How to analyse: Airlines


Most airline companies – especially in low cost segment – across the world continue to face losses due to stiff competition and low global economic growth. Airlines benefited from lower crude oil prices in 2015, as fuel costs constitute bulk of the costs.

So, does airlines benefit only during times of lower fuel prices, or during high global growth? Read on, to find out.

Characteristics of the sector

  • Two types of business models: Full Service Carriers (FSC) and Low Cost Carriers (LCC)
  • On-time performance is paramount: helps in attracting repeat customers
  • Bulk aircraft ordering: helps on saving big money with hefty discounts from manufacturers. It also helps in getting big upfront bonus payments from lessors in sale-and-leaseback transactions.
  • Sale and leaseback transactions: This is a common transaction in the industry. It happens like this – the aircraft carrier gives order to manufacturer → carrier gets delivery after a few years → carrier sells aircraft to lessor and lease it back
  • Code sharing: is an agreement where two or more airlines share the same flight (Source: Wikipedia)
  • DGCA (Director General of Civil Aviation) in India

Macro factors that influence sector demand

  • Domestic seat percapita penetration
  • Tourism
  • Alternative modes of transportation like railways
  • Per capita income
  • Economic growth

Key metrics you should watch for

Capacity Utilisation
  • ASK (Available Seat Kilometers): Measure of capacity, calculated by Number of seats x Number of kilometers flown
  • RPK (Revenue Passenger Kilometer): Measure of revenue generating units, calculated by Numbers of passengers x Number of kilometers flown
  • Load factor: RPK divided by ASK
  • Block hours per day: Time taken by the aircraft from departure gate of source to arrival gate of destination. So, this means the number of hours for which an aircraft is used per day.
  • Passenger yield: Revenue per RPK
  • Revenue per ASK (RASK)
  • Fleet size and expansion
  • Fleet age
  • Destinations and composition (Metro- Non metro)
  • Block hours
  • Revenue per employee
  • Maintenance cost per ASK: If the carrier has more of the same model of aircraft (e.g., all are Boeing 737s), then maintenance cost per aircraft will be lower due to economies of scale.
  • Fuel cost per ASK: Newer airplane models (e.g., Airbus A320 Neo) have better efficiency. Hence, if the airline has higher composition of newer models in its fleet, fuel costs will be lower.
  • Cost per ASK (CASK)
  • Lease payments
  • EBITDAR (EBITDA+Rent) margins: Carriers use a combination of owned and leased aircrafts. Hence, instead of looking at operating margins in terms of EBITDA, adding back rent/lease payments makes sense.

Key risks to the sector

  • Price competition: Fight for market share bu price cuts will reduce profitability
  • Oil prices: Fuel costs are more than 50% of total costs
  • Currency risk: Costs are mostly in USD (lease payment, fuel), while revenue is in INR


Usual stuff..

Fundamental: DCF

Relative: EV/EBITDAR, P/E

Major listed ‘Airline carriers’ in India:

Jet, Spice Jet, IndiGo

Note: This post is part of “How to analyse” series. I will continue to update the post, as I learn new stuff about the sector.

Feedback: Your feedback is important to me. It helps me correct my mistakes and lets me learn new things. Please leave your feedback in comments.

Image source: Pixabay


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