GLOBAL AIRLINES Industry Company Analysis BUS 417 Security

Agenda Industry Overview – Leo Market Analysis – Wylie Singapore Airline – Vincent Cathay Pacific – Miki Southwest – Margarita

Terminology ATK – Available Tonne Kilometer (Capacity) Passenger and cargo capacity ASK – Available Seat Kilometer (Capacity) [number of seats] * [kilometers flown] RPK – Revenue Passenger Kilometer (Traffic) [number of paying passengers] * [kilometers flown] FTK – Freight Tonne Kilometer (Traffic) [Freight tonnes carried] * [kilometers flown] Yield – Revenue per Kilometers Flown by Paying Passengers [Revenue] / [RPK] LF – Load Factor (Capacity Utilization) [RPK] / [ASK] = [Number of Passengers] / [Number of Seats] Break Even LF – Operating Costs = Operating Revenue [Unit Cost] / [Yield]

History 1945 2007 1925 1970 1910 World War II brought new life to the airline industry. Many The airline industry heavily depends on global economic Passenger service is established on the mail routes through 1970 s was the era of revolution for airlines. Introduction of airlines in the Allied countries were flush from lease contracts conditions. Decline in disposable income and business the development of the Ford Trimotor, the first successful large multi-aisle, wide body planes (Boeing 747). Southwest First jet propelled aircraft (Coandă) produced to the military and foresaw a future explosive demand for civil sentiment due to the recession severely crippled demand for American airliner with a 12 passenger capacity launches era of low-cost airlines. air transport. air travel. 1910 1925 1909 1914 1909 2014 1938 1949 2001 1970 1945 1938 1949 2007 2001 2014 Following the 9/11 incident, air travel decreased nearly 20% in air travel capacity. Passenger sentiment remained low DELAG (Deutsche Luftschiffahrts-Aktiengesellschaft) Tony Jannus conducted United States’ first scheduled airline Plunge in crude oil prices have alleviated stress on operating despite airport security improvements. Stock exchange becomes the world’s first airline Civil Aeronautics Act – Delegating federal responsibilities to flight on 1 January 1914 for the St. Petersburg-Tampa costs for airlines, enjoying peak profit margins. First production commercial aircraft (de Havilland DH 106) remained closed until September 17, and fell by 684 points Civil Aeronautics Authority Airboat Line (7. 1%) according to the Dow Jones Industrial Average, a record one day point decline. US stocks lost $1. 4 trillion in valuation in the following week.

Regulation 1925 – Contract Air Mail Act Private ownership of air mail (TWA, American, United) Air mail carriers soon expanded to carrying passengers 1926 – Air Commerce Act Established aviation safety standards 1934 – Federal Aviation Administration (FAA) Formed by Bureau of Air Commerce, improved and built additional airfields 1940 – Civil Aeronautics Administration (CAA) & Civil Aeronautics Board (CAB) CAA in oversee air traffic control and safety regulations CAB oversee air service, regulating fees and schedules Post 1945 – Air Transport Agreement Open skies competition for international routes Liberalized rules for international aviation markets and minimizes government intervention

Regulation 1978 – Airline Deregulation Act Elimination of the CAB which previously regulated entry, exit, routes, and pricing Mergers of local carriers permitted Implementation of the “Hub and Spoke System” Effect Removed government control over commercial aviation Expose airline industry to market forces

Business Structure Hub and Spoke Used by legacy carriers Allows more distant and international routes Utilize main airports as hubs Lead to more efficient use of transportation resource Centralized model result in inflexible operation

Business Structure Point to Point Used by low cost (discount) carriers Shorter routes, usually regional/domestic Decreased connection and travel times Increased utilization leads to lower unit cost Avoid domino effect Require more routes, less flexibility in destination

Airline Types Network Legacy Airlines • Service differentiation Low Cost Airlines • Price leadership • Different service classes • Fewer services • Luxury aircrafts • Medium sized aircrafts • Hub and spoke system • Point to point system • Serve major airport with connecting flights Cargo Airlines • Serves smaller airports to maximize air time • Dedicated to transport of air cargo • Division or subsidiary of passenger airlines • (US) Forbidden from carrying passengers

Airline Alliance An agreement between two or more airlines to cooperate on a substantial level Advantages • Increased traffic/revenue per seat mile • Improved frequent flyer program • Cost savings from economies of scale • Brand prestige Disadvantages • Violation of fair competition standards/antitrust rules • Consolidation of market, eliminating competition • Complex partnerships

Current Environment Economic value of industry Growing since the global recession Recent dip due to rise in the US dollar, devaluing foreign goods and tourist spending

