Effect of Weather Delays on Shareholder Value: Evidence from the Airline Industry

Airlines measure service quality based on different factors such as on-time performance, delays and cancellations, mishandled baggage and denied boardings. Among the above factors, recent studies show that long delays and cancellations have a major impact on airlines bottom line not only in terms of current costs but also in terms of loss of future revenue. Finance literature tells us that stock prices reflect the present value of future cash flows. In this paper we use event study methodology to examine how weather delay and cancellations affect current stock market returns for our sample airlines. We find some evidence that airline stocks are adversely affected by weather delays only when the delays are significant and widespread or persistent over a longer period. However the results are not significant and show that currently the stock market is not penalizing airlines for delays and there is no significant loss in the value for these firms

Sustainability Issues and Challenges in Aviation

Air transportation is essential in moving people and cargo across the globe. There is however increasing recognition by the general public about the negative impact of aviation on the environment. Studies show that commercial aviation is responsible for 2.4% of global carbon emissions (Wright, 2019). Aircraft manufacturers and airlines are reducing their carbon footprint by investing in environmental projects including forest conservation; capturing and reusing methane gas emitted from landfills; and developing fuel-efficient engines, biofuels and electric aircraft. British Airways and other airlines in the International Airlines Group (IAG), have committed to reach the UK government’s target of net zero carbon emissions by 2050. EasyJet says it will become the first major carrier to operate net-zero carbon flights, offsetting carbon emissions from the fuel used on every flight starting immediately. Emission trading system (ETS) in Europe, where airlines pay to reduce carbon emissions has reduced emissions on European flights by more than eight million tons through the European ETS, which equates to reducing emissions on every European flight by 40 percent. United Nations created the first global carbon offsetting scheme named CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), which will enable aviation to cut its CO2 emissions by 2.5 billion tons between 2020 and 2035 through US$40 billion investment in regulated, carbon reduction projects in other sectors. The International Air transport Trading Association (IATA) created the “Four Pillars” principle, namely technology, operations, infrastructure and economic measures for airlines to achieve carbon-neutral growth by 2020. The public is divided on this issue. The carbon-offset skeptics point out that it is hard to prove they lead to genuine, permanent emissions reductions that would not have otherwise happened and point to evidence that emissions reductions are often overestimated. Further, they argue that carbon offsets do not reduce global net emissions as emissions reductions are cancelled out by the airline emissions. Finally, they point to the fact that the airline emissions happen immediately, but the offsets do not reduce emissions until sometime in the future. Others believe in the power of technology to create solutions, such as electric aircraft, to reduce carbon emissions. This poster will explore the above issues and challenges of sustainability in aviatio

The Effect on Stockholder’s Wealth on Critical Systems Failure and Remedy: The Boeing 787 Case

In this paper we analyze the effect of Boeing Dreamliner 787’s battery problems on stockholder wealth. Using the event study methodology, we show that the recall in January of 2013 initially caused the company’s cumulative abnormal returns to fall by almost 4% in four trading days after the recall. This was followed by an announcement by two major airlines to ground all of the 787 Dreamliner jets. The FAA also ordered all US airlines to ground their 787s and announced an investigation to review all critical systems of 787s. However within four months of the investigation, FAA approved Boeing’s revisions to its 787 design. This caused Boeing’s abnormal returns to rise by almost 2%. On April 24th Boeing reported it’s greater than expected quarterly results which caused its abnormal returns to rise by an additional 3%. The Boeing case provides us an opportunity to study how critical mistakes can change the value of a manufacturer. It also shows how critical it is for the company to redeem itself by quickly addressing a crisis situation

Unlocking the Final Code to Managing Financial Risk in the Airline Industry

This paper reports our findings on the effectiveness of revenue hedging using the newly proposed price indices by Skytra. In the example analyzed we find that when hedged, if United Airlines’ transatlantic ticket price yields fell as much as 98%, its revenues would have only fallen 8%. Firstly, we explore revenue hedging and the evolution of financial risk management practices for the aviation industry. Until now, the industry has been confined to hedging risks posed by its major cost drivers, including fuel, foreign exchange and interest rates. However, even the most significant driver of these costs (fuel) makes up only 20 to 30% % of the total cost and until now, airlines did not have an ability to hedge the revenue side of their profit and loss account, limiting the impact of their hedging strategies. Skytra, a subsidiary of Airbus, has recently proposed a novel approach to managing the yield risk for airlines, which will complement the cost side hedging. Further, the ability to hedge yield would make the treasury functions of an airline more complete, by allowing it to focus on its two most significant drivers of economic outcome- yield and fuel

