CFO Summit
World Financial Symposium 2014
World Financial Symposium 2015
World Financial Symposium 2014
Welcome Address and
CFO Summit Introduction
Aleks Popovich
World Financial Symposium 2014
Senior Vice President, Financial and Distribution Services
IATA
World Financial Symposium 2015
World Financial Symposium 2014
Airline Financial Health
Understanding the spread of airline industry financial performance
Brian
Pearce
World Financial Symposium 2014
Chief Economist
IATA
World Financial Symposium 2015
World Financial Symposium 2014
2015 should see record profits for the industry
Global commercial airline profitability
8.0
6.0
30
EBIT margin
20
10
2.0
0.0
0
Net post-tax profit
-2.0
-10
US$ billion
% revenues
4.0
-4.0
-20
-6.0
-8.0
-30
2000
2002
2004
2006
2008
2010
2012
2014
Source: ICAO, IATA
IATA Economics www.iata.org/economics
4
Though that’s still only $8.27 per passenger
Worldwide airline net post-tax profit per departing passenger, 2015
250
$205.37
Ancillaries
200
$197.10
$8.27
Ancillaries
150
Fare
100
50
Cargo
0
Revenue
Cost
Net profit
Source: IATA
IATA Economics www.iata.org/economics
5
But paying investors ‘normal’ return for 1st time
Return on capital invested in airlines
9.0
8.0
Cost of capital (WACC)
% of invested capital
7.0
6.0
5.0
4.0
3.0
Return on capital
(ROIC)
