Of SpiceJet and Modi’s Political Play

SpiceJet rescue is no fix for aviation woes

SpiceJet - I
HONG KONG: SpiceJet’s woes are all too familiar. India is cajoling banks to lend to the country’s second largest single-brand carrier when the debt-ridden airline needs more equity. The government’s hope is to save jobs and prevent a repeat of the embarrassing high-profile failure of Kingfisher Airlines which was grounded in 2012. Even if the rescue works, exorbitant fuel taxes and the lack of a bankruptcy law will keep the industry stuck in an air pocket.The government is doing what it can to keep SpiceJet flying without directly putting taxpayers on the hook. The civil aviation ministry said on December 16 that it may “request” banks to lend up to $94 million to the carrier in loans guaranteed by the company’s chairman, Kalanithi Maran.Together with related parties, the tycoon owns 58 per cent of the struggling airline. State oil companies and airport operators are also being asked to play a part by extending credit or giving SpiceJet longer to make payments. Finding an outside investor at this late stage may depend on Maran’s willingness to put his own money to work. Swapping debt into equity would make more sense. Even after efforts to trim costs, the carrier made a net loss of $49 million in the quarter that ended Sept. 30 and its net debt is almost five times as large.
READ ALSO: DGCA asks SpiceJet to limit advance booking to a month
Losses may be worse in the current quarter after the airline regulator banned SpiceJet from taking advance orders beyond 30 days — a restriction which the government now wants to relax.

Struggling airlines are not unique to India, but there are significant unfavourable local factors. Sales taxes on aviation turbine fuel vary from state to state but currently average around 24 per cent, according to consultancy CAPA. That’s a major burden. The lack of a comprehensive bankruptcy law also means there is no market-based solution when companies get into financial trouble.
Local airlines can’t copy their peers in the US and elsewhere by seeking bankruptcy protection.
An air pocket is the result. SpiceJet could arguably have been better managed but the government-led rescue is no fix for India’s aviation woes.
READ ALSO: Kid with medical condition among those affected by SpiceJet cancellations

Some key developments:
— India on December 16 said that banks and other financial institutions could be asked to lend up to Rs 6 billion ($94 million) to SpiceJet.
— The civil aviation ministry said any loan to India’s second-largest single-brand airline would be backed by the personal guarantee of SpiceJet chairman Kalanithi Maran.
— In addition, the ministry said that regulator would be asked to allow SpiceJet to sell advance tickets until March 31, 2015.
— Airport operators would be asked to give the carrier up to 15 days to make payments and state oil companies would be asked to give credit for up to 15 days, Reuters reported.
READ ALSO: Oil companies begin fuel supply to SpiceJet

SpiceJet chairman Kalanithi Maran (right).
— The airline reported a net loss of $48.7 million for the quarter ended September 30. Net debt stood at $234.8 million at the end of the same period.
— Maran has already invested at least $400 million into the airline which needs at least a further $300 million to get back on its feet, consultancy CAPA estimates.
— Maran and related parties own 58.5 per cent of SpiceJet shares, according to Eikon.
— SpiceJet shares have fallen 20.8 per cent so far this year.

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Of SpiceJet and Modi’s Political Play mysistereileendotorgga/
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When comments are censored, where do they go? PMOH Eaven or buddhibai’s CST oven?
Bunch of idiots!
…and I am Sid Harth
Sid Harth • 1 min ago
Modi is making a political play at government initiative and Kalanithi Maran’s personal guarantee. Shame on you, Modi, Jaitley, et al. …and I am Sid Harth
Sid Harth • 3 mins ago
25 It is interesting to note that both Northwest and D elta airlines, which drastically cut their rental aircraft numbers in 20 04-2009, were either in the middle of bankruptcy or just emerging from bankrupt cy. United Airlines was also in trouble during those years, and they too sl owly decreased their rental aircraft. One reason for this decrease in aircraft rentals is because during Chapter 11 bankruptcy, creditors frequently take th eir planes back as airlines avoid obligations to their creditors. However, in the cases of both Delta and United, General Electric’s leasing division willing ly helped out both airlines by offering loans and deferrals on lease or loan pa yments, enabling them to keep their rental aircraft in operation (75). Amer ican Airlines is the only major carrier to avoid filing for bankruptcy, and i t has increased its rental aircraft over the years. As the economy begins to pick up, and airlines see increased demand, one would expect to see another u ptick in rentals as airlines seek the benefits leases provide.
