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Airline

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1) Background of the Industry

History of Commercial airlines

 American aviation pioneers, such as Rufus Porter and Frederick Marriott, attempted to start airlines using airships in the mid-19th century, focusing on the New York–California route. Those attempts floundered due to such mishaps as the airships catching fire and the aircraft being ripped apart by spectators. DELAG, Deutsche Luftschiffahrts-Aktiengesellschaft was the world’s first airline.It was founded on November 16, 1909 with government assistance, and operated airships manufactured by The Zeppelin Corporation. Its headquarters were in Frankfurt. The four oldest non-dirigible airlines that still exist are Netherlands’ KLM, Colombia’s Avianca, Australia’s Qantas, and the Czech Republic’s Czech Airlines. KLM first flew in May 1920, while Qantas (which stands for Queensland and Northern Territory Aerial Services Limited) was founded in Queensland, Australia, in late 1920.

Development of the airline Industry in India

During both World Wars, government subsidies and demands for new airplanes vastly improved techniques for their design and construction. Following the World War II, the first commercial airplane routes were set up in Europe. Over time, air travel has become so commonplace that it would be hard to imagine life without it. The airline industry, therefore, certainly has progressed. It has also altered the way in which people live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit and conduct business in places once considered remote.

India was also one of the first countries to embrace civil aviation.One of the first West Asian airline companies was Air India, which had its beginning as Tata Airlines in 1932, a division of Tata Sons Ltd. (now Tata Group). The airline was founded by India’s leading industrialist, JRD Tata. On October 15, 1932, J. R. D. Tata himself flew a single engined De Havilland Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi to Bombay via Ahmedabad. The aircraft continued to Madras via Bellary piloted by Royal Air Force pilot Nevill Vintcent . Tata Airlines was also one of the world’s first major airlines which began its operations without any support from the Government.

With the outbreak of World War II, the airline presence in Asia came to a relative halt, with many new flag carriers donating their aircraft for military aid and other uses. Following the end of the war in 1945, regular commercial service was restored in India and Tata Airlines became a public limited company on July 29, 1946 under the name Air India. After the independence of India, 49% of the airline was acquired by the Government of India. In return, the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International.

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2) Key Terms and Jargons used in the Industry

 The airline industry can be separated into four categories by the U.S. Department of Transportation (DOT):

  • International – 130+ seat planes that have the ability to take passengers just about anywhere in the world. Companies in this category typically have annual revenue of $1 billion or more.
  • National – Usually these airlines seat 100-150 people and have revenues between $100 million and $1 billion.
  • Regional – Companies with revenues less than $100 million that focus on short-haul flights.
  • Cargo – These are airlines generally transport goods.

 Another important terms:

Available Seat Mile =   (total # of seats available for transporting passengers)  X  (# of miles flown during period)

Revenue Passenger Mile =    (# of revenue-paying passengers)  X  (# of mile flown during the period)

Revenue Per Available Seat Mile =     (Revenue) / (# of seats available)

Air Traffic Liability (ATL): An estimate of the amount of money already received for passenger ticket sales and cargo transportation that is yet to be provided. It is important to find out this figure so you can remove it from quoted revenue figures (unless they specifically state that ATL was excluded).

Load Factor: This indicator, compiled monthly by the Air Transport Association (ATA), measures the percentage of available seating capacity that is filled with passengers. Analysts state that once the airline load factor exceeds its break-even point, then more and more revenue will trickle down to the bottom line. Keep in mind that during holidays and summer vacations load factor can be significantly higher, therefore, it is important to compare the figures against the same period from the previous year.

3) Industry updates

 The Major players and the top airline groups by revenue are as below

Group

Revenue ($B)

operating result ($B)

net result ($B)

Lufthansa Group36.11.761.49
United Continental Holdings34.01.820.85
Delta Air Lines31.82.220.59
Air France-KLM Group31.30.160.81
FedEx Express24.61.23 
AMR Corporation22.20.31-0.41
International Airlines Group (British Airways/Iberia)19.50.300.13
Japan Airlines Corporation16.02.22 
All Nippon Airways Group16.00.800.27
The Emirates Group14.81.481.46

As we know , fuel is the major driver of the airline industry, below is the trend of the fuel prices for the major airlines in the U.S.

Average fuel cost per gallon

2005

2006

2007

2008

2009

Southwest Airlines$1.13$1.64$1.80$2.44$2.12
JetBlue Airways$1.70$2.08$2.18$3.08$2.08
American Airlines$2.8 $2.12$3.03$2.07
Delta Air Lines$1.89$2.12$2.23$3.16$2.15
United Airlines $2.11$2.18$3.54$1.75

4) Analysis on the industry 

Factors which have a direct impact on the airline industry are the airport capacity, route structures, technology and costs to lease or buy the physical aircraft are significant in the airline industry.

Other imp factors are:

  • Weather -  Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down airports and cancel flights, which costs airline money.
  • Fuel Cost - According to the Air Transportation Association (ATA), fuel is an airline’s second largest expense. Fuel makes up a significant portion of an airline’s total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.
  • Labour - According to the ATA, labour is the an airline’s No.1 cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others.

Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and up-selling in flight services. But the largest proportion of revenue is derived from regular and business passengers. For this reason, it is important that you take consumer and business confidence into account on top of the regular factors that one should consider like earnings growth and debt load.

Business travellers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travellers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the number of leisure travellers to decline.

It is also important to look at the geographic areas that an airline targets. Obviously, more market share is better for a particular market, but it is also important to stay diversified. Try to find out the destination to which the majority of an airline’s flights are travelling. For example, an airline that sends a high number of flights to the Caribbean might see a dramatic drop in profits if the outlook for leisure travellers looks poor.

A final key area to keep a close eye on is costs. The airline industry is extremely sensitive to costs such as fuel, labour and borrowing costs. If you notice a trend of rising fuel costs, you should factor that into your analysis of a company. Fuel prices tend to fluctuate on a monthly basis, so paying close attention to these costs is crucial.

Thinking of entering the airline industry? , following are the point that you need to think upon

  1. Threat of New Entrants.  At first glance, you might think that the airline industry is pretty tough to break into, but don’t be fooled. You’ll need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. Brand name recognition and frequent fliers point also play a role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher.
  2. Power of Suppliers. The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isn’t a lot of cutthroat competition among suppliers. Also, the likelihood of a supplier integrating vertically isn’t very likely. In other words, you probably won’t see suppliers starting to offer flight service on top of building airlines.
  3. Power of Buyers.  The bargaining power of buyers in the airline industry is quite low. Obviously, there are high costs involved with switching airplanes, but also take a look at the ability to compete on service. Is the seat in one airline more comfortable than another? Probably not unless you are analyzing a luxury liner like the Concord Jet.
  4. Availability of Substitutes. What is the likelihood that someone will drive or take a train to his or her destination? For regional airlines, the threat might be a little higher than international carriers. When determining this you should consider time, money, personal preference and convenience in the air travel industry. 5
  5. Competitive Rivalry. Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy.
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