List of figures |
|
xviii | |
List of tables |
|
xxi | |
About the authors |
|
xxv | |
Foreword |
|
xxvi | |
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Foreword |
|
xxviii | |
|
Foreword |
|
xxx | |
|
Preface to the third edition |
|
xxxi | |
Acknowledgments |
|
xxxiii | |
List of abbreviations |
|
xxxiv | |
Part 1 Theoretical aspects of airline finance |
|
1 | (158) |
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1 Airline finance: an overview |
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|
3 | (37) |
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Introduction and historical background |
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4 | (11) |
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Bankruptcies and consolidation |
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|
5 | (6) |
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Legacy carriers' response to the low-cost challenge |
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11 | (4) |
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The international nature of the aviation industry |
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15 | (4) |
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19 | (1) |
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20 | (1) |
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21 | (1) |
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Business organizational structures |
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22 | (4) |
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23 | (1) |
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23 | (1) |
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24 | (1) |
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Not-for-profit organizations (NPOs) |
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|
25 | (1) |
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Comparison between business structures |
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26 | (1) |
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27 | (3) |
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30 | (4) |
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31 | (1) |
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32 | (1) |
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Money markets and capital markets |
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|
33 | (1) |
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33 | (1) |
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34 | (1) |
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The federal taxes structure |
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34 | (2) |
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Individual and corporate income taxes |
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35 | (1) |
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35 | (1) |
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Income taxes: corporate taxes versus individual taxes |
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36 | (5) |
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Tax loss carryback and carryforward |
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36 | (1) |
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36 | (1) |
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Discussion questions and problems |
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37 | (3) |
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2 Cost classifications and control |
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40 | (37) |
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41 | (4) |
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42 | (2) |
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44 | (1) |
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45 | (7) |
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47 | (5) |
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The use of costs for managerial decisions |
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52 | (1) |
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53 | (2) |
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54 | (1) |
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55 | (1) |
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Structure of airline costs |
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55 | (8) |
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56 | (5) |
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Direct operating costs (DOC) |
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58 | (2) |
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60 | (1) |
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61 | (1) |
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61 | (2) |
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Airline cost-control strategies |
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63 | (7) |
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Rebalancing/restructuring strategies |
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64 | (2) |
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66 | (2) |
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Productivity enhancement strategies |
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68 | (2) |
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Impediments to cost control |
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70 | (1) |
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Cost control in focus: U.S. airlines |
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70 | (3) |
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73 | (1) |
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Discussion questions and problems |
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|
