2. Contents
METRIC Global
Deals – METRIC Team
Recent Aviation Trends
Aviation sector outlook
Emirates
Target companies
Valuations
Structure
Outlook - Synergy
MAPPING VALUE GLOBALLY !!
3. METRIC GLOBAL
A fast growing Investment advisory & Boutique Investment
Bank based from Paris
We specialize in Aviation and Tourism Sector
It was started in 2004 by four SPJCM Grads
Operates from 6 Locations:
Mumbai, Singapore, Dubai, Shanghai, New York, Paris
Completed 22 deals in last four years
13 in aviation & 9 in Tourism
MAPPING VALUE GLOBALLY !!
4. Deals
• Co-advisors to Kingfisher & Air
Deccan (India)
• Co-advisors to Jet & Sahara
(India)
• Co-advisors to British Airways &
Iberia (Europe)
• Sole advisors to SPICE airways
(India)
• Advisors to Air Armenia
• Advisors to Cyprus airlines
5. Management Team……………….
•Sajeev Rao •Preet Sabharwal
•MBA (IB) •MBA (IB)
•4 yrs with METRIC •4 yrs with METRIC
•Global Head (Operations) •Head of Research (Tourism)
•Founder Partner •Founder Partner
•Involved in all deals •Involved in all Funds
•Hardik Doshi •Navin Bafna
•MBA (IB) •MBA (IB)
•4 yrs with METRIC •4 yrs with METRIC
•Head of Research (Aviation) •Chief Executive officer
•Founder Partner •Founder Partner
•Involved in all deals •Involved in all Funds
MAPPING VALUE GLOBALLY !!
6. Aviation Sector Outlook
• Global aviation industry: growth rate 2004-2007 5.6%
• New estimated growth rate: 3.6%
• The major conventional matured airline markets like US and Europe
will see there cumulative market share going down from 61% in
2005 to 42% in 2025
• Emerging market like China, India, Middle East poses great
opportunity for the civil aviation sector, especially for regional
carriers
• However markets like India & Middle East are highly regulated
markets which bar entry of foreign players
• New models like air taxi, Boutique regional catering to niche
travellers are picking up
7. Aviation Sector Outlook
Global RPK is expected to increase at a CAGR of 3.8% for the period 2007 -2024
, however they do not match the increasing costs
Growth of World RPKs, Operating Margin of the Aviation Industry,
(2000-2024) (1997 - 2007)
6
10000 9497.0
3.7
9000 4
1.9
2
8000
0
7000
6224.2
6000 -2
-1.7
5000 -4 -3.2
4000 3699.7 -6
3378.3 3287.3 3274.8 3289.6 -5.6
3000 -8
-7.6
2000 -10
1000
-12 -11.3
0 -13
-14
2002 2003 2004 2005 2006 2017 2024 2000 2001 2002 2003 2004 2005 2006 2007
Note: RPK stands for Revenue Passenger Kilometer
8. Aviation Sector Outlook
Markets like US and Europe are growing slower than the average world rate,
Characterized by a fall in their global share from 61% in 2005 to 42% in 2025
Projected Growth Rate of Aviation Industry, Global Air Traffic Distribution,
(2006 - 2025) (2003 - 2025)
China 7.5%
3.75 RPK Billion 10.25 RPK Billion
100%
7% 10%
Asia Pacific 6.0% 90%
20%
80% 24%
Latin America 6.4% 4%
70%
2% 2%
5%
60% 2% 2%
Middle East 5.7%
24%
50%
21%
Africa 5.4% 40% 4%
5%
30%
Russia 5.0%
20% 37%
31%
10%
Europe 4.7%
0%
USA, Canada &
2005 2025
Caribbean
4.6% US, Canada and Caribbean Latin America
Europe Russia
0% 5% 10% Africa Middle East
Asia Pacific China
9. Aviation Sector Outlook
Increasing costs put a huge pressure on the aviation industry
• Restructuring can provide scope for increased Cost cuttings
Opportunities - Companies like United Airlines has been negotiating with unions on wage and labour
concessions since it filed for Chapter 11 protection in 2002 and has asked a judge to
throw out contracts if cost-saving agreements cannot be reached - Delta is working on
restructuring deals in hopes of avoiding a bankruptcy filing All these will help in bringing
up the efficiency of the airline industry
• Airlines Liquidating assets - a blessing in Disguise
- In case any airlines goes for liquidation, it would help in reducing the excess capacity
that had been created
• Large airlines face increased competition from low-cost carriers while they
continue to address labour costs
Challenges
• High fuel prices have squeezed the entire industry
• Over capacity in the industry
10. Aviation Sector Outlook
Recent Deals
Swicorp, a diversified financial services firm based in Saudi Arabia has bought a
20 percent stake in Jordan Aviation for a total $180 million
British Airways Plc agreed to buy Paris-based L'Avion for 54 million pounds
($108 million) to enlarge its new Open Skies unit, expanding flights between
France and the U.S.