Sid Harth • 3 mins ago
24 Aircraft are very expensive – for example, the 2010 list price for a 777-300ER is upwards of $287 million – versus a cost of $10-15 million annually to lease a 777 (33). A common misconception is that leasing is often an expensive solution to purchasing. However, airline leases ar e often cheaper because “major leasing companies enjoy the benefit of bulk pricing, low margin financing and higher debt/equity ratios than an air line can or should maintain” (44). Another cited advantage of leases, in addition to the financial aspect, is the flexibility provided to airlines thr ough leasing. As discussed earlier, the market changes rapidly, and airlines c ompete for popular routes and the latest aircraft innovations. For example, if a certain route, due to market changes, experiences a great increase in dem and, an airline can quickly change aircraft to a larger plane to accomm odate that demand. On a similar note, leasing provides airlines with an abi lity to mitigate obsolescence risk, as the typical 10-year lease enables an airli ne to update aircraft efficiently to satisfy the ever-changing desire of customers to fly on the most technologically advanced planes. Below, one can se e that some legacy carriers have increased their aircraft rentals over the last 14 years while others have decreased their ratio of rentals to own ership.
Sid Harth • 4 mins ago
23 the lease term (86). Below, one can see the journa l entry related to the lease, including how an airline recognizes a sale by removi ng the asset from its balance sheet, replacing it with a receivable (86). Lessee Lessor Leased Asset xxx Leased Rece ivable xxx Lease obligation xxx Asset xxx Another benefit to a capital lease is the depreciat ion expense relating to the asset over the economic life of the asset (86). Ho wever, because airlines try to limit their long-term liabilities, which negatively impact their capital structure, operating leases are preferred by airlin es. With respect to an operating lease, the accounting treatment is entire ly different, as neither the asset nor the lease liability are included on the b alance sheet (86). Rather, the lease payments are treated as an expense on the inc ome statement over the term of the lease (86). Lessee Lessor Lease Expense xxx Cash xxx Cash xxx Lease Income xxx
Sid Harth • 4 mins ago
22 recognizing that such leases provide greater flexibi lity in updating equipment while keeping upfront costs down. Leasing is defin ed as a contract between a lessor and a lessee where the lessor provides the l essee with the right to use assets owned by the lessor (86). There are two typ es of leases that airlines must decide between: operating leases and capital l eases. The primary difference is the title transfer of the aircraft, w hich effects the accounting treatment of the lease. The Financial Accounting S tandards Board (FASB) issues the regulations that specify how leases shou ld be accounting for (86). According to FAS 13, if a lease meets one or more o f the following 4 criteria, the lease should be classified as a capital lease ( 86). 1.) The lease transfers ownership of the property t o the lessee by the end of the lease term. 2.) The lease contains a bargain purchase option. 3.) The lease term is equal to 75 percent or more o f the estimated economic life of the leased property. However, if the beginn ing of the lease term falls within the last 25 percent of the total estimated e conomic life of the leased property, including earlier years of use, this crit erion shall not be used for purposes of classifying the lease. 4.) The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments re presenting executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the l essor and expected to be realized by him. Source: (86) These conditions are flexible though, and any good legal team can twist the terms to take advantage of the benefits operating l eases provide. If a lease is recognized as a capital lease, an airline records th e asset and a lease liability generally equal to the sum of the present value of the lease payment during
Sid Harth • 5 mins ago
21 it is fairly typical for high-fare passengers to co ntribute around 30 percent of total passengers but generate as much as 70 percent of total revenue” (36). Understandably, airlines focus on filling their fir st and business class cabins, which more than covers the cost of their lowest far e economy class seats. One critical component of yield management is the u se of overbooking, which airlines employ to try and compensate for no-show p assengers. Rather than fly an empty seat if a customer does not show up, a irlines overbook flights based on a historical rate of no-shows (38). Howev er, there is a chance that most passengers show up for their flight, in which case the airlines are forced to “bump” patrons to different flights. Airlines t ake a financial penalty for bumping passengers in the form of compensation to t he bumped customer, as well as any lost goodwill (38). It is clear that y ield management is a complex process that is not a perfect science, as airlines strive to reap maximum revenue from each flight. Chapter 2 – Managing Cost Structure Capital-Intensive In stark contrast with other service businesses, a irlines today need more than storefronts and a few employees to start up. Rather, airline operation includes in extensive range of expensive equipment, from the airplanes to flight simulators to maintenance hanga rs, aircraft tugs, airport counter space and gates, and call centers (32). Co mpanies traditionally have financed their costs through loans or public stock offerings, but recently, airlines are leasing equipment such as aircraft, ba ggage vehicles, and hangars,
