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Introduction: The Aviation Value Chain
Istanbul Technical University
Air Transportation Management, M.Sc. Program
Aviation Economics and Financial Analysis
Module 1
10 November 2014
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Outline
• The aviation value chain
• Emerging role of ancillary products/ services
• The role of aviation
• The social rate of return
• Performance in the aviation value chain
• Investment
• Rate of return
• Credit rating
November 2014 2
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THE AVIATION VALUE CHAIN
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The commercial aviation value chain
November 2014 4
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The aviation value chain
• Made of a number of interlinked pieces
• Upstream and downstream
• Supply chain is not vertically integrated
• I.e., Airlines have limited investments in other
sectors of the value chain
• Some past investments were divested due to
regulation
• Current airline investments include:
• Fuel and ground handling services, cargo facilities,
some airport terminals
November 2014 5
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The aviation value chain – cont.
• Even without vertical integration, there are standards and operating procedures across the value chain members (IATA, ICAO)
• This has lowered industry costs
and increased customer service levels
• E.g., IATA has established standards for:
• sale and exchange of travel documents
• clearing of financial transactions between value
chain partners
• Records for travel documents
November 2014 6
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RELATIVE PERFORMANCE
IN THE AVIATION VALUE CHAIN
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Airline financial performance is volatile
Airline Industry Financial Performance
November 2014 8
Source: International Air Transport Association (IATA), Financial Forecast, September 2013.
• Airline financial
performance is
highly susceptible
to economic cycles.
• In 1970-2011, the
industry’s net profit
margin (net of taxes
and debt servicing
costs) was 0.8%.
• Recently, the best
net profit margin
was 3.2%,
insufficient to cover
7-8% capital costs
• The financial crisis
resulted in a net
operating loss of
more than US$25
billion in 2008
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Worldwide Airline Financial Performance
November 2014 9
Source: International Air Transport
Association (IATA)
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Airline Industry Rate of Return
November 2014 10
Source: International Air Transport Association (IATA)
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Rate of Return by business model
November 2014 11
Source: International
Air Transport
Association (IATA)
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Corporate Credit Rating (U.S.)
Exxon
Mo
bil
Mic
roso
ft
GE
Wa
l-M
art
To
yota
BP
eB
ay
Sta
rbu
cks
QA
NT
AS
Sou
thw
est
Luft
ha
nsa
British
Air
TA
M
Ala
ska
Alle
gia
nt
Delta
United
US
Air
wa
ys
Je
tBlu
e
Air C
ana
da
SA
S
Am
erica
n
November 2014 12
Source: Airlines for America Presentation “A4A Industry Review and Outlook”, November 2013
Credit rating of select airlines and U.S. companies
< BBB- (speculative or “junk”)
>= BBB- (investment-grade)
AAAAA+
A
BBB-
A-
AA
BBBB-
B+
B-
D
• Most airline
credit ratings
are junk
grade.
• Many airlines
have
consistently
ranked as
speculative
grade
• E.g., Delta,
United,
American
Air Canada
AA-
B
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Return on Invested Capital:
Aviation Value Chain
• Airlines have the lowest returns in the aviation value chain, well below that of travel agents and CRSs
• Airline returns are well below their cost of capital
13
Source: McKinsey & Company for IATA, 2011
November 2014
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Return on capital for the value chain
14
Source: IATA
November 2014
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Economic profits in the value chain
15
Source: IATA
November 2014
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THE EMERGING ROLE OF
ANCILLARY PRODUCTS/SERVICES
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The growth of ancillary revenues
• Airlines have identified elements of services that are of higher value to some passengers
• Seat selection, priority boarding,
luggage checking, entertainment, etc.
• Airlines are now monetising the value in these non-core services
• Growth in this revenue has been growing steadily
• A major source of income for LCCs and ULCCs
• New sources of revenue for legacy carriers
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Ancillary Revenues
$2.5
$10.3
$13.5
$21.5 $22.6
$27.1
$31.5
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012 2013
An
nu
al A
ncill
ary
Re
ve
nu
e (
$ b
illio
ns U
.S.)
Ancillary Revenue(Billions)
Number of
Reporting Airlines 23 35 47 47 50 53 59
18
Source: The Amadeus Yearbook of Ancillary Revenue by IdeaWorks Company, 2012, IdeaWorksCompany Press
Release June 2013 and July 2014.