Industry Economic Sensitivity Key external success drivers Global per capita income Global tourist arrivals World GDP World price of crude oil Consumer demand determinants Travel options Price Consumer preferences

Global Economy Reviving economic activity in key global markets Europe and Japan monetary policy stimulus Emerging markets in Asia Income levels and consumer spending on upward trajectory

Passenger Traffic Demand Steady growth since 2010 China and Middle East lead all regions with double-digit traffic growth Consumer spending on the rise in alignment with increasing disposable income

Industry Productivity Historically high airplane utilization and passenger load factors Airlines matching demand without oversupplying capacity Achieve all time high 80% load factor in 2014

Revenue and Cost Structure

Revenue and Cost Structure Profit Margin – 6% Historically low due to a mature industry with heavy competition Improving from cost cutting, lower fuel prices, and mergers and acquisitions

Revenue and Cost Structure Regional Profit Margins US airlines experience largest improvement due to post-financial crisis restructuring Consolidation of US airlines and adding capacity Strong US economy, rising US dollar, falling fuel prices Other regions did not experience consolidation

Revenue and Cost Structure Purchases (fuel, food, etc. ) – 45. 5% Fuel experienced drastic dips in 2014 and 2015, decrease in 25% airline costs, profit margins nearly doubled to US$20 B in 2014 Newer aircrafts are more fuel efficient Long term is uncertain due to high oil price volatility Oil hedging tactics can help smooth the effects

Revenue and Cost Structure Wages – 21. 8% High union participation rates keep industry labour costs high Declined in proportion to revenue due to industry consolidation and technological improvements to labour productivity

Revenue and Cost Structure Aircraft – 12. 4% Fleet forecasted to increase by 900 to a total of 27000 aircraft to satisfy growth in demand Pressure to replace aircrafts due to fuel efficiency higher capacity

Equity Investors Return on invested capital lower than Weighted Average Cost of Capital Marginally low due to slim profits Intensity of competition and challenges of the industry make it a risky investment Forecasted ROIC at 7. 5% for 2015, higher than WACC for once

Market Analysis Power of suppliers – High Dominated by two major suppliers, Boeing and Airbus Possibility of vertical integration of supplier is low Power of buyers – High There is low product differentiation across airlines Consumers are price conscious Competitive Rivalry – High Intense price competitions, multiple airlines offers the same routes and services Airlines need to compete on additional services and quality of services offered Availability of Substitutes – Low The distance covered by long-haul flights are not feasibly achieved by any other means currently Threat of New Entrants – Low High competition, low industry concentration, mature industry life cycle, capital intensity, heavy regulation, high technology changes all act as barriers to entry

Future Outlook Growing demand Traffic growth expected to increase in alignment with improving economic conditions, namely, world GDP

Future Outlook Diversifying market Less concentration on North America and Europe markets Booming emerging markets make expected revenues from airline industry less susceptible to region specific economic conditions

Industry Forecast Year Revenue ($B) IVA ($B) Revenue ∆ (%) IVA/Revenue (%) 2010 625. 3 206. 3 17. 1 28. 3 33. 0 2011 697. 3 211. 3 11. 5 2. 4 30. 3 2012 753. 0 220. 7 8. 0 4. 4 29. 3 2013 754. 0 227. 7 0. 1 3. 2 30. 2 2014 773. 8 244. 7 2. 6 7. 5 31. 6 2015 783. 0 256. 7 1. 2 4. 9 32. 8 2016 814. 0 254. 1 4. 0 -1. 0 31. 2 2017 836. 0 269. 0 2. 7 5. 9 32. 2 2018 865. 0 282. 9 3. 5 5. 2 32. 7 2019 881. 0 285. 1 1. 8 0. 8 32. 4 2020 897. 0 291. 2 1. 8 2. 1 32. 5 *Industry GDP (IVA) = revenue + change in stock – purchases – transfers in and selected expenses *Extracted from IBISWorld Industry Report “Global Airlines” March 2015

Singapore Airlines Ltd. (SIA)

Stock information Source: Bloomberg

1 year Stock Price Movements Source: Bloomberg

1 year vs S&P 500 Source: Bloomberg

5 years Stock Price Movements Source: Bloomberg

5 years vs S&P 500 Source: Bloomberg

10 years Stock Price Movements

10 years vs S&P 500

Share Price and Turnover Source: Annual report FY 2014/15 of Singapore Airline

Company information

Company Profile Founded in 1972 - from a regional airline to one of the most respected travel brands around the world Based at Singapore Changi Airport, Singapore Airlines is the national carrier of Singapore Ranking amongst the top 15 carriers worldwide in terms of revenue passenger kilometres 10 th in the world for international passengers carried One of the largest airlines in Asia