Sid Harth • 6 mins ago
20 there are clear differences between first class and economy, the variability of prices within economy class is sometimes substantia l. Source : Airline book At the extreme ends of the economy class spectrum, the least expensive seat is 4 times less than the highest economy class fare . One should note that the service and seat are identical, and the destination is the same; the only difference is in the restrictions placed on the tic ket, which essentially is the ability to choose exact travel dates and change you r plans without penalty. But the contribution to airline revenue is truly fo und in their premium cabins, where an airlines margin is highest. “For major international airlines
Sid Harth • 6 mins ago
19 times more than the exact same flight over the week end (15). This capitalizes on the fact that leisure travelers are more price-s ensitive and likely to alter their travel schedules around price, whereas busine ss travelers are time pressured and therefore have inelastic demand to pr ice. Profitability in the Airline Industry The ultimate challenge for airlines is selling the most tickets at the highest price and targeting the right consumers, le ading to price discrimination where passengers pay different price s for the exact same route and service. Airlines face additional pressure to fill seats because empty seats are considered perishable goods, with the aircraft flying even when seats are still available. Robert Crandall, the former Ameri can Airlines CEO of 13 years, once said, “I believe that revenue managemen t is the single most important technical development in transportation m anagement since we entered the era of airline deregulation in 1979” (3 7). Mr. Crandall followed up on this belief through action, as American Airli nes now credits yield management techniques as generating a revenue incre ase of $500 million per year (39). Striking an ideal balance between price and demand is undoubtedly difficult, and airlines resort to copious amounts o f market research to segment their customers. In the most binary form, there are 2 distinct segments; there are the business travelers and thos e travelling for urgent personal reasons that are price-inelastic, and then there are the leisure travelers who are price sensitive, and can alter de mand to fares (36). While
Sid Harth • 7 mins ago
18 on airline revenues” (10). The likes of Kayak.com, Orbitz.com, Expedia.com, and numerous other websites have placed significant downward pressure on airfares by allowing the general public to easily c ompare prices across airlines, in essence increasing price transparency (20). This in essence fosters competition, as consumers are able to instantly com pare prices, travel times, and dates. Source: Gadling (21) While the airline companies might not enjoy the grea ter transparency in their pricing, they too receive some benefits in the sign ificant cost savings recognized through direct bookings as well as the ab ility to further gauge consumer preferences and demand patterns (15). Air lines also recognized that they could leverage the Internet’s ability to provi de instant capacity feedback, enabling both day-dependent and time-dependent pric e discrimination. For example, the average fare on a Monday or Tuesday fl ight can be as high as 3
Sid Harth • 7 mins ago
17 closing of European air space for 6 days. Undoubte dly, passengers were furious as they spent nights in airports unable to depart, but perhaps a greater impact was absorbed by the airlines. The I nternational Air Transport Association (IATA) estimates that during those 6 da ys, airlines lost a total of $1.7 billion in revenue while stranding 1.2 million passengers a day (13). This type of disaster, one completely out of control of the airlines, is virtually impossible to budget for. In addition to the lost revenue, airlines also faced regulations requiring compensation for stranded pas sengers, in which airlines must provide accommodation and meal vouchers. Unfo rtunately, the industry was already forecasting losses of $2.8 bil lion for the 2010 fiscal year and being forced to cover passenger expenses was de vastating (13). The severity of the crisis became apparent when the Fin ancial Times reported that “some carriers warned European Commission officials in Brussels that there could be airline bankruptcies this week” (14). In retrospect, no airline filed for bankruptcy as a direct result of the volcano cr isis, but the eruption stands as a clear example of just how vulnerable airlines are to external shocks. Internet The rise of the Internet led to a paradigm shift i n the travel industry as the growth of travel websites and direct access to airline websites essentially cut out the middlemen, the travel agents. “The tra nsparency of pricing facilitated by the Internet and online travel distr ibution channels have all contributed to a precipitous decline in average far es and a significant impact