Japanese leasing firm Orix Corp. and Bahrain-based Manara Consortium have
each bought a 10 percent stake in Malaysian budget long-haul airline Air Asia X
for a total of 250 million ringgit ($77.26 million)
Japan Airlines Corporation announced that the Company has decided to issue
614,000,000 shares of its common stock worth JPY 250 per share through a
private placement on March 17, 2008.
Goldman Sachs and WL Ross agreed to invest $100 million in Spicejet. WL Ross
will invest $80 million, while the remaining $20 million will be brought in by
Goldman Sachs.
11. Aviation Sector Outlook
Global aviation industry will see the trends such as, liberalization in Asia Pacific
region and increased competition in developed markets
USA, Canada & Caribbean Europe
•Increased competition •Increased competition Russia
•Expansion of LCC Carriers •Expansion of LCC Carriers
•Competition from High Speed Trains •Recovering Economic Environment
•Accelerated Scope clause relaxation
•Trend towards usage of 70 to 110-seat Jets •Tax Barriers to western Aircrafts
•Right sizing of fleet size
•Replacement and rightsizing of aircraft fleet •Ageing Fleet
•Trend towards usage of 70 to 110-seat
Jets
Middle East
•Regional Network under Development
•Slow Liberalization Trends
•High Comfort Standards in Airlines Asia Pacific
•Industry Consolidation to take place •Trends towards Liberalization
•Increased Competition from Start-ups
•Pilot Shortage (in India and Japan)
Latin America
•Travel Demand growing above world level
•Increased Competition
•Expansion of LCC Carriers
•Ageing Fleet (Used aircraft) Africa
•Lack of Financing Resources
•Travel Demand growing above world level •Regulatory Policy (Mostly Government
owned Flag Carriers)
•Ageing Fleet
•Industry Consolidation would take place
12. Aviation Sector Outlook
• Unexpected increase in ATF
• Major cost driver
• Over Capacity
• High competition on routes
• FCC vs. LCC
• Lack of Infrastructure
• Sinking Margins
• Number of Passengers (factors)
13. Aviation Sector Outlook
Need of the Hour !!
