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British Airways

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Title: British Airways


1
Global Airlines
Industry Alla Serebrova Delta Airlines -
Eugene Southwest Airlines - Shaun British
Airways - Alex
2
Presentation Agenda
  • Industry Characteristics
  • Current State
  • Market Outlook
  • Companies in focus
  • Delta Airlines
  • Southwest
  • British Airways
  • YIELD Revenues divided by revenue
    passenger-kilometers it represents an aggregate
    of all the airfare and airline charges and is
    measured on a per-kilometer
    basis.

3
Glossary
  • ASK The number of seats available for the
    transportation of revenue passengers multiplied
    by the number of kilometers these seats are
    flown.
  • RPK One-fare paying passenger transported one
    km. RPK is computed by multiplying the number of
    revenue passengers by the km they fly.
  • PASSENEGR LOAD FACTOR() Percentage of seating
    capacity which is actually sold and utilized. RPK
    divided by ASK
  • UNIT COSTThe average operating cost incurred per
    ATK
  • YIELD Passenger revenues divided by revenue
    passenger-kilometers. PR per RPK. It represents
    an aggregate of all the airfare and airline
    charges and is measured on a per-kilometer basis.
  • BREAK-EVEN LOAD FACTOR The LF at which operating
    revenues cover operating costs. Unit Cost divided
    by Yield.

4
Industry Characteristics
  • Highly Concentrated Market Dominated by North
    America (41)
  • Half of the Worlds Fleet is operated by just 17
    airlines (of 650)
  • Half of all ASK are focused on the top 6 of
    routes (33 airports)
  • The Intra-North American Zone Represents 1/3 of
    the Total
  • Intra-Asia traffic (10,6)
  • Intra-Europe traffic (8,5)
  • Europe-Asia travels (7,4)
  • Transpacific flights (6,6)
  • North Atlantic traffic (11,6)
  • The International Traffic accounts for 57 of
    total PK

Source Airlines Gate
5
Airline Industry is Maturing
Worldwide RPK Growth Rates are Declining
6
Industry Characteristics
  • Capital Intensive
  • High Cash Flow
  • Labor Intensive
  • Highly Unionized
  • Thin Profit Margins
  • Cyclical/Seasonal
  • Travel agencies

Source Rolls-Royce
7
Airline costs
8
Labor Costs Per Employee
9
Aircraft Replacement
  • Profitability Triggers New
    Orders
  • Younger fleet - higher profits

10
Aircraft Replacement Trends
11
Business vs. Personal/Pleasure Revenue and
Traffic Shares

Source Air Transport Association
12
Not an Industry Free of Risk
  • Volatility
  • Geopolitical Instability
  • Oil disruption fears

13
Jet fuel prices remain high
  • Historically airline stocks have tended
    to trade in the same direction as
    fuel prices
  • Exceptions supply shocks
    or wars
  • Refining margins at 11.9/ bbl

14
Deregulation and its effects
  • The US experience - 1978
  • International traffic - bilateral agreements
  • Hub and spoke networks development
  • Europe (1993) and Asia are still lagging behind
  • State aid distortion
  • Government indifference
  • Airport constraints
  • Restriction of slot sales
  • Logical outcomes of deregulation
  • Regional LCC
  • Alliances

15
The Basic Business Model of the Network Carriers
is Broken
  • LCC have 30 cost advantage
  • Non-unionized workforce
  • Better business practices
  • Simple point to point
  • Higher utilization, shorter turns,
    no waiting at hubs, red-eyes
  • No transfers
  • Tickets - internet
  • Charge for food and drink

16
Even Constrained to the American Landscape, LCCs
? Point-to-Point
  • Look at the successful LCCs which operate a core,
    old-line, network hub operation
  • Air Tran at ATL
  • Frontier at DEN

17
Global Airlines Alliances
- STAR ALLIANCE (21)(United, Lufthansa, Air
Canada, Air New Zealand, ANA, Austrian, British
Midland, Lauda Air, Mexicana, SAS, Singapore,
Thai, Varig) - ONEWORLD (17)(American, British
Airways, Cathay Pacific, Iberia, Qantas, Lan
Chile, Aer Lingus, Finnair) - SKYTEAM (12)(Air
France, Delta, Alitalia, Korean Airlines,
Aeromexico, CSA Czech Airlines - QUALIFIER GROUP
(Swissair, Sabena, LOT Polish Airlines, TAP Air
Portugal, Air Europe, Air Littoral, Turkish
Airlines, Volare Airlines, PGA Portugana
Airlines, Crossair).