Sid Harth • 8 mins ago
16 As business travel demand plummeted, the hub airpor ts filled with idle aircraft and excess capacity. Legacy carriers, hav ing invested billions in their hub airports, found themselves unable to quickly sh ift demand to other routes. Low-cost carriers, who did not face the sa me sunk costs, capitalized on this opportunity and dominated the point-to-poin t routes. Two factors, however, affected the entire industry related to 9/ 11 that transcended both the hub and spoke model and the point-to-point model . Following the terrorist attacks, demand for air travel dropped st eeply, as travelers feared flying. Secondly, flying was recognized as an incon venient mode of travel, since long delays persisted as a result of the tigh t security which discouraged many people from traveling. International airlines faced similar challenges, as Cathay Pacific Airways, whose hub is located in Hong Kong, faced an extreme drop in traffic during the severe acute res piratory syndrome (“SARS”) outbreak in 2002 and could not easily alter routes. The health outbreak forced Cathay, who primarily operates international flights, to cut its normal weekly schedule by 45% as passenger books plunged 8 0% (11, 12). In comparison, low-cost airline Dragonair, based out o f Hong Kong, dropped 36% of its flights and adapted to demand, transferring aircraft to operate more flights to Mainland China. While both 9/11 and SARS drastically effected legacy carriers and had less of an impact on LCC’s, there are external shocks that effect the entire industry and severely impact airline’s bottom lines. On April 15, 2010, the Icelandic volcano Eyjafjall ajökul violently erupted, spewing ash several kilometers into the at mosphere, leading to the
Sid Harth • 8 mins ago
15 congestion. These issues brought light to the true flaw in the hub and spoke model: its inability to adapt quickly to external s hocks, leaving airlines with deserted flights and costly equipment and staff idl ing at hubs. The hub and spoke model is extremely vulnerable to external shocks. These shocks include momentous events such as the t errorist attacks of 9/11, medical pandemics such as the severe acute respirat ory syndrome (SARS) outbreak of 2002, the recent Iceland volcano erupti on, increases in fuel prices, and even smaller-scale events such as bad w eather or a security breach. Following the dot-com bust in 2000, 9/11 t riggered financial catastrophe for the susceptible airline industry. “In the United States alone, the industry posted cumulative net losses of over $ 40 billion from 2001 to 2005 […] and there were immediate layoffs and cutbac ks of almost 20% in total system capacity” (10). Source: IATA (31)
Sid Harth • 9 mins ago
14 tariffs were based on the country of origin, and th ere was no code sharing between airlines (46). The opening of the skies tr anslated into improved services for travelers, who now faced a copious amo unt of choice when flying certain routes, as well as lower prices because of competition. Networks Post 1978, legacy airlines architected and thrived on what famously became knows as the hub and spoke model. The idea is relatively simple, and revolutionized the industry at the time; an airline selects an airport with a central geographic location, relative to major traf fic flows, and operates flights in-and-out of this central hub enabling mor e cities, or spokes, to be reached. The benefits to the airline are numerous and can ultimately percolate down to consumers. One such example that effects both parties is the possibility for “larger aircraft to be used, gi ving access to lower seat- kilometer costs. This may in turn result in lower fares” (7). Airlines also can leverage the hub and spoke model to decrease labor and equipment costs. Rather than having support staff across many cities , airlines can centralize their operations, lowering costs (8). “Hub-and-spok e systems decreased unit costs but created high fixed costs that required la rger terminals, investments in information technology systems, and intricate re venue management systems” (9). So while there are benefits to the h ub and spoke model, there are also clear negatives. On a consumer facing fro nt, the hub and spoke model was widely unpopular with passengers because of increased delays and
Sid Harth • 10 mins ago
