense competition Low profit margins Erratic cash flow Seasonal industry
Thank You Come Again!!
Singapore Airlines
Background
• Founded in 1972.• National airline of Singapore.• Second largest carrier by market value.• Full member of global Star Alliance.• Route network reaches out to over 90
destinations in close to 40 countries.• Numerous awards.• Trades in US as an ADR (Symbol: SPAAF).
Global Route Map
Recent Awards
TIMEReaders' Travel Choice Awards 2005Preferred AirlinePreferred First/Business ClassBest Frequent Flyer Programme
Business Traveller (China)Best Airline in the WorldBest Asian Airline Serving China
Commonwealth Magazine (Taiwan)The Most Admired Company 2005 AwardsWinner - Airline Industry Category (8th year)
Asia Risk Magazine (HK)Asia Risk Awards 2005Corporate Risk Manager of the Year
TTG Asia Travel AwardsHall of Fame 2005
Travel Inside, Sabre, Swiss Postal Services, JPM Magazines (Switzerland)Golden Travel Star Award 2005 – SIA Switzerland (12th consecutive year)
Global Finance Magazine (US)Global Finance Award 2005 (Airlines Sector)Best Airlines Company – AsiaBest Airlines Company - Global
Subsidiaries
• SIA Group consists over 50 subsidiaries and associates, including:– SilkAir– SIA Engineering Company (SIAEC)– Singapore Aero Engine Services Private Limited
(SAESL)– Singapore Aircraft Leasing Enterprise (SALE)– Singapore Airlines Cargo (SIA Cargo)– Singapore Airport Terminal Services (SATS)– Singapore Flying College
Ownership in Other Airlines
• Virgin Atlantic Airways (49%)– Operates long-haul routes between London
and North America, the Caribbean, Africa, Asia and Australia.
• Tiger Airways (49%)– A low-cost airline based in Singapore.– Singapore's first true low-cost carrier.– Destinations encompass airports within a four
hour flying radius of Singapore.
Group Fleet
List of Major Shareholders
Temasek Holdings
• Temasek Holdings– Owns and manages the Singapore
Government's direct investments, both locally and overseas.
– Singapore Ministry of Finance is the single shareholder of Temasek Holdings.
DBS and Raffles
• DBS– Set up in 1968 as a development financing
institution led by the Singapore government.– Major shareholders include DBS, Raffles, and
Temasek.
• Raffles Holdings– Owned by Temasek and CapitaLand (which in
turn is owned by Temasek).– Singapore Airlines is also a shareholder.
Objectives for Future Growth
• Re-engineer business to meet any challenger head-on.
• Develop a sustainable business position through careful cost management and planning.
• Continue to work hard to access the heavy-protected Trans-Pacific route between Australia and the USA.
• Launch the world’s largest aircraft, Airbus A380, in 2006.
Airbus A380
• “First to fly the A380 - experience the difference in 2006.”
• Double-decker, four-engined airliner.
• Largest passenger airliner in the world, topping the Boeing 747, which was the largest for 35 years.
Current Stock Information
As of March 24, 2006
• Price: 14.70
• 52-week range: 11.00 - 14.90
• Shares outstanding: 1.22 billion
• Market capitalization: $17.93 billion
• Exchange rate: 0.72 CAD/SGD
• Dividend yield: 0.68%
Revenue Composition
3-months Chart
1-year Chart
5-year Chart
Key Ratios
Debt-to-Equity
Profit Margin
Return on Equity
SIA 48.42% 10.30% 8.56%
Industry
(International)
64.15% -4.46% -2.14%
Recommendations
Don’t Buy!
AIR CANADA
Background Began on April 10, 1937, called Trans-Canada
Airlines, subsidiary of Canadian National Railway Changed name to Air Canada since January 1,
1965. In 1989, Air Canada was completely privatized. In January 2000, acquired Canada’s second
largest air carrier, Canadian Airlines. On April 1, 2003, filed for bankruptcy protection. On September 30, 2004, emerged from
bankruptcy protection. ACE Aviation Holdings Inc. (ACE) is the new
parent of Air Canada.
ACE Aviation Holdings Inc. (ACE) Operating companies
and partnerships: Air Canada Air Canada Cargo ACGHS Limited
Parternership Air Canada Jazz Air Canada Technical
Services(ACTS) Touram Limited
Partnership-(Air Canada Vacations)
Aeroplan Limited Partership (85.6%)
Current Stock Information
As of March 24, 2006Ticker symbol: TSX: ACE.RV.TPrice: $3452-week range:$30.25-$43.03Shares outstanding: 76,852,830Market capitalization: 2,612,996,220Dividend yield: 0P/E Ratio: 12.928
2005 Operating Revenues
Passenger,84%
Cargo, 6%
Others, 10%
Passenger
Cargo
Others
2005 Operating Expenses
Air Canada and Jazz They contribute to the passenger
transportation revenue Purchases substantially all of Jazz’s fleet
capacity based on predetermined rates Jazz currently operates scheduled passenger
service on behalf of Air Canada They linked their regional and mainline
networks to serve connecting passengers more efficiently
They provide direct passenger air transportation to 159 destinations
Business Strategy1. Competitive cost structure
Lower average salaries, sales and distribution costs
2. Redesigned network to maximize efficiency and leverage international growth opportunities Increase used of large regional jet aircraft
3. Customer Driven Revenue Model for Passenger Services Offer five simple fare types ranging from low
one-way fares to Executive Class fares
4. New corporate structure to maximize the value of subsidiaries
HubsToronto Pearson International Airport is
the largest hub.Montréal-Pierre Elliott Trudeau
International Airport European hub and Atlantic Canada hub
Vancouver International Airport hub for Pacific operations
Calgary International Airport focus city
Air Canada’s Fleet Air Canada’s operating fleet, excluding Jazz
aircraft, at December 31, 2005:
Air Canada’s Future Fleet
Available Seat Miles (ASMs)
Revenue Passenger Miles (RPMs)
Passenger Load Factor (PLF)
Canada Up 0.4 pp
US Transborder Up 2.7 pp
Other International Up 1.4 pp
• Compare Q4 2005 to Q4 2004
Passenger Revenue per Revenue Passenger Mile (Yield)
Passenger Revenue per Available Seat Mile (RASM)
Average Salary and Employees
HedgesFuel hedges 2005 to 2007
Increase hedge position of approximately 4% per month to approximately 50% of anticipated jet fuel requirements
Foreign currency contractsForward contracts and option agreements
on US$521 million of future purchase
Financial Statements
Financial AnalysisACE North
American Airlines
All Airlines
Debt/Equity 914% 63.72% 64.15%
Profit margin 2.62% -6.97% -4.46%
ROE 22.09% -4.76% -2.14%
Stock Price – 1 Year
Stock Price – Since Incorporation
Recommendation
SELL