73 | (4) |
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3 The time value of money and its setting in the aviation industry |
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|
77 | (46) |
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77 | (1) |
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78 | (1) |
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Future value of a single cash flow (FV) |
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|
79 | (7) |
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79 | (2) |
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81 | (5) |
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Present value of a single cash flow (PV) |
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86 | (6) |
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More frequent compounding |
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92 | (4) |
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96 | (8) |
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Present value of annuities |
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97 | (4) |
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Future value of annuities |
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101 | (3) |
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104 | (4) |
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107 | (1) |
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108 | (3) |
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109 | (2) |
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111 | (1) |
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Discussion questions and problems |
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111 | (4) |
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Appendix 3-A: time value of money calculations in excel |
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|
115 | (4) |
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Appendix 3-B: tables for time value of money |
|
|
119 | (4) |
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4 Assessments of risk and return |
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123 | (36) |
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Actual and expected rates of return |
|
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124 | (1) |
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125 | (7) |
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129 | (3) |
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132 | (4) |
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Variance and standard deviation |
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133 | (3) |
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Financial risk preferences |
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136 | (1) |
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136 | (1) |
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137 | (1) |
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137 | (1) |
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137 | (5) |
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142 | (3) |
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Capital asset pricing model (CAPM) |
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145 | (2) |
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Risk in the aviation industry |
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147 | (3) |
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Chapter 7 (liquidation) Bankruptcy |
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150 | (1) |
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151 | (2) |
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153 | (1) |
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Discussion questions and problems |
|
|
153 | (6) |
Part 2 Airline accounting and finance |
|
159 | (140) |
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5 Airline financial accounting practices |
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161 | (32) |
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Basic principles of accounting |
|
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162 | (4) |
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164 | (1) |
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165 | (1) |
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Differences in airline accounting |
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166 | (1) |
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Issues pertaining to the airline industry |
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|
167 | (5) |
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|
167 | (2) |
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The IATA clearing house and foreign exchange |
|
|
169 | (3) |
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Accounting treatment of frequent flyer programs |
|
|
172 | (18) |
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Incremental cost method for mileage credits earned |
|
|
174 | (3) |
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Deferred revenue method for mileage credits sold (residual estimation) |
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|
177 | (3) |
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Deferred revenue method for mileage credits earned (residual estimation) |
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180 | (3) |
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Customer loyalty programs |
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180 | (3) |
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Multi-deliverable revenue recognition methods |
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|
183 | (2) |
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Passenger ticket sales earning mileage credits |