13 potentially provide 420 connecting and direct fligh ts, or 210 distinct services (with outbound and return flights counted as one se rvice). If the airline forms an alliance with a partner also operating at 21 air ports (with one common airport), the number of possible connections increa ses to 1,640” (30). The benefits to consumers are clear: more destinations, lower prices, more departure times, access to more lounges, faster mil eage rewards, and around the world tickets (29). This is a result of the a irlines sharing facilities, cooperating on sales, and making investments in dif ferent regions around the world. Open Skies Agreements Following deregulation in 1978, the U.S. “open mar ket” was hailed as a liberalization of the airline industry. However, t here were a few critical features of the open market bilateral agreements th at impeded a full liberalization. In the 1980’s, many of the U.S. leg acy carriers, seeking to obtain larger market shares in the international ar ena, pushed for further liberalization for 2 primary reasons. First, as maj or domestic carriers who were relatively new to the international space, the y recognized long-term opportunities for expansion in the international ma rkets as opposed to a more mature domestic market (46). Secondly, they argued that they could have more success in a fully liberalized open skies envir onment than their international counterparts because they could lever age their large U.S. domestic networks (46). Some of the features imped ing this liberalization included a full opening of route access, meaning no t all destinations are open,
Sid Harth • 10 mins ago
12 consumers and the airlines benefit by the advent of loyalty programs. Airlines enjoy a faithful consumer base while charg ing more for airfare; passengers seek to earn free tickets and other rewa rds. The frequent-flyer loyalty programs will only increase in size as airli ne alliances grow. Alliances With the airline industry catering to a global audi ence, it is critical for airlines to be able to reach all areas of the world . Unfortunately, hardly any single airline, no matter its size or scope, is able to efficiently provide service to destinations around the world. To counteract th is fault, airlines form alliances with one another, thereby increasing thei r market presence and expanding their network. “An airline alliance is a code-sharing agreement between two (or more) airlines to offer a broader a rray of services to their customers than they could individually” (27). Thes e agreements are the opposite of pre-regulation times, as airlines now p artner with one another to access more routes, enabling them to issue tickets for flights operated as if they are its own (27). While larger airlines have a greements with regional carriers, the concept of alliances has now spread i nternational, with U.S. airline’s partnering with foreign airlines to offer an expansive network that reaches all axis of the globe. The three largest a lliances are the Star Alliance, SkyTeam, and OneWorld (29). Price Waterhouse Coopers ran a study on “Airline Alliances and Competition in Transatlantic Airline Markets” and found that “A single airline serving 20 airports fr om its main hub can
Sid Harth • 11 mins ago
11 Source: Global airlines (36) The original demand curve, before incurring marketi ng expenses, is represented by the line D1. As a base, if the fare charged is P1, the number of passengers carried will be Q1 at point A. Followin g a marketing campaign, such as advertising a loyalty scheme, the demand cu rve shifts right and the slope becomes steeper along D2, representing a more inelastic demand to price. As a result of this rightward shift, the ai rline’s benefits are twofold: 1.) It increases its number of passengers at the origin al price at point B, while 2.) It can raise the fare and still having a substantia l increase in passengers, represented at point C (36). From this example, we can glean that both
Sid Harth • 12 mins ago
10 American Express recently teamed with Delta Air Lin es to earn one mile for virtually every dollar spent, as well as offering a bonus of 20,000 miles just for getting the card (28). These companies are in terested in partnership agreements because of the extensive membership roll s the airlines possess and the marketing opportunities as a result of thes e lists (27). American Express is able to advertise its new credit cards d irectly to Delta SkyMiles members because of their partnership. In essence, “FFP’s raise passengers ‘switching’ costs, making it relatively expensive, in terms of lost rewards, to transfer their patronage from one airline to anothe r” (36). American Airlines pioneered loyalty programs in 1981, and was soon th ereafter followed by major carriers such as United Airlines, Delta Airli nes, and others in introducing FFPs (27). After the introduction of F FPs, airlines found that loyalty programs were often more profitable than ot her forms of marketing, such as comparing services, routes, and price (36). In addition to lower marketing expenses, FFP’s provided airlines with gr eat revenue, as evidenced by the figure below.