Subsidiaries for the group

Corporate Structure

Information on Shareholdings Source: Annual report FY 2014/15 of Singapore Airline

Company Mission

Company History The maiden flight of Malayan Airways Limited (MAL), operated by an Airspeed Consul, takes off from Singapore Kallang Airport. Singapore Airlines moves to the new Singapore Changi Airport from Paya Lebar Singapore Airlines becomes the first airline to operate a 747 -400 on a commercial flight across the Pacific. Singapore Airlines is the first airline to operate the A 380 superjumbo, the largest passenger plane in the world. Today, Singapore Airlines serves over 280 destinations in 70 countries, including services by Singapore Airlines Cargo, Silk. Air and codeshare partners.

Management Team STEPHEN LEE CHING YEN Chairman of Singapore Airlines Ltd, SIA Engineering Company Ltd and NTUC Income Insurance Co-operative Limited. Managing Director of Shanghai Commercial & Savings Bank Ltd (Taipei) and GMT Investments Pte Ltd Graduated from Northwestern University, Illinois, USA in 1973 with a Master of Business Administration

Management Team Goh Choon Phong Chief Executive Officer (CEO) of Singapore Airlines Ltd Appointed the CEO of the airline on 3 September 2010 Worked for the SIA group for more than 20 years for the airlines' operations in China and Scandinavia Has held numerous senior positions during his career at the airline

Fleet Profile Source: Annual report FY 2014/15 of Singapore Airline

Company Routes Singapore Airlines operates passenger services to more than 60 cities in over 30 countries around the world. Within Asia, passengers can connect to over 30 cities served by Silk. Air, our regional wing. Use the interactive route map to view our flight itineraries

Company Routes Source: Annual report FY 2014/15 of Singapore Airline

Operation Analysis

Operation Analysis Source: Annual report FY 2014/15 of Singapore Airline

Revenue Source: Annual report FY 2014/15 of Singapore Airline

Expenditure Source: Annual report FY 2014/15 of Singapore Airline

Net profit Source: Annual report FY 2014/15 of Singapore Airline

Profit margin Source: Annual report FY 2014/15 of Singapore Airline

Risk Management Over the course of the period under review, the following were the more significant risk management activities carried out: (a) Review of Compliance Risks from Outsourced Activities (b) Review of strategies for managing Information Technology Risks (c) Review of Risks from Critical Supplier (d) Jet fuel prices

Fuel Price and Fuel Cost Source: Annual report FY 2014/15 of Singapore Airline

Financial Aanalysis

Balance Sheet (Annual) Source: Annual report FY 2014/15 of Singapore Airline

Balance Sheet Continued (Annual) Source: Annual report FY 2014/15 of Singapore Airline

Consolidated Profit and Loss Account Source: Annual report FY 2014/15 of Singapore Airline

Consolidated Statement of Comprehensive Income Source: Annual report FY 2014/15 of Singapore Airline

Statement of Cash flow Source: Annual report FY 2014/15 of Singapore Airline

Statements of Changes in Equity Source: Annual report FY 2014/15 of Singapore Airline

Quarterly Results of the Group Source: Annual report FY 2014/15 of Singapore Airline

Five-Year Financial Summary of the Group Source: Annual report FY 2014/15 of Singapore Airline

Financial Summary For the fiscal year ended 31 March 2015, Singapore Airlines Ltd. revenues increased 2% to SP$15. 57 B. Net income increased 2% to SP$367. 9 M. Revenues reflect Passenger Carried increase of 1% to 18. 7 M. Net income also reflects Impairment of Freighters decrease of 98% to SP$7 M (expense), Provision for penalties and costs incur decrease of 71% to SP$25. 1 M (expense). Dividend per share increased from SP$0. 21 to SP$0. 22.

Recommendation BUY

Cathay Pacific

Stock Information

1 Year Stock Price Movements

5 year stock price movements

10 year stock price movements

10 year stock price movements compare with index

Shareholding Structure

Company Profile Registered and based in Hong Kong, founded in 1946 Owned by the Swire Group. Cathay Pacific and its subsidiaries employ more than 32, 900 people worldwide, of whom around 25, 400 are employed in Hong Kong. Listed on The Stock Exchange of Hong Kong Limited, as are its substantial shareholders Swire Pacific Limited (“Swire Pacific”) and Air China. Offering scheduled passenger and cargo services to 203 destinations in 50 countries and territories Carry approximately one million passengers each month

