1. travel
2. transports
3. air travel
4. airlines

Welcome Address
Aleks Popovich
Senior Vice President, Financial and Distribution Services
IATA
World Financial Symposium 2014
World Financial Symposium 2014
Our choice…..
Financial
Health?
World Financial Symposium 2014
OR
Financial
Hell?
Why we’re here…..
(1)
To learn:
Historical Challenges
Success and Failure
Outlook and Risks
World Financial Symposium 2014
Why we’re here…..
(2)
To debate:
What strategic themes?
What standards?
What tools?
What policies?
What positions?
World Financial Symposium 2014
Why we’re here…..
(3)
To act:
Industry Mobilization
CFO Role
World Financial Symposium 2014
But, why does it matter….?
World Financial Symposium 2014
Welcome Address
James Hogan
President and CEO
Etihad Airways
World Financial Symposium 2014
World Financial Symposium 2014
World Financial Symposium 2014
World Financial Symposium 2014
The Challenge of Sustained
Airline Financial Health
John E. Luth
Chairman & Chief Executive Officer
Seabury Group LLC
World Financial Symposium 2014
World Financial Symposium 2014
What makes the difference
between success and failure in
the airline industry?
John E. Luth
Chairman & CEO, Seabury Group
Confidential – not for third party distribution © Seabury Group 2014
How has the industry performed since I joined?
Global airline net profit (1989-2013)
USD Billions
20
Gulf War
9/11 & SARS
Gulf War II
Global Financial Crisis
10
?
0
-10
-20
-30
90 analysis
91 92
Source: IATA,89
Seabury
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Confidential – not for third party distribution © Seabury Group 2014
11
How has the industry performed since I joined?
Cumulative airline profit (1989-2013)
USD Billions
Gulf War
30
20
9/11 & SARS
Gulf War II
Global Financial
Crisis
$10.8B
10
0
(10)
(20)
(30)
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: IATA, Seabury analysis
Confidential – not for third party distribution © Seabury Group 2014
12
Who are some of the top performers?
Return on Invested Capital ROIC performance (2004 – 2013)
Dominant FSCs
LCCs
16
4
4
6
8
8
10
10
9
9
11
11
7
6
4
7
19
7
6
8
5
4
6
4
6
4
5
3
2
7
3
4
19
Net profit margin
13
3
15
15
10
8
10
3
2
Net 14
profit margin
8
9
13
14
16
15
13
12
16
13
14
13
9
7
1
-6
-6
Source: CapitalIQ, Seabury analysis
Confidential – not for third party distribution © Seabury Group 2014
13
The top performers are the outcome of good decision making
Network
Fleet
Return on
Invested
Capital
Cost containment
Product / pricing
Confidential – not for third party distribution © Seabury Group 2014
14
Where have we come from?
There have been radical changes to the shape of the US industry over the last 30 years
1980
1985
1990
1995
2000
2005
Confidential – not for third party distribution © Seabury Group 2014
2010
2015
15
My experience in the US market
ROIC for selected carriers from 1992 – Present Day
16
9
1990
1995
2005
10
2015
1990
1995
8
2000
(12)
7
1990
1995
2005
2010
5
2015
1990
1995
(2)
2005
2015
(14)
(19)
3
2005
8
2015
1990
1995
2000
2005
2010
2015
(39)
Source: CapitalIQ, Seabury analysis
Confidential – not for third party distribution © Seabury Group 2014
16
Why is this business so hard?
Airline corporate structures
Consuming experts
No clear products
$
Pricing
Competition
External factors
Vulnerability to shocks
$
Double leverage
Taxes
Regulation
Ownership & Control restrictions
Confidential – not for third party distribution © Seabury Group 2014
17
Our global industry faces other unique challenges
System challenges
Span of control
challenges
Distribution /pricing
challenges
Confidential – not for third party distribution © Seabury Group 2014
18
Despite the challenges, progress has been made
Return on capital invested on airlines
% of invested capital
9
Cost of capital (WACC)
8
7
Return on capital (ROIC)
6
5
4
3
2
1
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: IATA
Confidential – not for third party distribution © Seabury Group 2014
19
What are best practices of Chief Financial Officers?