Sid Harth • 12 mins ago
9 to a more efficient workforce and lower costs, but also would increase passenger satisfaction. As a result, the cost-cutt ing measures implemented during the recession by LCC’s did not negatively im pact their reputations, and the LCC’s were able to take advantage of the legacy carrier’s weaknesses. Frequent-Flyer Programs Facing increased competition, the legacy carriers, fighting to retain customers, introduced frequent-flyer loyalty progra ms (FFP) which reward customer loyalty with tickets, cabin upgrades, prio rity check-in, priority boarding, lounge access, and other benefits (27). These innovative programs allow customers to enroll in an airline’s program, after which passengers accumulate mileage points according to distance tra veled and travel class, with first and business class passengers receiving multiples of the base rate (36). Passengers can then redeem those miles for r ewards such as free or discounted tickets and cabin upgrades. This is cri tical to brand loyalty as customers may choose airlines based on their award status with the airline rather than a slight price difference. For example , if a passenger has a certain flight status on United Airlines, but American Airl ines is offering a cheaper flight, it may be worth it to fly United to gain mi les if the price difference is not substantial. One recent development has increa sed the speed at which consumers accumulate frequent-flyer miles. Nonairl ine companies, particularly credit card companies, are now partner ing with the airlines to offer awards and miles for nonairline goods and ser vices. For example,
Sid Harth • 13 mins ago
8 controlled fares and set routes. The effects of de regulation include increased competition, lower fares, new carriers, frequent-fl yer loyalty programs, alliances, and networks (27). Whereas prior to 1978 the airlines competed more through advertising and onboard services than fares, the so called “legacy” carriers now faced stiff competition from new low-cost carriers (LCCs) who leveraged the advantages granted under t he deregulated market (4). One freedom granted under the new rules was t he opening of routes, enabling the low-cost carriers to pioneer the point -to-point service model. This model allows for greater efficiency, as the ai rlines can achieve shorter turnaround times, better fuel efficiency, and high aircraft utilization (5). From a consumer standpoint, travelers benefited as well, with passengers having a choice of two or more carriers on routes ( 27). Another advantage the low-cost carriers exploited was their ability to ne gotiate favorable terms with their unions, enabling such benefits as cross-utili zation of employees, further enabling them to offer lower fares while maintainin g margins. This starkly contrasts with the legacy carriers who carried over their cost structures from the pre-regulation era, in which they faced a highl y unionized labor force (4). As a result, LCC’s possess a substantial cost advan tage over legacy carriers simply because they are able to generate more outpu t per employee (10). “In 2004, Southwest produced 3.2 million available seat -miles per employee, as compared to 2.2 million at American. By this measur e, the productivity of Southwest employees was 45% higher than at American […]” (10). Southwest recognized that focusing on employee happiness first would not only translate
Sid Harth • 13 mins ago
7 the United States Government in 1938. “The Civil A eronautics Act of 1938 applied to interstate operations of U.S. airlines a nd gave the Civil Aeronautics Board (CAB) authority to regulate which airlines op erated on each route and what fares they could charge” (25). This set the s tage for an industry comprised of a few major players who controlled spe cific regions. CAB strictly enforced routes, granting only 1 airline p er route unless demand was sufficient to support more carriers (25). In addit ion, CAB set the fares for each route, ensuring the airlines a fixed rate of r eturn, but giving them little incentive to lower costs (25). Unfortunately, the CAB’s oversight became a “textbook case of how the regulatory process can ov erwhelm substance and how regulation protected the airlines from competit ion at the expense of consumers and competitors” (26). For example, airl ines seeking to add additional service between two given cities often f aced extensive hearings, only to result in denied service or acceptance with restrictions (26). While this regulated structure gave birth to large airlin es like Pan Am and Eastern who dominantly controlled regions, it stifled compe tition, resulting in higher fares and frustrated travelers. Starting in 1976 a nd through 1978, the CAB heard calls for change, and policymakers began to r ealize that airlines could better serve consumers with an opening of the skies (26). In 1978 the American government deregulated its dom estic airline market under the Airline Deregulation Act. This le gislation drastically changed both the structure of the industry and indi vidual airlines as market forces took over the duties of the Civil Aeronautic s Board, which previously
Sid Harth • 14 mins ago