Application of Core Theory to the Airline Industry

Competition in the airline industry has been fierce since the industry was deregulated in 1978. The proponents of deregulation believed that more competition would improve efficiency and reduce prices and bring overall benefits to the consumer. In this paper, a case is made based on core theory that under certain demand and cost conditions more competition can actually lead to harmful consequences for industries like the airline industry or cause an empty core problem. Practices like monopolies, cartels, price discrimination, which is considered inefficient allocation of resources in many other industries, can actually be beneficial in the case of the airline industry in bringing about an efficient equilibrium

Evaluating Financial Performance of Commercial Service Airports in the United States

Studies on airport performance have focused primarily on productivity and operational efficiency. There are very few studies on airports’ financial viability and strength, especially those in the United States. Most of the U.S. commercial service airports are government-owned entities and operated for the service of the community rather than for profit, but expected to be financially self-sufficient and raise capital funds mainly through the bond markets. However, past studies of the financial performance of U.S. airports have relied on traditional profitability measures and financial efficiency measures that are more appropriate for airports owned and operated by for-profit entities. Based on the literature for non-profit organizations and the practices of credit rating agencies and government oversight bodies, this paper adopts six pertinent financial performance metrics to measure and compare the operational financial performance, leverage, and liquidity of 60 large and medium commercial service airports in the United States during the 2010–2017 period. The paper further examines factors that may affect airport financial performance. The results reveal that large hub airports have better liquidity while medium airports have better leverage during the study period. These results suggest that the effect of airport size on financial performance is inconclusive. Regression analysis shows that airports with high productive efficiency and those without a dominant carrier tend to have more surplus revenues for meeting their operational financial needs and capital spending and have better liquidity. The paper highlights the importance of using appropriate metrics to evaluate the financial performance of public sector entities and provides relevant information to bond investors. The devastating impacts of the COVID-19 pandemic on airports accentuate the significance of leverage and liquidity. Therefore, the financial metrics discussed in this paper would help support public policy debates and allocate public funds to the airports

Implications of the New Accounting Changes for Aircraft Leasing

In this paper we analyze the implication of how the new accounting standard on leases will affect an airline’s balance sheet and performance ratios and its implication for the aircraft leasing industry. Effective January 1, 2019 the new lease standard requires nearly all leases to be reported on the airline’s balance sheet as assets and liabilities. This new lease standard is expected to have an effect on airline’s financial ratios, debt covenants, airline ratings, airline’s borrowing costs and is expected to increase airline’s currency volatility. Leases may have to be renegotiated and there is concern that the volume of leasing would tend to fall. In order to glean the impact of these changes, we look at a sample of airlines in the United States and examine how transferring operating leases to an airline’s balance sheet would affect the liquidity, profitability and leverage ratios, commonly used by rating agencies, to assign ratings. Our finding show that while airlines such as Jet Blue, American and Southwest airlines will experience minimal impact from the new accounting standard, other airlines such as United, Delta and Spirit will see a marked deterioration in their ratios

Sustainable Finance in Aviation

The aviation sector, with active participation from both institutional and private stakeholders, is vigorously pursuing the goal of achieving Net Zero emissions by 2050. This endeavor relies on a multifaceted strategy encompassing short-term, medium-term, and long-term solutions. These strategies entail diverse approaches, including carbon offset programs, fleet modernization, and the adoption of sustainable aviation fuels (SAFs), which play a pivotal role in the medium-term plan by offering substantial reductions in carbon emissions. The primary challenge ahead lies in bridging the substantial disparity between the current level of SAF production and the anticipated demand by 2050. Meeting this demand necessitates significant investments, estimated at trillions of dollars, posing financial obstacles for potential investors. Furthermore, SAFs currently come at a higher cost compared to traditional aviation fuels, and achieving carbon neutrality by 2050 demands substantial annual financial commitments. To secure funding for these initiatives, the aviation industry is turning to various green financing instruments. They attract investors by aligning their debt with sustainability objectives and presenting potential financial advantages. The adoption of these instruments is driven by the aviation industry\u27s dedication to environmental sustainability and adheres to global policies and regulations primarily aimed at curbing greenhouse gas emissions from aviation. Although the green financing market is relatively nascent (especially for aviation), it is poised for growth in the coming years, assuming a more prominent role in enabling airlines to finance their environmental endeavors. Nevertheless, this growth has led to heightened concerns about the authenticity of these green financing instruments, prompting investor skepticism regarding greenwashing practices. To tackle this issue, specific Key Performance Indicators (KPIs) and standardized reporting standards will be put in place to measure and transparently report sustainability efforts within the aviation sector. Looking ahead, advancements in aircraft technology and alternative energy sources, such as hydrogen and electricity, hold the potential to further diminish aviation emissions, especially considering the growing demand in future air travel. These innovations offer the promise of a greener and more sustainable future for air travel. However, they also necessitate substantial additional funding for research, development, and implementation. Ultimately, the aviation industry\u27s commitment to decarbonization can only be realized through collaborative efforts with the financial markets, as these markets offer specialized and cost-effective avenues for financing these critical sustainability initiatives