The Airline Industry Analysis and the Market Theory

Topics: Stock, Stock market, Finance Pages: 29 (6597 words) Published: August 6, 2010
Financial Management

Submitting to: Dr. Ashlee Brown
Word Count: 4300
Date: 23/03/2008

Student Name: Rajib Hasan
Student no: 05093031
Course: BAAF, Year 3

Industry analysis- The airline industry
Few invention of science has change the way people live and experience the world they are living and airplane is one of them. The oldest airline company of the world is KLM, a subsidiary company of air France, start to operate from 1920. Today the airline industry has reached to the point where it would be hard to think of life without air travel. It has shortened the time and narrowed the world to us. Currently there are more than 1600 Airline Company working throughout the world and only quarters of them are quoted company. [1] Despite of financial crisis in 1997 to 1998 and 9/11 attack in USA, airline industry still remains one of the largest and fast growing industries in the world. In the past decade, airlines industry has grown 6.6% per year. IATA (International Air Transport Association) forecasted that air industry will grow by an average 6.6% a year to the end of the decade and over 7% a year from 2000 to 2010. [4] Another research carried out by the IATA reveled that Scheduled airlines carried 1.5 billion passenger’s last year world wide. The main reasons for growing airline industry that fast are international investments and rapid increase of international supply, production chains and customers, rapid growth of lovely tourist destinations etc. [pic] Airline industry is considered as capital intensive industry. It needs big investment for huge range of expensive equipment and airplane, from airplanes to flight simulators to maintenance hangars, aircraft tugs, airport counter space, gates etc. Consequently airline industry has become one of the most capital intensive industries in the world that require large amount of money to operate effectively. E.g. Ryan air is one of the most successful airlines in Europe. They have 23 European bases which employed 3 billion worth of capital. It also needs thousands of people to run effectively. ____________________________________________________________




Risk managing was cheaper for airline industry in 2006. $7.2 billion was spent in 2006 where $8.3 billion was spent on 2005. [6] Airline Business and Aon’s survey on worlds top 50 Airline Company revels that airline companies account 1.6% of their total revenue for the risk management which cost less than $1 per passenger. [6] Primary risk of the company arises from the high fuel price. The gross profit margins and the net profit margins vary from business to business and from industry to industry. Following there is a list of service industry and their gross / net profit margin.

| |International Airlines |Discount Airline |Leisure & Hotels |Pizza Restaurants | |Gross Profit Margin [7] |5.62% |27.46% |9.64% |47.52% | |Net Profit margin [8] |4.05% |10.87% |7.36% |7.55% |

2007 was really a good year for the airline industry. In 2007, the total net sales increased by 7.3% comparing to 2006. IATA forecasted that total net sale for airline industry will be $90.6 billion which will lead to a $5.6 billion profit for 2007. [9] But the net sales as well as the profit for 2008 seems will go down because of the high fuel price. E.g. rising fuel prices and higher maintenance...

References: ✓ Davis & Pointon, (1994), Finance and the Firm, 2nd ed .New York, Oxford University Press
✓ Power,T et al(2005),Financial Management- An Irish text book, Gill and Macmillan Ltd, Dublin
✓ ABC "Directory: World Airlines", Flight International, 4(3) P101-102, April, 2007
✓ Erickson and Trevino,A Pecking order approach to leasing: the airline industry case, Journal of Financial and Strategic Decisions, 7, (3):71, July 1994[online]
Available in (Access date: 03/03/08)
✓ International herald Tribune, airline Industry Profit Heading for Decline in 2008, December 12, 2007 [online]
✓ Petty et al, (1993), Basic Financial Management, 6th edition, New Jersey, Prentice –Hall, Inc
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