November 2014
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Ancillary Revenue
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Spi
rit
Wiz
zAir
Alle
gian
t
Jet2
.com
Rya
nair
Tig
erai
r
Jets
tar
AirA
sia
X
easy
jet
AirA
sia
Gro
up
Ala
ska
Air
Gro
up
Uni
ted
Fly
duba
i
Vol
aris
Peg
asus
Fly
be
Aer
Lin
gus
JetB
lue
Nor
weg
ian
Qan
tas
Airw
ays
Ancillary Revenue as aPercent of Total Revenue 2013
19
Source: IdeaWorksCompany, 2014 Yearbook of Ancillary Revenue Results
November 2014
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The benefit of ancillary revenues
• Consumers can choose and pay for only the services they require
• Airlines can offer the core product at low prices
• marginal costs possibly
• Carriers are starting to adopt a merchandising approach for service offerings
November 2014 20
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THE ROLE OF AVIATION
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World GDP vs Air Traffic (Pax & Cargo)
22November 2014
0
1
2
3
4
5
6
7
8
9
10
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Ind
ex (
1972 =
1)
World GDP versus Air Cargo Transport
World GDP
Passengers
Cargo
Source: World Bank and International Civil Aviation Organization.
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Current Growth in Air Travel
November 2014 23
Source: International Civil Aviation Organization (ICAO), News Release, 16 July 2014
http://www.icao.int/Newsroom/NewsDoc2014/COM.21.14.EN.pdf
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• Canada will be
among the
slowest growing
regions in the
world, falling
well below
world average
• FAA has
lowered
forecast for US:
• from 2.6%
• To 2.2%
Growth will occur in regions other than N. America
Regional Air Passenger Traffic
24
Source: Boeing Current Market Outlook 2013-2032
0%
1%
2%
3%
4%
5%
6%
7%
8%
LatinAmerica
AsiaPacific
MiddleEast
Africa Europe NorthAmerica
World
Ave
rag
e A
nn
ua
l G
row
th R
ate
Forecast Growth of Air Passenger Traffic by Region
(2013-2032 AAGR)
November 2014
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Global Air Passenger Traffic
25
• Air travel
continues to
grow, but has its
ups and downs.
• Airbus forecasts
passenger traffic
growing 4.7%
(CAGR) over the
next twenty
years.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
20
13E
2014F
E/D
Pa
sse
ng
ers
(b
illio
ns)
Total World Traffic9/11
Economic Downturn
SARS
Financial Crises
Global Recession
Source: International Air Transport Association (IATA) Fact Sheet, ICAO Facts and Figures and
Airbus Global Market Forecast (2014-2033).
November 2014
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Regional Markets
November 2014 26
Source: International Civil Aviation Organization (ICAO)
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Air Cargo
November 2014 27
Source: ATAG, 2010 data
• 48 million tons of freight
• $5.3 trillion goods value
• 172 billion freight ton
kilometers
• High value items are
shipped by air (e.g.
perishable items)
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Air Cargo Value Pyramid
November 2014 28
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Profitability in the global airline industry
November 2014 29
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
2013E
2014F
Inflation Adjusted Annual Net Profit
Source: 1972-1996: ICAO, Civil Aviation Statistics of the World; 1999 IATA, World Air Transport Statistics;
2000-2014: IATA, Industry Financial Forecast, December 2007, 2012 and March 2014.
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THE SOCIAL RETURN FROM
AVIATION
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Importance of Air Transport
• Trade and tourism
• Social and cultural exchange
• Economic growth (hotels, automobiles, tourist destinations, other industries)
• Business-to-business transactions
• Government interactions
• Global interdependent world
November 2014 31
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Economic Impact of Air Transport
November 2014 32
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Economic Impact: Jobs
November 2014 33
Source: Air Transport Action Group (ATAG), 2010 data
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Economic Impact: Jobs
• Canada:
• 2011: 219,000 (401,000 direct, indirect, induced, catalytic)
• 1993: 48,000
• 1984: 42,282
• U.S.:
• 2011: 2.8 million (9.3 million direct, indirect, induced, catalytic)
• 1990: 515,000
• 1984: 398,406
• Worldwide:
• 2011: 8.4 million (56.6 million direct, indirect, catalytic)
November 2014 34
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Economic Impact: GDP
November 2014 35
Source: ATAG, 2010 data
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Economic Impact: Summary
• The air transport industry itself creates value in the economy.
• The industry drives direct, indirect and induced
impacts.
• Air transport becomes the vehicle for promoting economic growth in other sectors.
• ‘Catalytic Impacts’
November 2014 36
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THANK YOU!