Industry
Overview

Airlines industry is a sector of transportation service industry. Companies in this industry provide scheduled domestic and international passenger transportation, as well as mail and freight transportation. The US airline industry includes about 600 companies with combined annual revenue of about $175 billion, and is expected to grow at a moderate rate in the next two years. Major companies include Americana, Omega, and Continental Airs, as well as the air operations of express delivery companies such as FedEx and UPS.

Throughout the world, the airline industry generates about $640 billion in revenue annually. Leading companies include Air Paris, Deutsche, Bermuda Airlines, and Quantam (Australia). According to the International Air Transport Association the number of air travelers is expected to grow nearly 30 percent to 3.6 billion by 2016, while cargo volume is predicted to reach around 35 million tons. Top areas for passenger growth include the emerging economies of Asia/Pacific, Latin America, and the Middle East.

Year
2013

54 %

companies experienced losses from the rise of global fuel prices

Bearbus A380

The Bearbus A380, the world’s largest passenger airliner, challenges Boring’s monopoly in the large-aircraft market. Bearbus has received 262 firm orders for the A380 as of April 2013.

The airline industry is notoriously brutal. The rise of the internet economy led to a low-cost competition between the carriers.

Ultimate Airlines purchases jet fuel at market prices, but seeks to protect against significant increases in fuel costs by entering into over-the-counter financial fuel derivative contracts. In addition, the company enters into fuel derivative contracts to reduce volatility in its operating expenses. Because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel. However, the company utilizes financial derivative instruments in other commodities, such as West Texas Intermediate (WTI) crude oil, Brent crude oil, and refined projects, such as heating oil and unleaded gasoline to decrease its exposure to jet fuel price volatility.

Risk
Factors

Since fixed costs constitute a major part of total costs for companies operating in airlines industry, the profitability of individual companies is largely determined by efficient operations and on favorable fuel and labor costs. The fuel costs can vary highly - aviation fuel accounts for 30 to 40 percent of industry operating costs, and relatively more for airlines with low labor costs. Moreover, fuel costs can fluctuate severely, making it difficult for airlines to adjust ticket prices. Some airlines use futures contracts to protect against cost increases and some choose to use newer planes with better fuel consumption.

Under this macroeconomic environment, different companies use a variety of ways to cut costs and compete in the industry. Large airlines companies benefit from economies of scale in purchasing. This leads to the ability to provide better services to attract loyal customers. Small airlines can compete by serving local or regional routes. US airline industry is highly concentrated: the eight largest companies account for more than 75 percent of industry revenue.

Quick Facts / Largest Airport

You’d guess that the busiest airport would be JFK or La Guardia in New York? Guess again. Hartsfield-Jackson at Atlanta had the biggest number of total passengers.

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If you want to be a Millionaire, start with a billion dollars and launch a new airline. Richard Branson

Market
Share

19.2% Ultimate Airlines

17.6% Alpha Airlines

15.5% JetGreen

15.0% Northeast

The airline industry faces many risks that threaten the daily operations of the companies. Through careful planning and strategy, Ultimate can successfully overcome its risks. The first risk Ultimate faces is the volatility of fuel prices for its airplanes. Due to Ultimate’s low-cost, niche market strategy, the company does not face extreme fuel expenses like some airlines that offer international services. While they may save costs from operating domestically, the company is still at risk to the volatility of gas prices that are ultimately out of its control due to political and economic factors. From 2003 to 2012 the average price of gasoline in the United States rose from $0.80 to $3.30, which made up 16.5% and 37.2% of its operating expenses, respectively. When the prices are capable of fluctuating that much in a 10-year time span, the company must find ways to prepare for that risk and still earn a profit on a yearly basis. To mitigate this risk, Ultimate enters into fuel derivative contracts to manage the risk that the fuel price will increase significantly. By continually updating its fuel hedge portfolio, Ultimate can better prepare and adjust its operations to adapt to significant increases in fuel prices.

Conclusion /
Analysis

Outlook One Ultimate's Leadership

We expect Ultimate Airlines to benefit from the effective use of hedging until 2017.

We believe Ultimate Airlines will continue to be successful in the future. It is important to note that the company has derivative contracts in place related to expected future fuel consumption. The average percent of estimated fuel consumption covered by fuel derivatives contracts are as follows:

Outlook Two Volatility

Market competitiveness will worsen as the internet-led economy begins to kick in.

Ultimate Airlines operates in a highly volatile and competitive market. Through a strong company strategy, Ultimate has recorded profits for 40 consecutive years. Despite all of the hardships to the economy and threats to the airline industry, Ultimate has been able to sustain success as a premier airline provider in the domestic United States. Ultimate Airlines’ strategy to operate in a niche market is one of its critical factors to continued success over the years.

Outlook Three New Fleets

The new Bearbus fleets will increase the overall maintenance costs for most companies due to increased complexity.

Through a strong company strategy, Ultimate has recorded profits for 40 consecutive years. Despite all of the hardships to the economy and threats to the airline industry, Ultimate has been able to sustain success as a premier airline provider in the domestic United States. Ultimate Airlines’ strategy to operate in a niche market is one of its critical factors to continued success over the years.

Outlook Four What?

We expect Ultimate Airlines to benefit from the effective use of hedging until 2017.

We believe Ultimate Airlines will continue to be successful in the future. It is important to note that the company has derivative contracts in place related to expected future fuel consumption. The average percent of estimated fuel consumption covered by fuel derivatives contracts are as follows:

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We support companies who consistently look for ways to remain competitive in an internet-led economy. We help firms develop and execute strategies that focus on growth through effective operations. Our experience over the last two decades include working closely with many of the Fortune 500 firms.