Star Oneworld SkyTeam
Annual Passengers, mlns 296 209 174
Destinations Served, more than 815 559 451
Countries Served, more than 130 134 98
Fleet 2,130 1,852 985
Employees 312,076 269,100 151,000
18
Alliances Rational and Benefits
  • Rational - very effective at traffic redirecting
  • Increasing the geographic scope of the network
  • International market entry restricted by
    bilaterals
  • Most cost effective way to develop a new market
  • Maintain presence in a key market
  • Benefits
  • Revenue Growth
  • Cost Savings


19
2003 Positive Result despite SARS
  • bbb
  • ccc

Source Rolls-Royce
20
1st Half 2004 Traffic Rebound vs. 2003
21
Global Economic Growth
  • Economic growth is the major contributor to air
    travel demand
  • 2004 - 5 highest in 3 decades (China, Japan, US)

22
Traffic Revenues against H1/ 2000
23
2004 Cargo Traffic Strong
  • Freight represents 28 of total tonne-kilometres
  • Europe-Asia (23,6) Transatlantic
    flights (19,8)
  • Transpacific flights (19,4)

24
Traffic by Region
25
Productivity Recovery in 2004
  • Many FC items 2 ways to increase productivity
  • to increase aircraft utilization
  • to increase of seats

26
Passenger Aircraft Productivity 1982 - 2008
27
Economic and Traffic Growth 20042023
  • Worldwide economic growth will average 3.0/year
  • Passenger traffic growth will average 4-5 per
    year
  • Cargo traffic growth will average 6.2 per year

28
Market Outlook
  • Infrastructure develops alongside air travel
    demand
  • The world fleet will more than double over the
    next 20 years reaching 34,770 aircrafts (25,000
    new)
  • Economic and traffic
    growth rates vary by
    region

29
Summary
  • 2004 traffic forecast now 13.5 (18 ytd)
  • Driven by strong GDP growth in N America
  • Recovery from SARS in Asia
  • Aircraft overcapacity being eliminated
  • Productivity recovered to pre- 9/ 11 levels
    (75)
  • Airline profits recovering in Asia
  • But yields still very weak in US and Intra-
    Europe
  • Costs impacted by fuel price
  • Inability to pass on rises to consumers in US
    domestic market
  • Delivery upturn in 2005- 2007 consistent with
    traffic and
  • productivity projections
  • Longer term growth increasingly driven by Asia

30
Delta Airlines
31
Current Stock Information
  • Stock Price US 7.26
  • Stock Symbol DAL
  • Exchange NYSE
  • Shares Outstanding 123.545 million
  • Market Capitalization 911.93 million
  • Dividend 0.00

32
  • History Facts
  • Started as crop-dusting operator
  • First flight in 1929 as Delta Airlines
  • Headquarters Atlanta, Georgia
  • CEO Gerald Grinstein
  • Employee 60,000
  • Daily flights with partners 7,500
  • Destinations 496 cities in 88 countries

33
Management Team
  • Gerald Grinstein
  • Chief Executive Officer, 20yrs experience in
    airline industry
  • Michael Palumbo
  • Vice President, Chief Financial Officer,
    responsible for Trans World Airlines on time
    performance from worst to first
  • Joe Kolshark
  • Chief of Operations, served Delta for 16yrs,
    757/767 Captain
  • Jim Whitehurst
  • Chief Network and Planning Officer
  • Curtis Robb
  • Chief Information Officer, 30yrs information
    technology experience

34
  • Business Structure
  • Connection carriers
  • American Eagle
  • Atlantic Southeast Airlines
  • Chautauqua Airlines
  • Comair
  • SkyWest
  • Shuttle
  • Northeastern States
  • SkyTeam Alliance
  • Global Alliance
  • Song
  • Low-cost Carrier
  • Codeshare Partners

35
  • Current Situation
  • Losing over 3 billion since 2001
  • Facing bankruptcy protection, Chapter 11 filing
  • Expecting 2,000 maintenance, 3,000 customer
    service and 1,800 management job losses in 2005
  • Agreed 32.5 pay cut, fewer benefits for pilots,
    saving nearly 1 billion

36
  • Reasons for Deltas Suffering
  • Low cost carriers with minimal debt loads
    offering low fares
  • Use of high-cost hub-and-spoke operation
  • Increase in fuel price
  • Greater choices to select from
  • Sept. 11 incident causing less demand
  • SARS outbreak
  • Highest operating per unit cost
  • Inability to maintain sufficient liquidity
  • Significantly higher pilot salaries

37
Transformation Progress
  • SimpliFares
  • Interior Service Upgrade
  • Redesign of Atlanta Hub
  • Growing Cincinnati and Salt Lake Hubs
  • SkyMiles Program
  • New Aliances Continental Airlines, Northwest
    Airlines KLM Royal Dutch Airlines
  • Growing Song

38
Income Statement - Revenues
39
Income Statement - Expenses
40
Operating Expenses
41
Other Expenses Net Earnings
Basic and Diluted Loss per Share (03) -6.40
42
Earnings Trend
43
Balance Sheet
44
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45
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46
Contractual Payment Due by period
  •  

