Investing In The Airline Industry: Benefits And Opportunities Essay.

The purpose of this report is to give general benefits and opportunities of investing in an airline industry. I will recommend investors to invest their funds in American Airline Industry. This paper will demonstrate the drivers for investing in the industry, profit potential, potential growing demand, and market plan layout. The report will also discuss issues and challenges in the industry.

Past and Present Investment in the Airline Industry

In the current generation, air travel is becoming very common and it is very hard to imagine living without it. Air travel has modified way of life by doing business and reducing the time that is needed for traveling. It has altered the thought of distance, making adventuring to remote places possible.

The airline industry has shown an extraordinary safety record, passenger assurance is now very high. Many investors have shown interest and gain a lot of confidence in the business. The airlines have shown an improvement in quarterly revenue reports in the past couple of years.

The airline industry initially had a very high growth, it made most of the investors to be excited. However, as the time goes the investors started to worry because of an unexpected decline in the financial returns. The investment professionals discourage investors because of this problem and they considered investing in an industry to be a waste of funds.

Currently, if you can stop thinking about the past and consider only the current numbers you will note that investing in the airline industry is very intriguing. For instance, Berkshire holding company had invested around $ 1.3 billion in its major domestic carriers: America, United, Southwest, and Delta. Since the year 2013, the prices of airline stock have soared and cash flow and profitability have also grown substantially, in more than 10 years of consolidation and restructuring, the industry has become efficient and lean. The new management of airline has addressed most of the problems that were experienced in the past (Goetz & Sutton, 2017).

Another motive for airline industry strengths is that many of the airlines were relieved pot of the pension obligations in the recent bankruptcy in the US. In the year 2005, judge of the US federal bankruptcy sanctioned plan by UAL establishment which is the former company for the United Airlines, to allocate pension plan which was funded with $ 9.8 billion to the PBGC that was financed by the US government (Saranga & Nagpal, 2016).

Fuel price 

In the air travel, low fuel costs will increase the profit and will lead to the reduction of airfares. A recent drop in the cost fuel has helped in stimulating the growth and development of air travel and this will bring a positive impact on the global economy. Even though fuel prices vary in different countries, lowering its cost will lead to a gain to economic growth because the resources are transferred to efficient economies and the way the consumers would spend will also increase in the countries that have large oil imports economies. Reduction in the cost of the fuel is because of the following factors (Ciliberto, Watkins & Williams, 2018).

1.    Deceleration of economic growth in China and the decrease in demand of the crude oil in the emerging countries.
   
   
2.    The government of US is thrilling the prohibition on crude oil exportation due to the industrialization of the shale oil

There is currently an increase in the production of oil by non-OPEC countries.

Significant changes in the exchange rates have been realized in the past years, it was mostly noticed in a high decline of British pound due to the exit of the UK in European Union. The consequences that this will bring to air travel is a clear-cut over effects to the economy. The weakening of the pound has created an expensive outbound trip for the UK inhabitants. Concurrently, for the visitors overseas going to the UK, earnings to the local currency will expand further compared to the past. Consequently, the US dollar is stronger than the Euro, the economic conditions in Europe has been affected, countries with stronger currencies like the US would benefit.

Airline Industry Investment Drivers

The figure below shows indices of the exchange rates of key currencies to US dollar.

Fig 1 Indices of exchange rates of key currencies to USD

Economist Intelligence Unit has predicted is going to grow gradually at a decreasing rate up to 2050. The decrease in the growth rate is highly pronounced for the population of working-age. This reflects a global trend to an aging population that has been already witnessed in Japan and Europe.

The population growth of working age is anticipated to have an impact on the advancement of the population of the middle class of the emerging economies as shown by Oxford and Airbus Economies in Figure 2 below

According to UNWTO, the tourism sector has shown significant growth over time, notwithstanding frequent shocks, proving the segments resilience and strength, the number of global tourist arrival in the year 2015 increased by 5 percent to a total of 1.87 worldwide, this was an increase of 53 million compared to the previous year. This marked the sixth continuous year of average growth rate in international tourism due to the 2009 economic crisis.

The United States, France, China, and Spain still remain at the top rankings in international onsets and receipts. Based on the receipts, China has continued to lead in international outbound travel after it registers double growth in expenditure of tourist annually since the year 2004, facilitating Asian Destinations like Thailand, Japan, United States, and many European destinations. The expenditure by China travelers rise by 26 percent to attain $ 292 billion and total outbound passengers increase by 10% to $ 128 million.  