6 the number of bankruptcies continues to pile up, as airlines seek protection from creditors in Chapter 11 filings, using such me asures as a means to ease liquidity pressures and restructure costs. In the U.S., the major airlines that have filed for and come out of Chapter 11 bankrupt cy are: US Airways, United Airlines, Delta Airlines, Northwest Airlines , and Continental Airlines, which recently merged with United Airlines on Octob er 1, 2010 (72). That leaves American Airlines as the only major US airli ne to avoid filing for bankruptcy in the past decade. Unfortunately, Chap ter 11 bankruptcy is not a cure-all for airlines as many fail to successfully exit (4). Notably, Pan American World Airways (Pan Am), Trans World Airline s (TWA), and Eastern Airlines did not emerge from Chapter 11 and filed f or Chapter 7 bankruptcy, or liquidation. I will first provide a history of the airline industry, comparing and contrasting the landscape both pre and post der egulation. Following the industry overview, the paper looks at an airline’s cost structure, highlighting the major revenue and expense factors. Lastly, I a pplied industry specific performance metrics to a case study of Trans World A irlines (TWA) and American Airlines (AA), seeking to determine underl ying causation factors before filing for Chapter 11. These two airlines w ere chosen because of the availability of financial data and SEC filings duri ng the time period leading up to TWA’s bankruptcy filing. Chapter 1 – The Economics of the Airline Industry Following decades of growth after that first fligh t in 1903, the aeronautical industry became subject to industry-wi de regulation passed by
Sid Harth • 14 mins ago
5 2.5B passengers per year, the high-growth industry is truly global (2, 6). However, even with the industry’s continued growth, there have been numerous major airline liquidations. Prior to 1978, the competitive landscape lent itsel f to carriers dominating certain markets, which led to monopolizing behavior from the largest domestic airlines, the legacy carriers, with respec t to fares, routes, and schedules (24). The deregulation in 1978 of the US airline industry led to a paradigm shift in the market as routes opened up, f orcing the legacy carriers in the industry such as Pan Am and Eastern into a h ighly competitive, low- fare environment. Since the tragic terrorist attac ks of September 11, 2001, global airline’s performance has been particularly dismal, losing a total of 53.4 billion in net profit (3). When looking at the industry from a macro level, one cannot be surprised to hear these numbers. The airline industry is structurally challenged by its very nature, facing high fixed costs, cyclical demand, intense competition, and vulnerability to e xternal shocks. As such,
Sid Harth • 15 mins ago
If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting f resh money in. You’ve got huge fixed costs, you’ve got strong labour unions a nd you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: “My name is Warren and I’m an aer oholic.” And then they talk me down.” – Warren Buffet, 2002. The year is 1903 and 2 young brothers from Ohio tri umph as their aircraft, the Wright Flyer I, takes flight for the f irst time. Little did the Wright brothers know that their breakthrough innovat ion would revolutionize the world’s largest industry, travel a nd tourism. Commercial aviation catalyzes economic growth, world trade, in ternational investment and tourism, therein expediting the globalization of other industries (1). Now boasting 230 airlines representing 125 different co untries and transporting
Sid Harth • 16 mins ago
3 Chapter 6: Recommendations ……………………………………………………….. 62 Abstract: The purpose of this study was to determine what t he critical factors are to an airline’s financial turmoil, leading ultimate ly to a bankruptcy filing. Over the past decade, the airline industries’ perfo rmance has been dismal, leading to 20 bankruptcy filings. As competition i ncreases, it is crucial for airlines to know which core business areas are esse ntial to success. This paper identifies 8 specific industry metrics that a re used to compare airlines, revealing where certain airlines falter and others shine. Some of these metrics are later applied to a case study examining Trans World Airlines (TWA) and American Airlines (AA), highlighting the factors leading to TWA’s bankruptcy filing during the same time period Ameri can Airlines remained profitable. The results show that the labor ineffi ciency, operating inefficiencies, unsuccessful fuel hedging programs, and high long-term debt are critical factors leading to an airlines bankrup tcy. Four recommendations for airlines are provided, namely: 1.) The cross-ut ilization of employees, 2.) 4 Maintain Cost Discipline, 3.) Focus on Breakeven Lo ad Factor, and 4.) Do not neglect the intangibles such as brand reputation.
Sid Harth • 18 mins ago
C l a r e m o n t C olle g e s Sc h ol a rs hi p @ C l a r e m o n t C MC S e nior The s e s C MC S tude n t S cho l a r ship 2010 Air line B a nkr upt c y: The D et e r minin g F a c t ors Le a din g t o a n Air line ‘ s D ecline J a son T ol k in C l a r em o n t M cKen n a Co lle ge
Source: TOI
…and I am Sid Harth