Foundations of Airline Finance: Methodology and Practice

842 Pages·2014·18.05 MB·English

by  Bijan Vasigh

Foundations of Airline Finance

In recent years, the airline industry has experienced severe volatility in earnings,
with airlines recording periods of substantial profits that are closely followed by
periods of financial distress. This trend has continued into the new millennium,
with numerous examples of airlines across the globe entering bankruptcy
protection or liquidating.
The text provides an introduction to both the basics of finance and the
particular intricacies of airline finance, which can involve significant
fluctuations in both revenues and costs. This new edition also covers:
• capital budgeting;
• the management of current assets;
• financial risk analysis;
• fuel hedging;
• aircraft leasing; and
• revenue management.
This textbook contains chapters that cover unique aspects of the aviation
financial decision-making process. These include a rigorous and structured
presentation of the buy-versus-lease decision that is prevalent in the industry, a
valuation process for aviation assets, the recent trend toward privatization, and
the difficulty inherent in the valuation of a publicly owned or semi-publicly
owned asset.
Foundations of Airline Finance, now in its second edition, is an introductory
text that can be used either as a general financial text or in a specialized class
that deals with aviation finance in particular.
Bijan Vasigh is Professor of Economics and Finance in the College of Business
at Embry-Riddle Aeronautical University, Daytona Beach, FL, and Managing
Director, ACG Aviation Consulting Group, LLC, Ormond Beach, FL.
Kenneth Fleming is Managing Director, ACG Aviation Consulting Group,
LLC, Ormond Beach, FL.
Barry Humphreys is a former director of Virgin Atlantic Airways, and is
currently Nonexecutive Chairman of the British Air Transport Association and
an aviation consultant.
‘Foundations of Airline Finance is a great “bridge” between theory and practice.
The authors’ cumulative experience is reflected in a book that not only applies
the tools of financial management to aviation, but explains why these analyses
drive airline performance. The book provides solid frameworks to analyze
critical decisions in airline finance, including fuel hedging, leasing, and
valuation. Foundations of Airline Finance should serve as the basic reference for
airline CFOs, executives, and industry analysts.’ — John S. Strong, Professor of
Economics and Finance, College of William and Mary, USA
‘The authors provide an excellent introductory text for airline finance students.
Unlike other textbooks, there is a well-rounded coverage of invaluable finance
and accounting concepts that provide students with the academic foundation to
truly understand the aviation-related issues at hand.’— Dr. David Tan, University
of New South Wales, Australia
‘Foundations of Airline Finance is an outstanding contribution to the field of
aviation education. The authors provide an exceptionally in-depth look at airline
finance at a level that is easy to comprehend.‘— Chaminda Prelis, Assistant
Professor of Aviation Management, University of Dubuque, USA
Foundations of Airline Finance
Methodology and practice
Second edition

Bijan Vasigh, Kenneth Fleming, and Barry
Humphreys

First published 2015
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and in the USA and Canada by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2014 Bijan Vasigh, Kenneth Fleming and Barry Humphreys The right of Bijan Vasigh, Kenneth Fleming,
and Barry Humphreys to be identified as the authors of this work has been asserted by them in accordance
with the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any
electronic, mechanical, or other means, now known or hereafter invented, including photocopying and
recording, or in any information storage or retrieval system, without permission in writing from the
publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used
only for identification and explanation without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library Library of Congress Cataloging in
Publication Data
Vasigh, Bijan.
Foundations of airline finance : methodology and practice / Bijan Vasigh, Kenneth Fleming, Barry
Humphreys. – Second edition.
pages cm
1. Aeronautics, Commercial–Finance. 2. Airlines–Cost of operation.
I. Title.
HE9782.V37 2014
387.7068’1–dc23 2014017330
ISBN: 978-0-415-74325-9 (hbk) ISBN: 978-0-415-74326-6 (pbk) ISBN: 978-1-315-81376-9 (ebk) Typeset
in Times New Roman by Sunrise Setting Ltd, Paignton, UK
Contents

List of figures
List of tables
Preface
Acknowledgments
Abbreviations
PART I
Theoretical aspects of airline finance
1 Airline finance: an overview
Introduction and historical background
International nature of the aviation industry
Objectives of airlines
Accounting profit
Economic profit
Business organizational structures
Comparison between business structures
Agency issues
Financial markets
Summary
2 Cost classifications and control
Startup costs
Production costs
Use of costs for managerial decision-making
Structure of airline costs
Airline cost control strategies
Cost control in focus: American Airlines
Summary
3 The time value of money and its setting in the aviation industry
Time value of money
Future value of a single cash flow
Present value of a single cash flow
Nonannual compounding periods
Annuities
Perpetuities
Amortization
Summary
4 Assessments of risk and return
Actual and expected rates of return
Financial risk analysis
Financial risk preferences
Risk diversification
Beta (β)
Capital asset pricing model (CAPM)
Risk in the aviation industry
Summary
PART II
Finance in the airline industry
5 Airline financial accounting practices
Basic principles of accounting
Differences in airline accounting
Issues pertaining to the airline industry
Accounting treatment of frequent-flier programs
Summary
6 Financial performance and measurement
Financial statements
Balance sheet
Statement of stockholders’ equity
Income statement
Statement of cash flows
Summary
7 Assessment of financial statements
Financial ratio analysis
Airline-specific financial ratios
Airline industry benchmarking
Predicting insolvency
Summary
PART III