47
Fleet Structure Average Life
9.76
48
Cash Flow Statement
Yr ending 2003 2002 2001
Beg. Balance 1,969 2,210 1,364
Operating Act 453 285 236
Investing Act (260) (1,109) (2,696)
Financing Act 548 583 3,306
End. Balance 2,710 1,969 2,210
Free Cash per share (03) 1.54
49
Performance Factors (? from 02 to 03)
  • Operating revenues 13,303 (?)
  • Operating expenses 14,089 (?3.6)
  • Operating margin -5.9 (?3.9pt)
  • Net earning (loss) -773 (?40.06)
  • Opt revenue per available seat mile 9.90
    (?5.4)
  • Opt cost per available seat mile 10.48 (?1.6)
  • Passenger load factor 73.4 (?1.4pt)
  • Breakeven passenger load factor 78.1 (?1.5pt)
  • Cargo ton mile yiled 33.08 (?8.0)
  • Avg aircraft fuel price per gallon 81.78
    (?22.2)
  • End of yr full-time equivalent employees 70,600
    (?6.0)

50
Ratios
51
Market Stock Value
Last US 7.260 Net Change US -0.240
Change -3.20
52
Stock Price Movement (1yr)
53
Stock Price Movement (3yrs)
54
Recommendation
  • Huge Outstanding LT Debt
  • Extremely Volatile Market Condition
  • No Dividend Payment
  • Continuous Down Stream Stock Movement
  • - SELL -

55
Southwest Airlines

56
Stock Information
  • Stock Symbol LUV
  • Stock Exchange NYSE
  • Stock Price 15.89
  • Shares Outstanding 793.33 M
  • Market Cap 12.606B
  • Dividend 0.018

57
Company History
  • Commenced service on June 18, 1971
  • using 3 Boeing 737 aircraft servicing state of
    Texas
  • simple notion lowest possible fares, on-time
    delivery, and excellent customer service.
  • Became a major airline in 1989
  • 2003 was 31st consecutive year of profitability

58
Corporate Statistics
  • Offers flights within United States
  • 2900 flights per day
  • Flies to 59 cities (60 airports) in 31 states
  • Operates 405 Boeing 737 jets

59
Awards
  • Named Most admired airline for the second
    straight year in 2003 by FORTUNE magazine
  • Ranked in top 5 for Best companies in America to
    work for by FORTUNE magazine
  • Ranked 1 in fewest customer complaints for 13th
    consecutive year- Department of Transportation's
    Consumer Report.

60
Southwest Officers
  • Executive Position
    Service
  • Herb Kelleher Chairman of the Board
    33yrs
  • Gary C. Kelly CEO 18yrs
  • Colleen Barrett President
    26yrs
  • Donna Connover VP Cust. Operations 27yrs
  • Joyce Rogge VP Marketing
    16yrs
  • Greg Crum VP Flight Operations
    25yrs

61
Industry Competitors
  • Main competitor is the automobile
  • Other discount airlines ie. Jetblue, AirTran
    Airways
  • Challenges from old-line carriers and theyre
    subsidiary upstarts

62
Market Share
  • Southwests Market Share
    Southwests
    Capacity By Region
  • (Southwests top 100 city-pair markets
  • based on passengers carried)

63
External Challenges
  • Florida hurricanes
  • Post 9/11 terrorism concerns
  • Increased security measures
  • Technology

64
Competitive Advantage
  • customer service
  • Point-to-point carrying strategy
  • Quick turnaround strategy
  • low fares
  • performance enhancing winglets
  • Employee productivity
  • one of the lowest operating cost structures in
    the industry

65
New Jet Design
66
Present and Future Planning
  • Recently commenced service from Philadelphia
  • Installation of RAPID CHECK-IN kiosks in 2004
  • Plan to increase capacity at an average rate of
    8 from 2004-2012
  • Expansion projects at Fort Lauderdale, Houston
    Hobby, Las Vegas, Oakland, Tampa

67
Hedging Program
  • 2004 over 80 at 24/barrel
  • 2005 over 80 at 25/barrel
  • 2006 over 60 at 31/barrel
  • 2007 over 40 at 30/barrel

68
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69
Financial Statement Analysis
  • ROE 5.45
  • P/E 45.85
  • Price/Book (mrq) 2.28
  • EP/S 0.349
  • Operating Margin (ttm) 7.56
  • Dividend Yield 0.11

70
Operating Expenses
71
Income Statement
72
Company Fleet
  • Current age of fleet is 9.2 years

73
Stock-Based Employee Compensation
74
Stock-Based Employee Compensation
75
Composition of Long-Term Debt
76
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77
Important Statistics
  • Load Factor 66.8 Industry 79.0
  • Break-even Load Factor 66.75
  • Available Seat Miles 71.7 trillions
  • Revenue Passenger Miles 47.9 trillions