1
Provided clarity to decision makers
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20
Provided clarity to decision makers
SAP
Thought leader
CMA
Business partnership
MBA HyperionMS Access
ESSBASEBusiness Intelligence
MS PowerPointDatabase
Data
CFA
CIMA
Accounting
Business Objects
Relationship building
SQLVBA
Communication
Team
MS
Excel
Analysis
MS Office Oracle CPA
MS Outlook
Problem solving
Source: Skill requirements in ~2,000 FP&A job postings on Linkedin
Confidential – not for third party distribution © Seabury Group 2014
21
What have the good CFOs done?
1
Provided clarity to decision makers
2
Secured new sources of capital to
keep the machine going
Confidential – not for third party distribution © Seabury Group 2014
22
Secured new sources of capital to keep the machine going
Raised capital
Financed aircraft
$500 million +
$450 million
Acted as financial advisor to
Acted as financial advisor to
€500m long term liability
restructuring and
€26m recapitalization
Series of liquidity
initiatives
$109 million
$545 million +
Acted as financial advisor to
Acted as financial advisor to
In its Chapter 11 exit
financing
Secured bank facility
$750 million
$179 million
Acted as financial advisor to
Acted as financial advisor to
Exit financing rights
offering
In its equity offering
$1,250 million
$750 million
Op leases for 30+ A320
aircraft with 8 lessors
SLB of new A330 aircraft
Evaluated over 135 new and
used a/c under sourcing
program
$750 million
A350 lease financings
SLB financing for 3 x A330200
Restructured 30+ A319
aircraft leases
Debt financing for 6 x A330200 with four bank groups
$300 million
Restructured debt and leases
for 50+ EMB 145s
Restructured EETC and
leveraged leases (11 x MD11F and A300F)
Confidential – not for third party distribution © Seabury Group 2014
A321 aircraft sourcing
$300 million
n/a
Solicited proposals for the
SLB of 10 x E190
12 proposals received from
60+ lessors solicited
23
You financed nearly a trillion US dollars of in new
aircraft deliveries over the last 20 years!
Confidential – not for third party distribution © Seabury Group 2014
24
What have the good CFOs done?
1
Provided clarity to decision makers
2
Secured new sources of capital to
keep the machine going
3
Enforced capital discipline
Confidential – not for third party distribution © Seabury Group 2014
25
Example: Today’s fleet evaluation
Changing Inputs
Network models
Existing fleet plan
O&D level yields and
profitability for key
segments is the key
component
Discounted cash flow model
OEM offers
Operating costs
Hundreds of
iterations
Fleet evaluation models
Route and fleet
optimisation
Fleet transition
Financing
Sensitivities
Confidential – not for third party distribution © Seabury Group 2014
26
What can we do as an industry to deliver sustainable ROIC?
Industry-Common Initiatives
CFOs’roles
Regulatory issues
Deliver cost/benefit analyses to CEO /
government affairs
Managing the supply chain process
Supporting the “life-cycle” of SLAs /
contracts
Understanding product customization
Measuring true
customer profitability
Instilling cost efficiencies
Fast feedback loops on detailed activitybased costing across the organization
Confidential – not for third party distribution © Seabury Group 2014
27
We have made significant progress…
“The average return on invested capital today is 5.4% - up from 1.4% in 2008.
But we are still far from earning the 7-8% cost of capital that investors would
expect”
Tony Tyler, Doha 2014
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28
Networking Break
World Financial Symposium 2014
World Financial Symposium 2014
Welcome Address
H.H. Sheikh Nahyan bin Mubarak Al Nahyan
World Financial Symposium 2014
World Financial Symposium 2014
Looking ahead at the low
profitability problem
Brian Pearce
Chief Economist
IATA
World Financial Symposium 2014
World Financial Symposium 2014
It would be good to change this!
1st
quartile
Industry median ROIC, without goodwill
Percent
1965 – 2007 Average
Industry
0
5
10
15
20
25
30
Median
3rd
quartile
35
Pharmaceuticals
Software
IT Services
Beverages
HH & Personal Products
Apparel Retail
Broadcasting
Restaurants
Health Care Equipment
Computers & Peripherals
Food Products
Machinery
Chemicals
Movies & Entertainment
Aerospace & Defense
Auto Components
Building Products
Energy Equipment & Services
Health Care Facilities
Integrated Oil & Gas
Department Stores
Trucking
Construction Materials
Metals & Mining
Paper Packaging
Paper & Forest Products
Integrated Telecom
Electric Utilities
Airlines
1 ROIC after tax, excluding goodwill; For charting purposes, ROIC values are cut off if beyond (-5%, 50%)
Source: McKinsey
IATA Economics www.iata.org/economics
32
The investor challenge looks set to intensify
Interest rates
6
Forecast
5
US 10-year bond
yield
4
German 10-year
bond yield
%
US Fed Funds rate
3
2
1
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Global Insight
IATA Economics www.iata.org/economics
33
The problem – ‘inadequate’ returns on capital
Return on capital invested in airlines
10.0
Cost of capital
(WACC)
9.0
% of invested capital
8.0
7.0
Investor
value loss
6.0
5.0
4.0
Return on
capital (ROIC)
3.0
2.0
1.0
0.0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
34
Is the problem a result of liberalization?
