Jan 2018 Exam Flashcards
(39 cards)
Three key themes of the aviation industry?
1) The cost of oil is rising ~10% YOY
2) Staff costs are rising ~5% YOY (even FR are having to pay pilots more)
3) Seats available rising ~5% YOY (market becoming more saturated)
Name some KPIs for the aviation industry.
1) Profit per pax
2) Load factor (which has to be above the break even load factor!)
3) Advance bookings
4) Costs vs. bookings
5) Various IATA metrics such as RPKs
Three points which make up a finance lease?
1) It’s essentially buying an aircraft through a hire purchase. The airline aquires the aircraft over a number of years through routine payments.
2) All the risks and rewards of ownership are transferred to the airline.
3) When it comes to accounting on the balance sheet; a finance lease is recorded as the purchase of a non-current asset at its full price. A liability is listed for the amount not yet paid on the aircraft.
How are finance leases shown on balance sheets?
1) The aircraft is shown as a non-current asset
2) A liability is shown for the amount withstanding on the ‘payment plan’
Who holds the risks and rewards of ownership through a finance lease?
The airline.
What is an operating lease?
Where you don’t own the aircraft. It’s just similar to hiring a car on holiday.
They’re accounted for on the balance sheet as something akin to short-term rental payments.
How is an operating lease shown on the balance sheet?
Short term rental payments made to the actual owner of the aircraft (who also bears all the risks and rewards of ownership)
What’s the equation for breaking even?
Fixed Costs
_________________________________________
Contribution (item’s sale price - variable costs per unit)
Why is sensitivity in forecasting important?
In terms of calculating break-even and NPV
You tell me! Why is sensitivity in forecasting important?
In terms of calculating break-even and NPV
7 sources of funds
1) Shareholders funds
2) Loans (secured and unsecured)
3) Sovereign Wealth Funds
4) Hedge funds
5) Lender of last resort
6) Overdraft
7) Chapter 11 / Bankruptcy
What is WACC?
The Weighted Average Cost of Capital.
It’s used to calculate how much a company pays for its various forms of finance.
It takes into account the £value of each x the %cost of each
(eg, £10,000 loan, 5% interest rate)
It’s hard to calculate the %cost of interest if it’s floating. Also, the £values may be projections.
What are the problems with trying to calculate WACC?
It’s hard to calculate %cost of interest if it’s floating.
The £values may be projections.
7 steps about securitisation
1) Good for when a business wants to expand but it’s already utilised it’s other sources of finance
2) The lender looks at the business as a whole, it sees property/assets as lower risk
3) The aircraft are seen as guaranteed flows of cash providing they’re flown on the most lucrative routes
4) These money-making aircraft are then used as the basis for a loan with low interest, especially if it’s guaranteed by company and insured by the bank
5) The aircraft can now be taken off the balance sheet as they’re now owned by someone else. The aircraft are often used back through an operating lease.
6) A lower rate of interest is paid when compared to if the assets are left in the main companies’ ‘pool’ of assets and liabilities
7) An airline often sets up an SPV, which is run as a separate company aside from the main airline group, which may buy the aircraft and lease them back
What happens to an aircraft on the balance sheet which is used for ‘securitisation’?
It’s taken off the balance sheet as the aircraft is now effectively owned by another company. The aircraft is then often used back through an operating lease.
Upon what basis are aircraft identified as being eligible for securitisation?
If they’re assigned to fly the most lucrative routes and consistently bring in a guaranteed flow of income.
What is an acquisition? (4 things)
1) Buying a supplier (eg, oil company)
2) Buying a customer (eg, a travel agents or string of hotels)
3) Buying a rival (eg, the remnants of AB/ZB - not sure why you’d buy a shit airline though
4) Buying to diversify (spread risk) - (eg, Ferrovial entered the airport market away from construction by buying BAA)
You would do an investment appraisal before deciding how to diversify your business.
3 cases FOR acquisitions specific to aviation (and their sub-cases)
1) Synergies
1. 1. - SAVED MANAGEMENT COSTS - reduce layers of management
1. 2 - SAVED ADMIN COSTS - IT systems etc
1. 3 - POTENTIAL TO BE A MONOPOLIST / PRICE LEADER
2) Economies of scale
2. 1 - BULK BUYING - although scope within aviation is limited as the main cost are staff and oil, and you’re unlikely to get discount on them - however you might be able to with the aircraft
2. 2 - EASIER TO RAISE FINANCE - But only if you’re profitable in the first place. You’ll only need to show the banks one set of figures, although now you’re needing to raise more finance.
2. 3 - EASIER TO MARKET / BRAND - although recent aviation mergers have retained both brands (eg, AF / KL)
2. 4 - TECHNICAL ECONOMIES - Inventory of parts etc, although now you’ll have a wider variety of aircraft to maintain
3) REDUCED RISK - you’ll now have one less competitor and you’ll be operating in more markets. However, whilst there is face validity in that, if you really want to reduce and spred risk, why not diversify away from aviation?
What is the ultimate goal of an acquisition?
Lower costs per unit. However, the cost savings may not always justify the costs and complications of a merger.
What are 5 synergies brought about by airline mergers?
1) Bigger network
2) Cost savings (management, IT systems, duplicate lounges)
3) Single inventories (parts etc.)
4) Single high value contracts (catering, maintenance, aircraft etc.)
5) Potential to become a monopoly or strong price leader in the market
9 cases against airline acquisitions?
1) 80% of mergers don’t achieve their published goals (there is uncertainty as to how the acquisition will actually go and the aims may be exaggerated to gain initial support)
2) Is it just about the bosses’ ego? (some people are just desperate to make empires)
3) It might just generate income for advisors who encourage firms to merge
4) How do we know the right price to pay? If it seems a rival is also prepared to bid then the prices may be inflated.
5) how are they going to be financed?
6) The acquisition may be deemed anti-competitive by courts
7) often taking on more problems such as pension pots
8) The costs and inconvenience of a merger may not outweigh the economic benefits
9) If the company is abroad then there are FOREX issues, specifically transaction risk.
What is goodwill?
The value you pay for an aquisition over the total value of the assets.
Often it’s the value appended to the brand, customer base, the companies reputation etc,
Although when airlines acquire other airlines, one brand may be lost, therefore airlines may pay a lot of goodwill for a brand which they’re not even going to maintain
What is impairment?
The reduction in value of an asset or of the goodwill paid. Often impairment is due to your product/asset becoming obsolete.
(the opposite of impairment is appreciation)
2 ways in which an airport’s expansion would be financed?
1) Shareholders
2) Institutional investors such as pension funds (eg, Ontario Teachers Pension Plan with BHX + BRS)
In what four scenarios would you need to do an investment appraisal?
1) Deciding to invest in new equipment (eg, BA buying $5bn new aircraft)
2) Deciding to enter a new market (eg, open a new route)
3) Deciding to close a division (eg, closing domestic services a lá Little Red)
4) Deciding to acquire a competitor