Subsidiaries

Associates

Company Mission

Company History 1946 Founded by Farrell and Kantzow Began to operate passenger flights to Manila, Bangkok, Singapore and Shanghai 1948 Butterfield & Swire (k. a. the Swire Group) took a 45% share in the company, which then became wholly responsible for the management of the airline afterward 1960 -1967 Business grew at average 20% a year initiated international services to Japan Had their one millionth passenger 1980 s Expanded international network to Europe and North America, which includes Vancouver

Company History 2001 Faced some of its greatest commercial challenges including the 11 September terrorist attacks, a second Gulf War and SARS. 2002 Became joint venture partners in Air Hong Kong with DHL 2006 brought Dragonair into the Cathay Pacific Group as a wholly owned subsidiary. Also established a closer relationship with Air China, with each airline taking a 17. 5% stake in the other

Management Team

Management Team John Slosar Became Chairman of Cathay Pacific on 14 March 2014. Joined the Swire group in 1980 and has worked with the group in Hong Kong, the United States and Thailand. Holds degrees in Economics from Columbia University and Cambridge University. Has been a Director of the airline since July 2007. Was appointed Chief Operating Officer in July 2007 and Chief Executive in March 2011. Is also Chairman of John Swire & Sons (H. K. ) Limited, Swire Pacific Limited, Swire Properties Limited and Hong Kong Aircraft Engineering Company Limited.

Management Team Ivan Chu Appointed as Chief Executive of Cathay Pacific on 14 March 2014. Joined the Swire group in 1984 and has worked with the group in Hong Kong, Mainland China, Taiwan, Thailand Australia. Holds a Bachelor of Social Science degree from the University of Hong Kong and a Master of Commerce degree from the University of New South Wales. Was appointed Director Service Delivery for Cathay Pacific in September 2008 and Chief Operating Officer in March 2011. Is also Chairman of Hong Kong Dragon Airlines Limited and a Director of John Swire & Sons (H. K. ) Limited and Swire Pacific Limited.

Management Team Rupert Hogg Became the Director and Chief Operating Officer on 14 March 2014. Joined the Swire group in 1986 and has worked with the group in Hong Kong, Southeast Asia, Australia and the United Kingdom. Holds a Master of Arts degree in History from Edinburgh University. Was appointed Director Cargo in September 2008 and Director Sales & Marketing in August 2010. Is also Chairman of AHK Air Hong Kong Limited and a Director of Hong Kong Dragon Airlines Limited.

Management Team Martin Murray Appointed as Finance Director of the Company since November 2011. Joined the Swire group in 1995 and has worked with the group in Hong Kong, the United States, Singapore and Australia Graduated from the University of Glasgow with a Bachelor of Accountancy degree. Also a director of Hong Kong Dragon Airlines Limited. Was previously Deputy Finance Director of Swire Pacific Limited

Fleet Profile

Aircraft 66 Owned 81 Leased (Most of them are with purchase option) Had 16 new aircraft in 2014 and expecting 9 new aircrafts to be delivered in 2015. Have 79 new aircraft due for delivery up to 2024 as at 31 st December 2014.

Company Route

Operation Analysis

Composition of Assets

Revenue Composition

Revenue and Break-even

Geographical Revenue

Composition of Expenses

Key Statistics

Risk Management The company is exposed to the fluctuations in: • Foreign exchange rate Ø As the company’s revenue streams are denominated in various foreign currencies. Ø Strategy: Financed their assets in those foreign currencies in which net operating surpluses are anticipated, thus establishing a natural hedge. Also uses currency derivatives to reduce anticipated foreign currency surpluses. • Interest rate Ø The company’s long term borrowings are at floating rates Ø Strategy: Use interest rate swaps to maintain appropriate fixed and floating rates. • Jet fuel prices Ø Fuel cost accounts for over 35% of the total operating expenses Ø Strategy: Use fuel derivatives

Fuel price and consumption

Fuel Expenditure and Hedging

Hedging Fuel Prices

Financial Statements

Balance Sheet (Semi-annual)

Balance Sheet (Annual)

Income Statement (Annual)

Income Statement (Semi-annual)

Statement of Cash Flow (Annual)

Statement of Cash Flow (Semi-annual)

Statement of Changes in Equity

Recommendation BUY

STOCK INFORMATION

1 YEAR STOCK PRICE MOVEMENTS

5 YEARS STOCK PRICE MOVEMENTS

10 YEARS STOCK PRICE MOVEMENTS

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN -SOUTHWEST AIRLINES CO. , -S&P 500 INDEX, - NYSE ARCA AIRLINE INDEX