78
Stock Chart
79
Stock Chart (4 Year)
80
Recommendataion
  • Hold

81
By Alexei
82
Company History Background
  • Start as a merger of small UK air companies in
    early 19th
  • Nationalized in 1939 (British Overseas Airways
    Corporation)
  • In 1979 Government intention to sell BOAC
  • BA privatised in 1987

83
Market background
  • Public company with limited distribution of
    shares outside UK (in ADR form)
  • Stocks Traded
  • At London Stock Exchange (BAY)
  • At New York Stock Exchange (ADR BAB)
  • Number of shares 1,082,845,212
  • Price per share NYSE 41.48
  • Dividends counts in Pounds
  • Debt corporate rating stands at BB
  • Stable, backed by fleet
  • 3.3 bn

84
Service/Products
  • BA provides scheduled passenger and cargo Airline
    services
  • 154 destinations in 75 countries (last year 174
    destinations in 83 countries)
  • carried more than 36 million passengers last
    year
  • Programmes
  • Club World flat bed
  • World Traveller Plus
  • Club loyalty programme
  • Main base of operation (airports)
  • Airport Heathrow (hub structure) 38 of all
    passengers
  • Gatwick (new structure point to point)
  • New York John F. Kennedy International Airport
    (hub)
  • Alliances
  • Oneworld Aer Lingus, American Airlines, British
    Airways, Cathay Pacific, Finnair, Iberia, Lan
    Chile and Qantas
  • DBA
  • Franchise
  • Six airways Loganair, GB Airways, British
    Mediterranean Airways, Sun Air of Scandinavia,
    Comair of South Africa and Regional Air of Kenya

85
Management
  • Rod Eddinghton
  • Chief Executive. Executive Board Member since
    2000 (in industry since 1979)
  • John Rishton
  • Chief Financial Officer. Appointed in September
    2001. In BA since 1994
  • Martin George
  • Director Marketing and Communications. Appointed
    in 1997. In BA since 1987
  • Mike Street
  • Director Customer Service and Operations since
    1997. Executive Board Member since 2000
  • Robert Webb QC
  • General Counsel. Joined British Airways in 1998

86
Strategy
  • Reduce costs ( current improvement by 2
    billion)
  • Cut jobs (13,000 people)
  • Sell and lease airplanes to simplify fleet (fleet
    reduction 39 aircrafts in 2004)
  • Reduce number of unprofitable routes
  • Reformation customer service
  • New executive Club loyalty programme
  • New web site service
  • Development of new small routs in UK
  • Balance Sheet improvement
  • Cutting debt amount (selling Qantas shares) Still
    3.3billion
  • Achieve 10 operating margin

87
Opportunities/threats
  • Opportunities
  • Cargo service in Vietnam
  • New small routs in UK
  • New customer service (web site)
  • New terminal 5 in Heathrow in 2008
  • Threats
  • Gas prices (overspend 128.8 million)
  • Two Unions (pension programs)
  • Italian government
  • Heathrow charges increased (extra 300 million
    prepayment)
  • UK and EU regulations. Increased insurance, spot
    regulation (may be an extra cost of 300-400
    million)

88
Competitors
  • Lufthansa
  • Air France
  • Small domestic and European carriers
  • Delta
  • United

89
Financial statement analysis
  • Balance Sheet
  • Income Statement
  • Cash flow Statement
  • Main problem different standards and currency
    conversion

90
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91
Net debt 3.3bn lower
m
3.3bn
Dec 01
Mar 02
Jun 02
Sep 02
Dec 02
Mar 03
Jun 03
Sep 03
Dec 03
Mar 04
Sep 01
Jun 04
Sep 04
From Q2 http//media.corporate-ir.net/media_files/
irol/69/69499/presentations/UBS_Q204_05_final.ppt
92
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93
Revenue

http//media.corporate-ir.net/media_files/irol/69/
69499/presentations/UBS_Q204_05_final.ppt
94
Costs
95
Cost performance

Cost reduction
Net costs
Unit costs
http//media.corporate-ir.net/media_files/irol/69/
69499/presentations/UBS_Q204_05_final.ppt
96
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97
Ratio Analysis
Stock Industry SP 500 Load factor 70.3
Price/Earnings 5.79 39.20
26 Price/Book 1.11 2.42
4.3 Price/Sales 0.4 1.2 3.1 Price/Free
CF 2.63 14.45 16.39 Operating Margin
6.73 6.32 18.07
98
ADR price chart
99
Recommendation
  • Pro
  • Opportunities for growth in Asia
  • Improved debt situation
  • Cons
  • No CF to investors
  • Long run recommendation
  • SELL

100
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