• Consolidation
• Backward and forward Integration
• Newer Opportunities
• Efficiency in Operations
• Investment in infrastructure
• Diversification in services
18. Revenue 2007-08 2006-07
AED million % AED million %
Passenger 28,118 77.2 21,677 75.7
Cargo 6,012 16.5 5,047 17.6
Courier 299 0.8 264 0.9
Excess baggage 256 0.7 217 0.8
Mail 138 0.4 66 0.2
Transport revenue 34,823 95.6 27,271 95.2
Sale of goods 1,232 3.4 1,019 3.6
Destination and leisure
(see below) 196 0.5 183 0.6
Other 190 0.5 170 0.6
Total operating revenue 36,441 100.0 28,643 100.0
Aircraft In operation On firm order On option
B777-200 9- -
B777-300 12- -
B777-300ER 32 34 20
A310-300F 3- -
A330-200 29- -
A340-300 8- -
A340-500 10- -
A350-900/1000X
WB - 70 50
A380-800 - 58-
B777-200LR 4 6-
B747-400ERF 2- -
Total 109 168 70
19. Rationale: Emirates as a buyer
• Vision to enter LCC operations
• Diversification of operations (Base)
• Newer opportunities in other sectors
• Using its Position to grow
• Playing on advantage in adverse situation
20. Aviation Sector Outlook
Presence of major airports with huge traffic potentials and
small catchments areas is a risk for growth of regional carriers
Catchments Population of Main Gulf Airports Passenger Traffic in Main Gulf Airports
Catchments population in a radius of a 2.5 Km Drive Size of bubble represent number of passengers
23. • Headquartered in Rome, it operates services to
24 domestic and 66 international destinations
• World's 19th largest passenger airline by fleet size
– 181 aircrafts, carrying 25 million passengers
annually throughout the 1990’s
• Set up a regional subsidiary Alitalia Express and in
2001 became a member of the Sky Team Alliance
• Operating fleet on 31st March 2008 consisted of
181aircrafts of which 145 for short/medium-haul
and 28 for long-haul
• The average fleet age of Alitalia is 12.7 years as of
March 2008.
24. Positives
• The Italian government is
seeking to get out and to sell
39.99% of the airline, even
though it could sell up to
49.9% or completely sell out
• Dual base in Rome & Milan
• Ownership of Slots in
premium European airports
25. • XL Leisure Group (XLLG) - a major tour operating company in the UK and is
third-largest holiday company.
• Big player in the UK holiday market. Consists of charter and scheduled
airlines, holiday companies and flight-only tour operators.
• XL Air-ways, its airline, flies to more than 50 destinations. It sells holidays
under a diverse range of brands including Kosmar, XL.com, Freedom Flights
and Travel City Direct.
• Operations in France, Germany, Ireland, Australia and Cyprus.
• Sept 2008 - Group entered into Administration having suffered as a result
of volatile fuel prices, the economic downturn, and were unable to obtain
further funding.
29. Aviation Sector Outlook
International Tourism supports the UK aviation industry,
• Tourism makes a major contribution to the UK Economy
Opportunities - In 2005 the sector generated an estimated 46.8 billion Pounds (3.9% of GDP) -3/4th of
the international visitors to the UK arrive by air
• Increased trade from countries outside EU provides immense opportunity -55% of the UK’s
exports of manufactured goods to countries outside the EU are transported by air
-60% of imports of machinery, mechanical appliances and electric equipments from
outside the EU are carried by air
• Poor Infrastructure to support the Aviation Industry
Challenges - Passengers travelling through air have risen faster then the capacity of air
transport system to handle them
- Congestion cost to passengers and airlines is estimated to be 1.7 billion pounds in 2005
and expected to exceed 5 billion pounds by 2015
• Increasing Global terrorism has impacted the UK aviation industry negatively - It has
increased cost of security for the airlines, adding to the increasing operational costs
- Reduced demand and cancellation of flights have added another blow
30. • China Eastern, one of three Chinese state-owned large key aviation enterprise groups.
• China Yunnan Airlines and China Northwest Airlines merged into China Eastern Airlines in
2003.
• Registered capital of RMB2.558 billion, total asset of about RMB51.699 billion.
• 168 large and middle modern transport aircrafts, 22 general-purpose aircrafts, and 450
international and domestic airlines.
• The group is also widely engaged in import and export, finance, in-flight foodstuffs, real
estate, advertising media, machinery production and other fields with holding over 20 branch
companies.
• China Eastern Airlines is owned by the Chinese government (61.64%), publicly held H shares
(32.19%) and publicly held A shares (6.17%), and has 35,000 employees.