Company Ownership

Company Profile Headquarters in Dallas, Texas Southwest is a major domestic airline that provides primarily short-haul, highfrequency, point-to-point, low-fare services Has among the lowest cost structures in domestic airline industry Southwest offers a relatively simple fare structure. . Southwest bundles fares into three major categories: “Wanna Get Away ” “Anytime ” and “Business Select” Uses a single aircraft type – Boeing 737 Southwest’s use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training activities #4 Fuel Efficiency U. S Domestic airline Provides services in 93 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and five near-international countries including Mexico (Cancun, Mexico City, and Cabo San Lucas/Los Cabos)

Company History 1971 – Air Southwest Co. changes its name to Southwest Airlines Co. Begins its service to Dallas, San Antonio and Houston. 1975 – Southwest Airlines common stock is listed for trading on the American Stock Exchange under the ticker symbol "LUV". 1979 – Begins its service to New Orleans. That is the first destination outside the State of Texas. 1993 - Acquires Morris Air and Arizona One 1995 – Becomes one of the first airlines to have a website

Company History 1996 - Online booking site is launched 2009 – Becomes largest carrier in the US with 545 Boeing 737 aircrafts servicing 68 airports in 35 states and able to offer more than 3, 300 flights a day 2011 – Integration of Air Tran. The purchase adds 25 additional destinations previously not served by Southwest in Mexico and the Caribbean , Atlanta, Georgia 2014 –Air. Tran and Southwest are fully integrated. Southwest introduces new branding, including a new livery and logo

MISSION

FLEET

SYSTEM MAP

Route Map (Dallas)

Management Team

Chairman of the Board, President & Chief Executive Officer Management Team • In 1986 began his career at Southwest Airlines as Controller, moving up to Chief Financial Officer and Vice President Finance, then Executive Vice President and CFO, before being promoted to CEO and Vice Chairman in July 2004. • He received a B. B. A. in Accounting from the University of Texas at Austin. • He is a Certified Public Accountant and serves on the Board of Directors of the Lincoln National Corporation and Airlines for America, the airline industry advocacy group (serving as Chairman from 2012 - 2014). Gary C. Kelly

Executive Vice President & Chief Operating Officer Management Team • Mike received a B. B. A. from the University of Texas at Austin. He is also a Certified Public Accountant • Joined Southwest in 1993 • Mike has held several positions at Southwest such as Executive Vice President of Aircraft Operations, Senior Vice President of Planning, Vice President Financial Planning & Analysis, Senior Director of Financial Planning & Analysis, Director of Financial Planning, and Director of Internal Audit Mike Van de Ven

Executive Vice President & Chief Legal & Regulatory Officer Management Team • Before joining Southwest Airlines, Ron was a partner in the San, where Ron worked extensively on the Southwest Airlines' account. • Ron has represented Southwest since 1981 • Ron has an undergraduate degree from the University of Texas at Austin, and, earned a law degree from George Washington University, in Washington, D. C Ron Ricks

Management Team Executive Vice President & Chief People & Administrative Officer • Prior to joining Southwest Airlines, Jeff worked 12 years at Mesa Petroleum from 1981 to 1993. • Following Belo, Jeff joined The Staubach Company as their Executive Vice President Corporate Operations and was also President of Staubach Lease Administration Company until 2004 when he came to Southwest Airlines. • Joined Southwest in 2004 Jeff Lamb • Jeff completed his undergraduate work at West Texas State University - Canyon, Texas (now West Texas A&M) in 1986

OPERATIONS ANALYSIS

Air Tran Integration: Two Approaches to Low Cost Southwest and Air. Tran may share a low-cost philosophy, but they deliver a significantly different product. Among the differences: Air. Tran operates two aircraft types - Boeing 717 -200 and Boeing 737 -700. Southwest only flies Boeing 737 s. Air. Tran flies to five international cities. Southwest is domestic only. Air. Tran offers business class seating. Southwest is strictly coach. . Air. Tran has assigned seating. Southwest offers open seating. Air. Tran sells food. Southwest is limited to peanuts and pretzels. Air. Tran charges for checked bags. Southwest does not.

What Makes Air. Tran an Attractive Partner? Atlanta. The combined airline can give Delta a serious competitive challenge. New York La. Guardia. Southwest is a recent entrant but will grow with Air. Tran's slots and gates. Washington Reagan. Southwest flies out of nearby BWI and Dulles. Newark International. Additional New York metro area presence. Miami International. Southwest serves Fort Lauderdale and West Palm Beach. International destinations Boston, Fort Lauderdale, Los Angeles, Washington Dulles, Philadelphia, Orlando, Tampa and Las Vegas are among the cities with an Air. Tran and Southwest presen