The UNWTO 2016 tourist highlights it does not revise drastically its long-term forecast on the arrival of tourist but it is assumed to have grown at an annual rate of 3.3 percent between the year 2010 and 2030, reaching out 1.8 billion travelers. As shown in the figure 4 below, the majority of the growth is anticipated to happen in an emerging economies, it is expected to attain a 2.2 percent growth annually in the global tourist onsets between the year 2010 and 2030 reaching out over 1.5 billion tourists. This is an equivalent to 57 percent of global tourist arrival.

Figure 4 history and projection tourist arrival to advance and emerging economies  

More airport connections would lead to the expansion of the market which would mean more revenue to the airline industry. The team that has been trending for the past five years is the strengthening of the global and the local hub airports across the globe. The phenomenon has been due to airline industry consolidation which was witnessed recently in the US local market, it outlines also the initiation of a super connector airline as demonstrated by the Big 3 carriers. This enables an increase in the services provided by the hubs and revenue they earn in the airport operations (Gegg, Budd & Ison, 2014).

Because of the increase in the demand of airline transport port in the US and South-eastern Europe, it would be strategic for the company to have at least two headquarters one in Chicago and another one in Panorama, Europe.  It would be very important for the company to partner with associations that are situated in the US and Europe, this would help the company to identify key business opportunities and the profit-generating projects (Abdullateef, Iwu, Kareem & Manzuma, 2018).

Fuel Price

The company would extend its market to specific key destinations maximize its profit by linking specific destinations in the US, south-eastern Europe, and western Europe, this would be the target market and it is expected to yield a lot of revenue according to the current stand in the airline travels (Wu, Cheng & Ai, 2018).

It would be crucial for the company to establish to be a limited-liability in any of the E.U nations so as to gain more advantages, the country(s) to be determined by relative tax and the tax requirements. For example, if the company would be registered in Luxembourg it may give a significant tax and also logistic merits (Bigdeli & Marcusson, 2018).

It is also crucial for the company to be registered in a subsidiary organization in another nation, for instance, a country like Switzerland to acquire the required landing rights and slots in the country. The company is going to acquire aircraft made in Britain which is advantageous (Oliveira & Oliveira, 2018).

The company structure, comprising of the business ownership, AOCs and company registration is going to be determined based on negotiation and consultation between the company, prospective investors, guidance from experts and other related partners (Gunarathne & Seidmann, 2018).

Variety of the start-up cost is pointed out in the following areas in an approximate deteriorating value (Santana, Valle, Galan, 2018).

Purchase or leasing of three then followed by two or more 99-seat jet aircraft British Aerospace (RJ100), Bae 146 and Avro RJ85.

Allocation of sufficient cash for the reserve to guarantee prompt payment of financing payments, leasing or the cost of operations of the aircraft.

Advertising, public relations and marketing costs including the costs of company website developments which would facilitate airline booking, fare and flight information, and the creation of online reservations and sales among other activities.

1.    The cost associated with training, recruiting, flight certification and ground operation crews.
   
   
2.     Money reservations that would cater for the costs of operation of at least six months from the start of the business.
   
   
3.    Legal and administrative costs that are incurred in setting up business and operations.

The following chart and the table shows the assumptions that govern the start-up costs.               

Start-up requirements	Cost (USD)
Legal consulting	200,000
Market and route study	100,000
Stationaries, office supplies etc.	10,000
Marketing materials and Brochures	30,000
Design consultants	60,000
Corporate insurance	20,000
Office rent	50,000
System development and software	100,000
Equipment and office furniture	150,000
Expensed vehicle	100,000
Advertising and public relation	80,000
Staff training, screw and manuals	60,000
Other expenses	30,000
Total start-up costs	990,000

Start-up assets
Cash required	10,400,000
Start-up inventory	150,000
Additional current assets	50,000
Long-term assets	200,000
Total assets	10,800,000

CAPITAL AND LIABILITIES
Liabilities
Current borrowing	600,000
Long-term liabilities	0
Accounts payable	390,000
Additional current liabilities	0
Capital
Private investment	10,800,000
Other	0
Additional investment	0
TOTAL FUNDING	11,790,000

It would be good for the company to operate in the following destination

1.    Euro Airport, Switzerland, France
2.    Berlin, Germany

1.    Stanstead Airport, United Kingdom, Landon
2.     Munich, Germany

1.    Considerations of business regime and tax, it has a minimum profit tax rate and a regulatory environment for the business.
   
   
2.    Low-facilities are available in the selected areas based on aircraft-support, business operations and the aircraft itself.