Airline industry profit margin, after debt interest and tax
8%
After liberalization
6%
4%
2%
Average
0.2%
0%
-2%
-4%
-6%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: IATA, ICAO
IATA Economics www.iata.org/economics
35
Is the problem a lack of scale?
Average invested capital and return on capital 1997-2011
25
Average invested capital (IC), $ billion
Delta
United
American
20
ANA
AF-KLM
15
Lufthansa
BA
JAL
10
SIA
Qantas
5
Malaysian
-10%
Emirates
Aerolineas
-5%
LAN
Ryanair
Easyjet
COPA
0%
5%
10%
15%
Return on invested capital (ROIC), % of IC
Allegiant
20%
25%
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
36
Is the problem legacy business models?
ROIC for worldwide average legacy and LCCs versus WACC
9%
8%
WACC
7%
% invested capital
6%
ROIC 'LCCs'
5%
ROIC 'Legacy'
4%
3%
2%
1%
0%
2004
2005
2006
2007
2008
2009
2010
2011
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
37
Lots of new entrants ‘LCCs’ have disappeared
Iceland Express
WOW
Air Finland
Flying Finn
snowflake
Nordic
Planet
airlink
flyglobespan
nexus
FlyMe
flyforbeans.com
Viking
GetJet
mytravellite
SterlingCimber
jetmagic Kiss
duo Go
Maersk Air
Debonair buzz
Air Wales
Hamburg airlines
EUjet Basiqair
centralwings
VBIRD
VirginExpress
Air polonia
HLX
flywest
LTU GermaniaSmart Wings
flyeco
dba
Skyeurope
Aeris
Helvetic flybaboo
Airclickair
Turquoise
air lib express
myair
Clickair
Volareweb
Norwegian
Thomsonfly
Ryanair
AerArann
Aerlingus
Jet2
Monarch
easyJet
flybe
Transavia
airberlin
germanwings
SkyExpress
WIZZ
vueling
Volotea
Pegasus
fly gibraltar
Atlas-blue
WindJet
Failed
Survived
Source: HSBC
IATA Economics www.iata.org/economics
38
Broad spectrum not ‘legacy’ vs ‘LCC’ models
Source: IATA, Airline Analyst
IATA Economics www.iata.org/economics
39
Is the problem with airlines’ supply chain?
30
Return on invested capital in the air transport value chain, 2002-2009
25
ROIC
WACC
20
15
10
5
0
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
40
Supplier ‘excess’ profit not large in $ terms
-0.6
-0.2
0.3
0.5
0.2
-3.7
0.7
-17.0
IATA Economics www.iata.org/economics
Total
Travel
agents
CRS
Airlines
ANSP
Airports
Catering
Groundhandling
MRO
Lessors
Manufacturers
Source: IATA, McKinsey
Freight Forwarders
1.3 -16.0-18.0
0.5
41
Although there are large upstream fuel profits
Jet kerosene and Brent oil prices
200
180
160
$140/b
140
Jet price
120
$110/b
100
Oil price
80
60
40
20
2008
2009
2010
2011
2012
2013
2014
Source: Platts, Datastream
IATA Economics www.iata.org/economics
42
But is there a long-term cost problem?