• China's first airline company to be listed on the Hong Kong, New York and Shanghai stock
markets.
31. Positives……
• Incomes and travel are certainly rising in
China – a 10.8% GDP expansion
stimulating a 16% rise in air passenger
numbers, to 185 million.
• Investments continue to pour into the
sector - CAAC expecting capital assets
investment to increase this year to US$5
billion, led by investment in airline fleets
and airport upgrades.
• Key focus for the industry this year is
consolidation.
32. Aviation Sector Outlook
Chinese air passenger traffic is increasing vigorously and will be the third largest
only behind that of the US and Europe in the future
Growth of Chinese Passenger Traffic ,
(2000 - 2005)
160 Growth Analysis
138
140 • China will be the fourth largest international
market for leisure travellers by 2020, with about
117.7
120 100 million outbound Chinese tourists
102.4
•As per IATA, the region's current 23 percent
100
89 share of the world's air traffic will grow to 50
77.4 percent by 2006
80
67.3
• Route Analysis
60 - Total routes served by Chinese airline
companies -1,200
40 • Domestic - 975 (reaching 136 cities)
• International - 225 (reaching 38 countries)
20
0
2000 2001 2002 2003 2004 2005
33. Aviation Sector Outlook
• Weak Aircraft Component supply
Challenges - The key weaknesses in the Chinese aviation sector are engines and avionics, and it
is in these areas that China will need foreign assistance - For engines, while China
can produce components, they are still some way from effectively producing their
own products
- Avionics is also similarly primitive
• Lack of Skilled Labour
- There is plentiful supply of cheap labour in China, but a dearth of well trained
specialists - though this is improving
• Structural Weakness of Chinese airline Industry
- China's air transport industry is still regarded as having structural weaknesses.
The total fleet of the three main carriers, for instance, is still less than that of an
airline like British Airways or Lufthansa
• Highly Competitive Landscape
- With opening up of skies, keener competition, something that will bring its own set
of challenges
• Over sea technology transfer in this domain also suffer with the problem of
autonomy
34. Aviation Sector Outlook
Absence of a regional airline network and no proper coverage of western
Chinese territory are some of the opportunities present (1/2)
• Absence of regional airline network
Opportunities - The concept of regional airline have just picked up with only one Airlines Company
focusing on regional routes started operation in September 2006
• Governmental Focus on Regional Aviation
- China will give top priority to the development of small aircraft with 50 to 70 seats
for regional flights
• Western China - an opportunity waiting to be tapped
- Western china (Tibet, inner Mongolia etc.) poses a great opportunity for
regional players as it not covered properly by present Chinese airlines - The
western region cover as much as 71% of the total Chinese territory
• High demand for regional Jets
- China still needs more than 400 small jetliners for regional flights, which will account
for more than 26 percent of the total flights in 2019
• Chinese Developmental Goals
- However the developing of the West Programme and the Olympic Games in 2008
will accelerate the need for regional jets
35. Aviation Sector Outlook
Chinese policy on civil aviation helps the flow of FDI in the sector
indicating a huge opportunity for foreign entities
Chinese Aviation & FDI
FDI Policy - Highlights
• Foreign investment or management on the air traffic control Impact on Chinese Aviation
system is prohibited.
• According to CAAC, between 1980 and the
• FDI on the existing public and general air transportation end of 2003, more than US$ 30 billion in
enterprises are encouraged, which includes following foreign investment was pooled into China's
- General aviation enterprises related to agriculture, forestry, civil aviation sector in projects including plane
and fishery and engine maintenance, ground services
- General aviation enterprises related to business flight, and air catering.
