Financial Analysis of Pakistan International Airlines

The United States carries over one third of the globe’s total traffic, where Over 1.5 billion passengers fly annually. Over the past 20 years, air travel has grown at an average of about 5% per year, the reason for annual change is usually differences in economic growth, and of course other environmental factors, such as the current war. As a rule, the annual growth in air travel has been about twice the annual growth in GDP. Deregulation, liberalization, and competition have essentially altered the management strategies and practices of airlines. Productivity improvements and cost management have been two of the greatest concerns for US airlines for the past twenty years. As a whole, the airline industry must continue to improve their specialization in terms of fleet utilization, pricing and revenue management, and schedule optimization.

The airline industry has been a major factor in the globalization of the world economy. It connects the sellers and the buyers as well as transports goods across countries. It also breaks the time and distance barriers. In the past, air travel was considered a luxury but it is now a common necessity.

Given these approximations, the CAPM model would total the risk-free rate and the market risk premium times beta to arrive at a cost of equity of 9.68%, which reflects the investors’ expected return from investing in shares of the company.

The Capital Assets Price Model (CAPM), is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return, which is often used to estimate a cost of equity (Wikipedia, 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:

American airline industry is steadily growing at an extremely strong rate. This growth comes with a number economic and social advantage. This contributes a great deal to the international inventory. The US airline industry is a major economic aspect in both the outcome on other related industries like tourism and manufacturing of aircraft and its own terms of operation. The airline industry is receiving massive media attention unlike other industries through participating and making of government policies. As Hoffman and Bateson (2011) show the major competitors include Southwest Airlines, Delta Airline, and United Airline.

CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the cost of capital. Under the CAPM, the market portfolio is a well-diversified, efficient portfolio representing the non-diversifiable risk in the economy. Therefore, investments have similar risk if they have the same sensitivity to market risk, as measured by their beta with the market portfolio.

Although the airline industry is in the business to transport people from one place to another they could not function without those who keep the airplanes operating on schedule. The airline industry has become the major provider of public transportation for Americans traveling between the nation's cities. Scheduled airlines now account for 92%

airline industry has never matched the profitability of even the average U.S. corporation (ATA Report, 2007). In its “”FAA Aerospace Forecast Fiscal Years 2008–2025,” the Federal Aviation Administration (FAA) reported on the industry’s 36 mainline air carriers that use large passenger jets (over 90 seats) and 84 regional carriers that use smaller piston, turboprop, and regional jet aircraft (up to 90 seats) to provide connecting passengers to the larger carriers (FAA, FAA Aerospace Forecast Fiscal Years 2008–2025, A Review of 2007), stating that “three distinct trends have occurred over the past several years that have helped shape today’s U.S. commercial air carrier industry: (1) major restructuring and shrinking by the mainline network carriers; (2) rapid growth by low-cost carriers, particularly in nontraditional long-distance transcontinental markets; and (3) exceptional growth among regional carriers.”

The modern day airline industry is a highly complex and dynamic industry, characterized by numerous elements. For instance, the airline industry is now, unlike its inception period, populated by privately owned companies, rather than state owned enterprises. Then, the airline sector is marked by high levels of financial resource consumption, employment concerns or pollution complaints.

Airlines Industry is large and growing, it is also the most fiercely competitive sector. It facilitates international trade, world economy growth, tourism and international investment. The airline industry has over time with the use of modern technology been able to take advantage of the short haul, high frequency and gained a competitive advantage over other forms of travel, such as buses and railroad travel. Additionally, the airline industry still holds the market for global travel at a low cost and convenient way to travel. The aviation industry gives a good contribution to the GDP which includes the following: airline services, general aviation, civil airport operations, aircraft manufacturing, and

3,4- The Airline industry and the market The airline industry is large, specially in the United States, mainly due to the “ Deregulation” of the industry. In 1938, the Civil Aeronautics Board was created to control the growth of the air transportation industry. This board had the authority to control entry, exit, prices and methods of competition. In the late 1970 this structure was found inefficient and in 1978 deregulation took place. Due to the deregulation of the industry competition intensified, prices dropped, and the number of people travelling increased. Many new companies emerged and regional airlines saw deregulation as an opportunity to expand. Due to the rise in competition, by 1986 mergers started to take place and in 1987 64.8% of the market was controlled by the four largest airlines. The demand for air travel is determined mainly by price, studies revealed that half of the leisure travellers and on quarter of business travellers did not have a preference for a particular airline, which means that prices determined the

In terms of major cities, American Airlines holds significant market share of many of the top domestic routes. According to the U.S Department of Transportation Bureau of Transportation Statistics, American Airlines holds 67.43% share of the Dallas/Fort worth Texas market, 67.46% of the Miami Florida market, 16% of the Chicago market, 16.49% of the Los Angeles market and 13.85% of the New York market; these are significant shares as these are cities within the top five domestic routes in the U.S (DOT, 2015a). American Airlines is also a major employer in the aviation industry. As of June 2015, American had 59,905 full time employees and 7,427 part time employees (DOT, 2015b). Although these numbers makes American the fourth largest employer among major carriers, these numbers are significantly lower from their highest levels of 107,311 full and part time employees reached back in August of 2002 (DOT, 2015b). The managerial accounting significance of this fact will be explored in the Activity Based Costing section of this

Increased interest rates & credit crunch in US are affecting people to spend on luxuries like long distance air travel. The economic environment of the airline sector has been characterized by growth in relation to most key figures. Air travel demand has closely mirrored the cyclical pattern shown by gross domestic product (GDP) figures in that it responds to cyclical upswings and downswings. However, air travel growth has far exceeded GDP growth over the period. Between 1960 and 1995 the total world economy, measured by GDP, grew by a factor of just over three, while air transport, measured by tonne-kilometres, grew by a factor of nearly 20 (Hanlon, 1999).Furthermore, fuel and aircraft prices are major expenditure items subject to fluctuations and the international orientation of the industry means that movements in foreign exchange rates can have major effects upon industry profitability. Holloway (1998) maintained that aviation managers face the need to pursue strategies capable of sustaining profitability throughout entire economic cycles.

The growth of airline industry in any country is directly proportional to its GDP growth; the greater the business activity, the more air travel and the higher the GDP of the country. The demand

Airline industry is a growing and a challenging industry across the globe and it is becoming more competitive on quality, pricing and most prominently safety in the contemporary world.