Airline Industry – An Overview<br />Highly competitive<br />Capital and Labor intensive<br />Seasonal industry – increased revenues in 2nd and 3rd quarters<br />Sensitive – Fuel Prices, Price of airfares and customer demand<br />
Industry Trends<br /><ul><li>Growth in the industry</li></ul>Where RPK : Revenue per Passenger Kilometer<br />ASK : Available Seat Kilometers<br /> PLF : Passenger Load Factor<br /> FTK : Freight Ton Kilometer<br /> ATK : Available Ton Kilometer<br />Source : www.iata.org<br />
Dynamics of Airline Industry<br />Competitiveness of an Airline depends on two factors:<br />1. Revenue - ability of a firm to fill the seats in an airplane<br />Break Even Load Factor (BLF) which measures the percentage of capacity needed on a plane to cover its costs. BLF for profitable airlines has generally fluctuated between 60% and 65%.<br />2. Costs – mostly uncontrollable<br /><ul><li> Labour – Competitive Wage Structure
Maintenance</li></ul>Costs are also attributed to flight time, flight distance, landing fees, en-route charges, handling, administrative costs and opportunity costs of not flying.<br />
Dominant Business Models<br /> Currently 2 dominant business models in the airline industry<br />Hub and Spoke Model – <br /><ul><li>used by traditional / dominant airlines who concentrate their long haul and international flights at a hub while branching out short haul services to other cities.
A long haul flight out of the hub typically waits for passengers from connecting flights to board. Since the volume of passengers is significantly higher, there is a need for Very Large Aircrafts.</li></ul>Point to Point Model – <br /><ul><li>used by regional or budget airlineswho deploy their aircrafts on a specific route between 2 airports
the airplane typically does not need to wait for connecting flights; which results in a faster turnaround time as compared to the 1st model</li></li></ul><li>The Boeing Company<br /><ul><li>Founded in 1916.
Forefront of Civil Aviation for almost a century</li></ul> From B17s and B29s during World War II,<br /> B52 during Cold War to Boeing787.<br /><ul><li>Is into sales of:-</li></ul>Commercial Aircrafts<br />Military Aircrafts<br />Missiles<br />Space System Controls<br />
<ul><li>Revenues:-US$ 64.306 billion (2010)</li></ul>Commercial Aircraft -2/3 <br />Military Aircraft ,missiles, space systems- 1/3<br /><ul><li>Boeing unique importance for US</li></ul>It Supplies:-<br /> F-15 fighter aircraft to Air Force One<br />Space Shuttle to support its political strength<br /><ul><li>Largest contributor to the US BOP in terms of exports</li></li></ul><li><ul><li>Boeing fleet consists of 14 models
Flagship of Boeing fleet :-747-400, held 420 passengers in the standard three-class configuration.
B747 bought for its range and not its capacity</li></li></ul><li>AIRBUS INDUSTRIE <br /><ul><li>Founded in 1970 by consortium of principle agencies:
Known for producing and marketing:-</li></ul>First commercially viable ’fly-by-wire’ airliner, the Airbus A320, and<br />World's largest airliner, the A380.<br />
A380 Vs B747 <br /><ul><li> The A380 is much bigger than the B747
The A380 is a true double Decker while the B747 is not.
The A380 can accommodate 33% more passengers than the B747
The A380 has more powerful engines than the B747
The B747 comes in a lot more variants than the A380 </li></li></ul><li>Strategies of Airbus & Boeing<br /><ul><li>Developed countries are seeing a decrease in traffic but new markets are exploding.
Customers seem to want more comfort but are not willing to sacrifice speed and price for it.
Airbus tends to treat these changes by designing large aircraft and tinkering with them to adapt them to the market, while
Boeing invests in research and innovation hoping to recoup the costs through early replacement .</li></li></ul><li>Viability of A3XX<br />
Rationale Behind the launch of A3XX<br /><ul><li>Worsen of congestion problem at major hubs due to growth in air traffic
Airbus Views: -</li></ul>Increased frequencies and number of routes is temporary<br />Increasing point-to-point routes is not a feasible solution (e.g. the lack new destinations in Asia)<br /><ul><li>A need for bigger planes with higher capacities (A3XX)</li></li></ul><li>How A3XX relates to consumer & Market preferences<br />Advantages<br /><ul><li>More space and a wider aisle
Usage of fly-by-wire technology (reduce costs)
Has 4 engines (more safety)</li></ul>Disadvantages<br /><ul><li>slower turnaround time due to large capacity
higher noise emission</li></li></ul><li>How A3XX relates to consumer& Market preferences<br />How large the market of VLA is?<br />It’s a small market<br /><ul><li>Increase of point-to-point routes
Increasing demand for small & medium capacity planes
B747 bought for its range and not its capacity
Airplanes not flying at full capacity</li></li></ul><li>More point- to- point routes…. <br /><ul><li>Increased services at secondary airports
If the B747 was in demand more for its seating capacity and not its range
we would not see such low current orders as compared to theB777 and A340, which have lower seating capacity. </li></li></ul><li>Airplanes not flying at full capacity<br /><ul><li>Large capacity planes economical as fixed cost is spread over a larger number of passengers
A3XX has a higher list price and 12% more operating cost per flight as compared to the B747,
the 35% increase in capacity makes it more economical</li></ul>BUT,<br /><ul><li>On condition a decent Passenger Load Factor is achieved
Industry average PLF is between 60%-70%</li></li></ul><li><ul><li>easier to achieve decent PLF with smaller capacity planes especially in times of recession
Airline industry increasingly more competitive
Questions to be answered :</li></ul> a) R&D capitalization and depreciation.<br /> b) Tax status and Tax rate.<br /> c) Operating margin.<br /><ul><li> Target IRR is 15 – 20 %.</li></li></ul><li> WHY SHOULD <br /> AIRBUS GO AHEAD WITH AIRBUS A3XX ??<br />
<ul><li>COMPETITIVE ADAGE</li></ul>MANUFACTURER OF WORLD’S LARGEST COMMERCIAL JET<br /><ul><li> INTERNATIONAL</li></ul>SUPPORT<br />Low cost loans & subsidies from Britain, German & French Government<br />