aerial sightseeing, or serving for industries
- Any projects related to State Security are prohibited • In 2004, 4 joint ventures were approved, 2
• Forms of the foreign investment include foreign loan projects were used, and the total
foreign investment was US$ 784 million
- Joint investment
- co-operative management (Joint Co-operation for short)
- Shareholding
• Any foreign company invests in a public air transport
enterprise
- its maximum stake is not permitted to exceed 49% - If
foreign investment is from more than one company, each
company can own a maximum stake of 25%
36. Options
ALITALIA XL EASTERN CHINA
•Government backed •Tourist sector •Government Problems
•100 % possible •Huge Growth Potential •Biggest market
•European market entry •European market •Ambiguity on Policies
•Lowest exposure •Synergy Value •Huge Potential
37. Synergy
• Direct entry to European markets
• Positioning base in Europe (Italy)
• Inheriting slots in premium European Airports
• Acquiring one of the major brands in the
sector
• Use of Emirates Premium service to target the
executive segment
• Alitalia cargo service add a new segment to
the business
• Positioning itself in the form of Subsidiary as
the LCC (EUR & MENA)
• Saving of Opportunity cost starting a LCC
Service
• Huge Pipe line of Aircrafts can now be used as
per usability
38. Synergy
• Rome to be used as a commercial
base
• Milan to be used as a Cargo base
• Establishing AL WAHD as the LCC
operator
• Tourist base for other Emirates
divisions
• Establishing two brands
FCC – Emirates ALITALIA
LCC – AL WAHD
39. Synergy……
• Using XL to enter the European
tourism market
• XL airways to be Spun off
• ALWAHD to be used for all
services
• More acquisitions in this sector
• Leveraging the Middle-east &
Asia-Pac market to Increase the
XL business
40. Synergy
• ALWAHD & EMIRATES
AIRTALIA to be used for XL
services
• No outsourcing of Carriers
• More services such as
Chartered plane, Pick &
Carry, Point to Point service
would be introduced
49. Why not others?
Singapore Airlines Air China
Made a bid for 24% at 6 times the book Made A bid for 30% at $5HKD
value at $3.8HKD Already have holding of 12% in China Eastern
Disapproved by shareholders reason being Has Support of Cathay Pacific as partner.
cheap offer while approved by management Seat occupancy ratio and passenger volume
as they will get cash and international decreased over 10% in August compared with
expertise. the corresponding period last year, of which
Air China which has 12% stake in China passenger volume amounted to 2.77 million,
Eastern doesn’t want to allow foreign player representing a sharp loss of 16.6% year on year,
to enter in growing Chinese market at time of while seat occupancy ratio was down 13% year-
Olympics and create rival. on-year to 71.1%.
Singapore airlines not ready to revise bid Rejected by Management of China Eastern
but wants entry into Chinese market. Started Talks with Shanghai Airlines having
Chinese government want to restructure 15% of shanghai market and Air China has 12%
aviation industry
50. Why not others?
Union didn’t agree to job cut and
Lufthansa
restructuring.
Alitalia currently loses about
Made a bid initially for €1 million, or $1.46 million,
British Airways
Alitalia(49.9%) and Australian per day and has roughly €1.2
Airlines for 100% stake. But million of outstanding debt. First quarter profit dropped by
Australian Airline investors of
90% to 27 million pounds from 274
state owned holding company
million pounds a year earlier.
OEIAG hold 25% and other
competitors Siberian S7, Air-
Cut in revenue forecast due to
France KLM.
rising fuel cost and slumping
demand.
Backed out of Alitalia deal due
to risk of credit rating
British Airways plans to raise
downgrade.
fares, reduce passenger capacity,
stop hiring and merge with Madrid-
Air-France KLM
based Iberia to lower spending on
planes, maintenance and staffing.
Made a bid for Alitalia once
Lufthansa backed out at of €138
CAI consortium
million, or $217.6 million valuing
at less than 10 cents one fifth of
Made a bid of €1bn (£791m)
market value.
30 percent market share Rejected by union as plan
Alitalia is a strong brand and in one of Europe's biggest involved 3000 job cuts and more
Italy is a very interesting market economies makes Alitalia stringent working conditions for
but financial situation and union an attractive proposition remaining staff.
acceptance is problem.
