What makes the difference between success and failure in ... · What makes the difference between success and failure in the airline industry? John E. Luth Chairman & CEO, Seabury

Confidential – not for third party distribution © Seabury Group 2014

What makes the difference

between success and failure in

the airline industry?

John E. Luth

Chairman & CEO, Seabury Group

1Confidential – not for third party distribution © Seabury Group 2014

How has the industry performed since I joined?

Global airline net profit (1989-2013)USD Billions

Source: IATA, Seabury analysis

-30

-20

-10

0

10

20

05 0907 0806 1110 12 13949392919089 040201 03009998979695 14 15 16 17 18

Gulf War 9/11 & SARS

Gulf War II

Global Financial Crisis

?


How has the industry performed since I joined?

Cumulative airline profit (1989-2013)USD Billions

Source: IATA, Seabury analysis

Gulf War 9/11 & SARS

Gulf War II

Global Financial

Crisis

-30

-20

-10

0

10

20

30

03 04 05 06 07 08 09 10 11 12 13 14 15 16 1702919089 92 96 97 98 99 00 019493 95 18

$10.8B


Who are some of the top performers?Return on Invested Capital ROIC performance (2004 – 2013)

Source: CapitalIQ, Seabury analysis

Net profit margin Net profit margin

16

108

24

86

44

6

10977

3

11119910

7

435

234

64

3

LC

Cs

Do

min

an

t F

SC

s

-6

5

86

-6

78

10

14

89

15

1

7

15

1919

64

13

16

131413

16

121315

1413


The top performers are the outcome of good decision making

Network Fleet

Cost containment Product / pricing

Return on

Invested

Capital

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=9yeUgWZWoNWkJM&tbnid=T1Fj3VJEanMVuM:&ved=0CAUQjRw&url=http://www.forbes.com/sites/rickwhittington/2011/04/28/cautious-projections-reveal-aerospace-upside-just-dont-buy-defense/&ei=WruYUvevPKar0QXuqIDIDw&bvm=bv.57155469,d.ZG4&psig=AFQjCNHPfRqTiAM32OtA7IxylO9Oje2EKQ&ust=1385827538442868





Where have we come from?There have been radical changes to the shape of the US industry over the last 30 years

1980 1985 1990 1995 2000 2005 2010 2015


My experience in the US marketROIC for selected carriers from 1992 – Present Day

Source: CapitalIQ, Seabury analysis

16

-12

9

-19

2015200519951990

73

2015200519951990

8

-14

10

1990 1995 2000 2005 2010 2015

5

-2 2015200519951990

8

-39

1990 1995 2000 2005 2010 2015


Why is this business so hard?

Airline corporate structures

Pricing

Competition

Consuming experts

No clear products

Taxes

Regulation

External factors

~

$

Vulnerability to shocks

Double leverage

Ownership & Control restrictions

$

QQ

QQ


Our global industry faces other unique challenges

System challenges

Span of control

challenges

Distribution /pricing

challenges


Despite the challenges, progress has been made

Return on capital invested on airlines% of invested capital

Source: IATA

0

1

2

3

4

5

6

7

8

9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Return on capital (ROIC)

Cost of capital (WACC)


What are best practices of Chief Financial Officers?

Provided clarity to decision makers1


Provided clarity to decision makers

Source: Skill requirements in ~2,000 FP&A job postings on Linkedin

VBA

Thought leader

TeamSQL

SAP

Relationship building

Problem solvingOracle

MS PowerPoint

MS OutlookMS Office

MS Excel

MS AccessMBA HyperionESSBASE

Database

Data

CPA

Communication

CMA

CIMACFA

Business partnership

Business Objects

Business Intelligence

Analysis

Accounting


What have the good CFOs done?


Secured new sources of capital to

keep the machine going

1

2


Secured new sources of capital to keep the machine going

Raised capital Financed aircraft

€500m long term liability

restructuring and

€26m recapitalization

Acted as financial advisor to

In its Chapter 11 exit

financing

$109 million


Exit financing rights

offering

$750 million


In its equity offering

$179 million


Series of liquidity

initiatives

$450 million$500 million +


Secured bank facility

$545 million +


$1,250 million

Op leases for 30+ A320

aircraft with 8 lessors

Evaluated over 135 new and

used a/c under sourcing

program

n/a

Solicited proposals for the

SLB of 10 x E190

12 proposals received from

60+ lessors solicited

$300 million

Restructured 30+ A319

aircraft leases

Restructured debt and leases

for 50+ EMB 145s

$750 million

SLB of new A330 aircraft

A350 lease financings

A321 aircraft sourcing

$750 million

SLB financing for 3 x A330-

200

Debt financing for 6 x A330-

200 with four bank groups

$300 million

Restructured EETC and

leveraged leases (11 x MD-

11F and A300F)


You financed nearly a trillion US dollars of in new

aircraft deliveries over the last 20 years!


What have the good CFOs done?


Secured new sources of capital to

keep the machine going

Enforced capital discipline

1

2

3


Example: Today’s fleet evaluation

Changing InputsNetwork models

Discounted cash flow model Fleet evaluation models

Hundreds of

iterations

Existing fleet plan

OEM offers

Operating costs

Fleet transition

Financing

Sensitivities

O&D level yields and

profitability for key

segments is the key

component

Route and fleet

optimisation


What can we do as an industry to deliver sustainable ROIC?

Industry-Common Initiatives CFOs’roles

Regulatory issues

Managing the supply chain process

Understanding product customization

Instilling cost efficiencies

Deliver cost/benefit analyses to CEO /

government affairs

Supporting the “life-cycle” of SLAs /

contracts

Measuring true

customer profitability

Fast feedback loops on detailed activity-

based costing across the organization


We have made significant progress…

“The average return on invested capital today is 5.4% - up from 1.4% in 2008.

But we are still far from earning the 7-8% cost of capital that investors would

expect”

Tony Tyler, Doha 2014

Documents

What makes the difference between success and failure in ... · What makes the difference between success and failure in the airline industry? John E. Luth Chairman & CEO, Seabury