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|
183 | (1) |
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183 | (2) |
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Interline frequent-flyer miles |
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|
185 | (2) |
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Frequent-flyer miles sold to third parties |
|
|
187 | (1) |
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Accounting changes related to frequent flyer programs |
|
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188 | (1) |
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|
189 | (1) |
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Managerial implications of frequent flyer programs |
|
|
189 | (1) |
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190 | (1) |
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Discussion questions and problems |
|
|
191 | (2) |
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6 Financial performance and measurement |
|
|
193 | (49) |
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194 | (1) |
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195 | (23) |
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196 | (4) |
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200 | (1) |
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201 | (14) |
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|
202 | (3) |
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Straight-line depreciation (SLD) with excel |
|
|
205 | (1) |
|
Double-declining-balance (DDB) |
|
|
205 | (1) |
|
Double-declining-balance (DDB) with excel |
|
|
206 | (1) |
|
Sum-of-years digits methods (SYD) |
|
|
207 | (2) |
|
Sum-of-years digits (SYD) with excel |
|
|
209 | (1) |
|
Modified accelerated cost recovery system (MACRS) |
|
|
210 | (2) |
|
Comparison of depreciation methods |
|
|
212 | (3) |
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215 | (1) |
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|
216 | (1) |
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|
217 | (1) |
|
The statement of stockholders' equity |
|
|
218 | (5) |
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Common stock at par value |
|
|
218 | (1) |
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Additional paid-in capital |
|
|
219 | (1) |
|
Retained earnings and dividends |
|
|
220 | (2) |
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Accumulated other comprehensive income (loss) |
|
|
222 | (1) |
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|
222 | (1) |
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|
223 | (6) |
|
Common-size income statement |
|
|
227 | (2) |
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|
229 | (1) |
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|
230 | (6) |
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|
231 | (12) |
|
|
234 | (1) |
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|
234 | (2) |
|
|
236 | (1) |
|
Discussion questions and problems |
|
|
237 | (5) |
|
7 Assessment of financial statements |
|
|
242 | (57) |
|
|
242 | (1) |
|
|
243 | (16) |
|
|
245 | (1) |
|
|
245 | (1) |
|
|
246 | (1) |
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|
247 | (2) |
|
|
249 | (1) |
|
Accounts receivables turnover ratio/days of accounts receivable |
|
|
249 | (1) |
|
Inventory turnover ratio/days of inventory |
|
|
250 | (2) |
|
Total asset turnover ratio |
|
|
252 | (1) |
|
Accounts payable turnover ratio/days of accounts payable |
|
|
252 | (1) |
|
|
253 | (1) |
|
Operating profit margin ratio |
|
|
254 | (1) |
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|
254 | (1) |
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|
255 | (2) |
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|
257 | (1) |
|
|
258 | (1) |
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|
259 | (7) |
|
|
260 | (1) |
|
|
260 | (1) |
|
Times interest earned ratio (TIE) |
|
|
261 | (1) |
|
|
262 | (1) |
|
|
263 | (1) |
|
|
264 | (1) |
|
Dividend payout ratio (DPR) |
|
|
265 | (1) |
|
|
266 | (1) |
|
Airline-specific financial ratios |
|
|
266 | (6) |
|
Break-even load factor (BLF) |
|
|
271 | (1) |
|
Airline industry benchmarking |
|
|
272 | (16) |
|
|
272 | (1) |
|
|
272 | (3) |
|
Profitability ratio analysis |
|
|
275 | (4) |
|
|
279 | (2) |
|
|
281 | (1) |
|
|
282 | (6) |
|
|
288 | (2) |
|
|
289 | (1) |
|
|
290 | (1) |
|
Discussion questions and problems |
|
|
291 | (4) |
|
Appendix 7-A: financial ratios |
|
|
295 | (2) |
|
Appendix 7-B: DuPont Model |
|
|
297 | (2) |
Part 3 Airline capital budgeting |
|
299 | (172) |
|
8 Airline capital budgeting |
|
|
301 | (43) |
|
Capital budgeting and cash flows |
|
|
302 | (3) |
|
|
305 | (2) |
|
Replacement vs. expansion decisions |
|
|
305 | (1) |
|
Independent projects vs. mutually exclusive projects |
|
|
306 | (1) |
|
Investment in long-term assets (capital budgeting) |
|
|
307 | (1) |
|
|
307 | (5) |
|
Discounted payback period |
|
|
310 | (2) |
|
|
312 | (6) |
|
Internal rate of return (IRR) |
|
|
318 | (10) |
|
Modified internal rate of return (MIRR) |
|
|
326 | (2) |
|
|
328 | (2) |
|
Break-even analysis (BEP) |
|
|
330 | (8) |
|
|
331 | (1) |
|
Graphical approach to break-even analysis |
|
|
332 | (2) |
|
|
334 | (1) |
|
Economic (present value) break-even point |
|
|
335 | (2) |
|
Annual production break-even |
|
|
335 | (2) |
|
|
337 | (1) |
|
|
338 | (1) |
|
|
338 | (6) |
|
9 Airline capital structure and cost of capital |
|
|
344 | (79) |
|
|
346 | (21) |
|
Internal equity (retained earnings) |
|
|
347 | (1) |
|
|
347 | (21) |
|
|
348 | (1) |
|
Stock price (par value, book value and market value) |
|
|
349 | (1) |
|
Return on average capital employed (ROCE) |
|
|
350 | (5) |
|
|
355 | (1) |
|
Zero growth (constant dividend) |
|
|
355 | (2) |