1.    The selected destinations have major interconnection with key carriers between Trans-Atlantic, Europe and international destinations.
2.    Availability of a realistically high cargo traffic that includes the opportunities for international shipments of outbound and inbound cargo.
3.    Aviation authorities of the regions are very supportive in airline operations

There are unique challenges and issues that are faced by the airline industries.  Based on American Airlines, labor is one of the costs which the airline industry must incur. A company must pay the pilots, the flight attendants, baggage handlers, passenger service representatives (Ringham & Miles, 2018).

Most of the developed economies like those of the European Union and the US are benefiting from the reduced cost of commodities that are imported and the economies would be driven by high consumer expenditure. The same case is experienced in China and other economies that are emerging economies where consumption rate is high and supports the growth of the airline industry (Dai, Liu, & Serfes, 2014).

 The fig below shows history relationship between the price of Brent crude oil and the price of Aviation Jet Fuel.

Though it is hard to predict the fluctuation of oil in the future, nevertheless considering the past year of reduction in the cost despite substantial and elongated political turmoil in the year 2015, it is going to add confidence for the trend to endure for medium-term (Parise, 2018).

Exchange Rates in the Current Market

According to the reports by International Air Transport Association, there would be more air passengers and cargo in the near future. The rise of passenger flight is projected to rise to 5.3 billion in the year 2019 and the projection of cargo to rise to 70.1 million tonnes (Ellis, Adapa, Rice & Valenzuela, 2018).

Most airline industries are ordering many planes and the manufacturers are building the tirelessly. For instance, Airbus recorded a delivery of 718 planes in the year 2018

According to the reports, there is going to be high demand for pilots in the near future, for instance, North America requires new pilots demand is 110,000. 120,000 technicians and over 150, 000 cabin crew employees (Chen & Gayle, 2018).

6.0 Conclusions

An increase in the demand air travel shows that there is an advancing domestic economy globally. Nowadays many travelers enjoy spending their money to travel by air because of speed and thus enable consumer satisfaction and confidence. Airline demand is rising at a high rate because of the increase in tourism and the reduction of fuel cost which has made fares to be cheap and affordable to most tourist. Therefore, Investing in an airline industry is the most profitable business to venture into (Pearce, 2015).  

References

Abdullateef, A.O., Iwu, C.G., Kareem, O. and Manzuma-Ndaaba, N.M., 2018. Determining customer continuous online usage intention in the airline industry. Research and investment management implications.

Bigdeli, S. and Marcusson, P., 2018. Oil exposure, hedging, and firm value: A quantitative study on the US airline industry.

Chen, Y. and Gayle, P.G., 2018. Mergers and product quality: Evidence from the airline industry. International Journal of Industrial Organization.

Ciliberto, F., Watkins, E. and Williams, J.W., 2018. Collusive Pricing Patterns in the US Airline Industry.

Dai, M., Liu, Q. and Serfes, K., 2014. Is the effect of competition on price dispersion nonmonotonic? Evidence from the US airline industry. Review of Economics and Statistics, 96(1), pp.161-170.

Ellis, D.J., Adapa, S., Rice, J. and Valenzuela-Abaca, F.R., 2018. Global geographic reach: A Delphi study into the future of the airline industry.

Gegg, P., Budd, L. and Ison, S., 2014. The market development of aviation biofuel: Drivers and constraints. Journal of Air Transport Management, 39, pp.34-40.

Goetz, A.R. and Sutton, C.J., 2017. US Airline Industry. Low Cost Carriers:" Emergence, Expansion and Evolution, 199.

Gunarathne, P., Rui, H. and Seidmann, A., 2018. When social media delivers customer service: Differential customer treatment in the airline industry. Management Information Systems Quarterly, 42(2), pp.489-520.

Oliveira, M.V. and Oliveira, A.V., 2018. What drives effective competition in the airline industry? An empirical model of city-pair market concentration. Transport Policy, 63, pp.165-175.

Parise, G., 2018. Threat of entry and debt maturity: Evidence from airlines. Journal of Financial Economics, 127(2), pp.226-247.

Pearce, B., 2015. Economic performance of the airline industry. Retrieved March, 1, p.2016.

Ringham, K. and Miles, S., 2018. The boundary of corporate social responsibility reporting: the case of the airline industry. Journal of Sustainable Tourism, pp.1-20.

Santana, M., Valle, R. and Galan, J.L., 2018. How National Institutions Limit Turnaround Strategies and Human Resource Management: A Comparative Study in the Airline Industry. European Management Review.

Saranga, H. and Nagpal, R., 2016. Drivers of operational efficiency and its impact on market performance in the Indian Airline industry. Journal of Air Transport Management, 53, pp.165-176.

Wu, H.C., Cheng, C.C. and Ai, C.H., 2018. An empirical analysis of green switching intentions in the airline industry. Journal of Environmental Planning and Management, 61(8), pp.1438-1468.