Unit cost of air transport
US$ in 2013 prices to fly a tonne kilometer
4.0
Boeing 707
3.5
3.0
2.5
1973
oil
crisis
2.0
US airline
market
deregulation
1.5
EU airline
market
deregulation
1.0
0.5
0.0
1950
1960
1970
1980
1990
2000
2010
Source: IATA, ICAO
IATA Economics www.iata.org/economics
43
There is a long-term ‘revenue’ problem
Unit cost and the price of air transport
4.0
7.0
3.5
6.0
3.0
5.0
1973
oil
crisis
2.5
4.0
US deregulation
2.0
3.0
1.5
EU deregulation
Unit cost
(US$/ATK)
1.0
2.0
1.0
0.5
US$ in 2013 prices per tonne kilometer
US$ in 2013 prices to fly a tonne kilometer
Boeing 707
Price
(US$/RTK)
0.0
1950
1960
1970
1980
1990
2000
2010
Source: IATA, ICAO
IATA Economics www.iata.org/economics
44
In fact yields have fallen faster than unit costs
Breakeven and actual load factors
70%
Load factor achieved
65%
% ATKs
60%
Breakeven load factor
55%
+15%
points
50%
45%
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: IATA, ICAO
IATA Economics www.iata.org/economics
45
Some have improved performance a lot
Operating margins
COPA Airlines
Southwest Airlines
Ryanair
Delta Air Lines
American Airlines
Jet Blue
United Airlines
AirAsia
THY - Turkish Airlines
British airways (IAG)
Air Canada
Japan Airlines
Lufthansa
Avianca
Air France - KLM
GOL
SIA
Lan Airline
Korean Air
Garuda
Thai
-15%
2014Q2
2013Q2
-10%
-5%
0%
5%
10%
15%
20%
Source: IATA, Airline Analyst
IATA Economics www.iata.org/economics
46
Partly due to the pattern of the cycle
Business confidence indices (50 = no improvement)
65
60
United States
55
Japan
Europe
Brazil
50
45
40
Blue region: Economy shrinking
35
30
25
2008
2009
2010
2011
2012
2013
2014
Source: Markit, Datastream
IATA Economics www.iata.org/economics
47
But some markets have changed in structure
Source: SRS Analyser
IATA Economics www.iata.org/economics
48
Behaviour has changed in some markets
ASKs by region of airline registration
210
Asia Pacific airlines
+38%
200
190
ASKs billion
180
European airlines
+18%
170
160
N America airlines
+2%
150
140
130
120
2008
2009
2010
2011
2012
2013
2014
Source: IATA
IATA Economics www.iata.org/economics
49
But will structural change be challenged?
19th June meeting Competition Authorities
Concerns over JVs/mergers
• ‘anti-competitive’
• ‘detriment to consumer welfare’
Source: OECD Call for Contributions to 19th June meeting
Source: OECD
IATA Economics www.iata.org/economics
50
Structural change in the product too
2013 ancillaries and operating profits, % revenues
35%
Allegiant
30%
Ryanair
Ancillaries as % revenues
25%
20%
Flybe
Air Asia
United
15%
Qantas
10%
Korean
Easyjet
Aer Lingus
JetBlue
Frontier
5%
PIA
Spicejet
SAA
Alaska
Delta
Hawaiian
BA
JAL
0%
-20%
-15%
-10%
-5%
0%
5%
Operating profits as % revenues
10%
15%
20%
Source: IdeaWorks, Airline Analyst, IATA
IATA Economics www.iata.org/economics
51
Cargo may be another structural problem
Revenues from passengers and cargo
650
90
600
Passenger revenue
80
550
70
450
400
60
Cargo revenue
350
US$ billion
US$ billion
500
50
300
250
40
200
150
30
2000
2002
2004
2006
2008
2010
2012
2014
Source: IATA, ICAO
IATA Economics www.iata.org/economics
52
Permanent pause to ‘globalization’?
International trade / domestic industrial production
1.2
1.1
Index, 2005 equal to 1
1.0
Change of trend
starting to look
permanent
0.9
0.8
0.7
0.6
0.5
1995
2000
2005
2010
Source: IATA, Netherlands CPB
IATA Economics www.iata.org/economics
53
Growing trade protectionism needs fighting
Source: World Trade Organization, Global Trade Alert, B20
IATA Economics www.iata.org/economics
54
Financial markets reflecting progress so far
Source: IATA, Datastream
IATA Economics www.iata.org/economics
55
Leadership Panel:
How long can this industry continue to defy the laws of economics?
Moderator:
Paul Steel, Senior Vice President, MER & Corporate Secretary, IATA
Panelists:
Peter Davies, Senior Partner and Co-Head of Developed Markets Strategy, Lansdowne Partners
Eric Eugène, Global Head of Transportation Group, BNP Paribas
John E. Luth, Chairman & Chief Executive Officer, Seabury Group LLC
Christoph Mueller, CEO , Aer Lingus
Manoj Papa, CEO, Air Seychelles
Worldyour
Financial
Symposium
2014
Send
questions
to:
+971 50 364 55 16 or [email protected]
World Financial Symposium 2014
Networking Lunch
World Financial Symposium 2014
World Financial Symposium 2014