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|
357 | (5) |
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|
362 | (1) |
|
|
363 | (2) |
|
|
365 | (1) |
|
Valuation of preferred stock |
|
|
366 | (1) |
|
|
367 | (1) |
|
|
368 | (15) |
|
Bonds, notes, and debentures |
|
|
368 | (1) |
|
|
369 | (1) |
|
|
370 | (2) |
|
|
372 | (8) |
|
|
379 | (1) |
|
Valuation of zero-coupon bonds |
|
|
380 | (1) |
|
|
380 | (3) |
|
|
383 | (7) |
|
The role of bonds and stocks in the aviation industry |
|
|
390 | (2) |
|
|
392 | (8) |
|
Cost of equity and retained earnings |
|
|
393 | (1) |
|
Capital asset pricing model (CAPM) |
|
|
394 | (3) |
|
|
397 | (1) |
|
|
397 | (4) |
|
|
399 | (1) |
|
Factors affecting the cost of capital |
|
|
400 | (1) |
|
|
401 | (4) |
|
|
402 | (1) |
|
|
402 | (1) |
|
|
402 | (1) |
|
Ability to match price to input costs |
|
|
402 | (1) |
|
Timely new product development |
|
|
402 | (1) |
|
|
403 | (2) |
|
|
405 | (4) |
|
Weighted average cost of capital (WACC) |
|
|
409 | (3) |
|
|
410 | (1) |
|
|
410 | (1) |
|
|
410 | (1) |
|
|
411 | (1) |
|
Cost of capital and financial distress |
|
|
412 | (3) |
|
Marginal cost of capital (MCC) |
|
|
415 | (2) |
|
|
417 | (1) |
|
Discussion questions and problems |
|
|
418 | (5) |
|
10 Management of current assets |
|
|
423 | (48) |
|
|
424 | (8) |
|
|
432 | (16) |
|
|
432 | (1) |
|
|
432 | (1) |
|
|
433 | (1) |
|
|
434 | (2) |
|
|
436 | (2) |
|
Liquidity (cash) management models |
|
|
438 | (4) |
|
Baumol-Tobin cash inventory model |
|
|
438 | (4) |
|
Miller-Orr model: fluctuations in cash flow |
|
|
442 | (3) |
|
|
445 | (1) |
|
|
446 | (2) |
|
|
448 | (3) |
|
Current liabilities management |
|
|
451 | (1) |
|
|
451 | (3) |
|
|
454 | (12) |
|
Inventory carrying (holding) costs |
|
|
454 | (1) |
|
|
455 | (2) |
|
Economic order quantity (EOQ) |
|
|
457 | (3) |
|
Determining EOQ with quantity discounts |
|
|
460 | (2) |
|
Reorder point with safety stock |
|
|
462 | (1) |
|
|
463 | (2) |
|
ABC inventory control model |
|
|
465 | (1) |
|
|
466 | (1) |
|
Discussion questions and problems |
|
|
467 | (4) |
Part 4 Practical applications of airline finance |
|
471 | (160) |
|
11 Airline fuel hedging practice |
|
|
473 | (43) |
|
|
474 | (4) |
|
|
475 | (3) |
|
|
478 | (1) |
|
|
479 | (1) |
|
|
480 | (2) |
|
|
481 | (1) |
|
|
482 | (2) |
|
|
483 | (1) |
|
Introduction to financial derivatives |
|
|
484 | (1) |
|
|
484 | (1) |
|
|
485 | (2) |
|
|
487 | (6) |
|
Futures and forward contracts |
|
|
490 | (3) |
|
Hedging strategies for the airline industry |
|
|
493 | (11) |
|
Other risk reduction strategies |
|
|
496 | (2) |
|
|
498 | (4) |
|
Zero cost and premium collars |
|
|
502 | (2) |
|
|
504 | (1) |
|
|
505 | (1) |
|
|
505 | (1) |
|
|
506 | (1) |
|
|
506 | (2) |
|
Accounting for financial derivatives |
|
|
508 | (2) |
|
|
510 | (1) |
|
|
511 | (1) |
|
Discussion questions and problems |
|
|
511 | (3) |
|
Appendix 11-A: Black-Scholes option pricing model |
|
|
514 | (2) |
|
12 Analysis of aircraft leasing |
|
|
516 | (46) |
|
|
517 | (1) |
|
|
518 | (9) |
|
|
519 | (3) |
|
Financial (capital) lease |
|
|
522 | (3) |
|
|
525 | (2) |
|
|
527 | (6) |
|
|
527 | (2) |
|
|
529 | (2) |
|
|
531 | (1) |
|
Cross-border lease leasing |
|
|
531 | (2) |
|
|
533 | (13) |
|
Net advantage to leasing (NAL) |
|
|
534 | (6) |
|
|
540 | (2) |
|
|
542 | (4) |
|
Major aircraft-leasing companies |
|
|
546 | (7) |
|
|
547 | (1) |
|
GE capital aviation services (GECAS) |
|
|
548 | (1) |
|
Air Lease Corporation (ALC) |
|
|
548 | (1) |
|
|
548 | (1) |
|
Boeing Capital Corporation (BCC) |
|
|
549 | (1) |
|
|
549 | (1) |
|
Dubai aerospace enterprise (DAE) |
|
|
549 | (4) |
|
|
553 | (1) |
|
Discussion questions and problems |
|
|
554 | (4) |
|
Appendix 12-A: key provisions of a dry operating lease |
|
|
558 | (2) |
|
Appendix 12-B: key provisions of an operating wet lease (ACMI) |
|
|
560 | (2) |
|
13 Application of financial theory to aviation industry |
|
|
562 | (38) |
|
Commercial airport and air traffic control (ATC) systems |
|
|
563 | (1) |
|
|
564 | (2) |
|
|
566 | (1) |
|
|
567 | (1) |
|
|
568 | (2) |
|
|
570 | (6) |
|
|
574 | (2) |
|
Commercial aircraft industry |
|
|
576 | (4) |
|
Large commercial aircraft manufacturers |
|
|
577 | (1) |
|
Regional jet manufacturers |
|
|
578 | (4) |
|
|
579 | (1) |
|
Aircraft secured bond products |
|
|
580 | (2) |
|
Asset-backed securities (ABS) |
|
|
582 | (9) |
|
Pros of asset-backed securities |
|
|
583 | (1) |
|
Cons of asset-backed securities |
|
|
584 | (1) |
|
Conventional equipment trust certificates (ETCs) and pass-through certificates (PTCs) |
|
|
584 | (2) |
|
Pass-through certates (PTC) |
|
|
585 | (1) |
|
Aircraft lease portfolio securitizations |
|
|
586 | (4) |
|
Airline default and credit risk |
|
|
590 | (1) |
|
|
590 | (1) |
|
|
590 | (1) |
|
Enhanced equipment trust certificates (EETCs) |
|
|
591 | (5) |
|
|
593 | (2) |
|
|
595 | (1) |
|
|
595 | (1) |
|
|
596 | (1) |
|
|
596 | (1) |
|
|
596 | (4) |
|
14 Airline revenue management |
|
|
600 | (31) |
|
|
600 | (2) |
|
Airline pricing policy airline revenue management |
|
|
602 | (7) |
|
|
604 | (1) |
|
First-degree (perfect) price discrimination |
|
|
604 | (1) |
|
Second-degree (quantity discounts) price discrimination |
|
|
605 | (1) |
|
Third-degree (multi-market) price discrimination |
|
|
605 | (1) |
|
|
605 | (4) |
|
Revenue management "fences" |
|
|
609 | (4) |
|
Advance purchase restrictions |
|
|
610 | (1) |
|
Passenger loyalty programs |
|
|
610 | (1) |
|
|
611 | (1) |
|
|
612 | (1) |
|
Schedule-driven "restrictions" or "fences" |
|
|
612 | (1) |
|
|
612 | (1) |
|
Revenue management in practice |
|
|
613 | (3) |
|
|
615 | (1) |
|
|
616 | (12) |
|
|
624 | (1) |
|
Forecasting overbooking levels |
|
|
625 | (3) |
|
Other issues associated with revenue management |
|
|
628 | (1) |
|
|
628 | (1) |
|
|
629 | (2) |
Glossary of Terms |
|
631 | (8) |
Index |
|
639 | |