2.0
1.0
0.0
2000
2002
2004
2006
2008
2010
2012
2014
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
6
Widening gap above breakeven driving returns
Breakeven and achieved weight load factors
69
Achieved
67
% ATKs
65
Breakeven
63
61
59
57
2000
2002
2004
2006
2008
2010
2012
2014
Source: IATA
IATA Economics www.iata.org/economics
7
Consolidation has played an important role
Market share of top-4 airlines/JVs
81%
68%
36%
48%
42%
33%
51%
59%
Source: SRS Analyser
IATA Economics www.iata.org/economics
8
The product structure is changing too
2013 ancillaries and operating profits, % revenues
35%
Allegiant
30%
Ryanair
Ancillaries as % revenues
25%
20%
Flybe
United
15%
Qantas
10%
Korean
Easyjet
Aer Lingus
Spicejet
SAA
Alaska
JetBlue
Frontier
5%
PIA
Air Asia
Delta
Hawaiian
BA
JAL
0%
-20%
-15%
-10%
-5%
0%
5%
Operating profits as % revenues
10%
15%
20%
Source: IdeaWorks, Airline Analyst, IATA
IATA Economics www.iata.org/economics
9
Low fuel prices important but US$ major offset
The Brent crude oil price and the US dollar
160
95
US dollar
90
120
85
100
80
80
75
60
70
US dollar trade weighted index
Oil price, US$ per barrel
140
Brent crude oil price
40
65
20
Source: Datastream
60
2008
2009
IATA Economics www.iata.org/economics
2010
2011
2012
2013
2014
2015
10
Driving further divergence in performance this year
Airline net post-tax profit margins
Net post-tax profit as % revenue
8%
N America
6%
4%
Europe
Asia-Pacific
2%
0%
-2%
-4%
-6%
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: ICAO, IATA
IATA Economics www.iata.org/economics
11
ROIC gains driven by a subset of the industry
Distribution of 2014 airline ROIC
14
Most frequent ROIC = 0%
12
Median ROIC = 3.2%
number of airlines
10
34 airlines ROIC > WACC
8
6
4
2
0
-21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
% return on invested capital
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
12
FCF concentrated in the US
2014 Free Cash Flow by region
4
2
FCF US$ billion
0
-2
Network
LCC
-4
-6
-8
-10
US
LA
ME
EU
AP
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
13
But good ROIC performance in Europe as well
2014 return on capital by region
30%
ROIC as as % invested capital
20%
Average cost of capital
10%
0%
-10%
-20%
-30%
N America
Europe
Asia Pacific
LA
ME
AF
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
14
Median airline balance sheet still deteriorating
Free cash flow and adjusted net debt
30
Adjusted net debt, US$ billion
25
6 airlines could
repay all debt
in next 5 years
20
15
10
5
0
-50%
Median airline
$3 billion net debt
-3% FCF/net debt
-40%
-30%
-20%
-10%
0%
10%
20%
Free cash flow as a % of adjusted net debt
30%
40%
50%
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
15
Why the spread? 2 approaches
Michael Porter’s ‘5 forces’ – the external business environment
All typically high in most airline markets
1. Rivalry – US domestic mergers/N Atlantic JVs?
2. New entrant threat
3. Substitutes threat
4. Supplier bargaining power
5. Customer buying power
John Kay’s ‘Distinctive capabilities’ – what makes firms different
Apart from 1 for some airlines, most capabilities are weak in most airlines
1. Strategic assets (e.g. route/slot rights)
2. Strong key relationships with suppliers/staff/customers
3. Reputation
4. Innovation – economies of density from JVs/other collaboration forms?
IATA Economics www.iata.org/economics
16
Behind the Curtain
Underlying Factors Behind Airline Financial Success
Michael
Bell
World Financial Symposium 2014
Partner- Aviation, Aerospace & Defense
Spencer Stuart
World Financial Symposium 2015
World Financial Symposium 2014
The Evolving Role of the Airline CFO
in Securing Outstanding Airline Financial Performance
Prepared for:
Presented by:
September 2015
IATA World Financial Symposium 2015
CFO Summit
Barcelona, Spain
Michael Bell – Spencer Stuart
What I Would Like To Cover Today
 Provide some brief context on Spencer Stuart
 Share developing findings from the LEK-Spencer Stuart joint
study on outstanding airline performance
 Illustrate with examples from best practice airlines
 Share a findings from the Spencer Stuart study – “The New
Finance Leader”
 Share findings from recent review of global airline CFO
population
Spencer Stuart –Aviation CFO Search Track Record
Lots of Empirical Evidence through Aviation CFO Searches
LEK-Spencer Stuart Joint Study on Airline Profitability
 Joint study between LEK Consulting (business, strategy,
economics) and Spencer Stuart (leadership, organization,
culture)
 Identified the highest performing airlines on “economic profit”
 Determined the underlying common denominators
 Interviewing the CEOs and leadership teams to test/validate
hypotheses and gain more insight into their success
 Drawing broader conclusions and implications for the industry
Top Airlines by Economic Profit
Five Airlines That Stand Out
Five Underlying Principles among the Leading Airlines
Strategic Focus
and Clarity
Organizational
Alignment
Stable and Visionary
Leadership
Cost
Discipline
Bold, IndustryChanging Actions
Strategic Focus and Clarity
> Copa Airlines – Hub of the Americas – “We connected the dots
for intra-Latin America travel”
> Delta Air Lines – Seizing Control of its Own Destiny
> Emirates Airline – “Anywhere to Anywhere over Dubai”
> Ryanair – Cost Leadership making Flying Affordable to
Everyone
> WestJet Airlines – “everything is focused on generating a 12%
return on invested capital – it is that simple”
Cost Discipline
 Copa
• First-world yield, second-world costs
• Frugal spending; Spartan style, with the tone set by the
CEO
• Executives do not fly in the front cabin
 Emirates
• Continually driving down unit costs through large, widebody aircraft; massive deployment of Airbus A380 even
on thinner routes
 Ryanair
• Rabid focus on cost
• Cost avoidance, not cost reduction
Bold, Industry-Changing Actions
 Delta
• Trainer Refinery acquisition to manage fuel costs
• Equity investments and true partnerships with Aeromexico, Gol, China
Eastern
• Repurchase of its commercial information systems from Travelport
• The first of the "big three" U.S. airlines to ditch the traditional fixed
miles-for-a-free-flight system in favor of a supply-and-demand scheme
 Emirates
• First airline to build a global hub for connecting the world, anywhere to
anywhere with one stop
• Largest current and future fleet of A380s – 66 in service and 74 on
order
Stable and Visionary Leadership
 Copa
•
Stanley Motta – Chairman, Director and primary shareholder since 1986; iconic Panamian figure
•
Pedro Heilbron – President and CEO for the past 25 years
•
COO (Dan Gunn) and CFO (Jose Montero) joined 17 and 15 years ago
 Delta
•
Richard Anderson – CEO since 2007
•
Ed Bastian – President; joined Delta 17 years ago
•
Core leadership team worked with Richard Anderson at Northwest and Continental since the
1990s
 Emirates
•
CEO Tim Clark joined 30 years ago
•
President, Group Services Gary Chapman joined 26 years ago
Organizational Alignment
 WestJet
•
“We live and breathe employee engagement as a means to meet our
organizational alignment objectives between staff and management.”
•
Massive investment in ongoing dialogue with employees – town halls, on-line
forums, CEO blog
•
Launch of regional subsidiary Encore taken to an employee vote with 91%
support
•
85% of employees participate in the employee share purchase plan; staff account
for some 13% of the total shareholder base, with generous matching schemes
•
Profit sharing program pays out twice annually and accounts for 12% of an
employee’s base salary. Profit share, Employee Share Participation Program and
stock price appreciation, combined, produce 35% upside for staff.
•
Employees have a voting seat on the Board
Five Underlying Principles among the Leading Airlines
Strategic Focus
and Clarity
Organizational
Alignment
Stable and Visionary
Leadership
Cost
Discipline
Bold, IndustryChanging Actions
Major Facing Issues the Airline Industry
 Industry consolidation
 Business model convergence
 Product disaggregation
 Liberalization
 Digitization
 Others?
CFO Response
What can and should the airline CFO do to
help airlines:
 Proactively secure outstanding financial
performance?
 Address the threats and opportunities
presented by the industry trends?
The Various Roles of the CFO at an Airline
 Cost czar
 Guardian of shareholder value
 Risk manager
 Driver for goals and results
 Face of the company to investors
 Keeper of the books
 Business partner to the CEO and top leadership team
 Other?
Evolution of the CFO Role
 Share some insights from a brief survey of the global airline
CFO population
 Share some insights from Spencer Stuart’s Study – “The New
Finance Leader: Lessons and Advice for Today’s CFO”
Spencer Stuart Study: The New Finance Leader
Lessons From and Advice for Today’s CFO
 Surveyed nearly 150 CFOs around the world
 Interviewed dozens more in one-on-one interviews
 Experience from thousands of successfully completed
CFO searches
 Expert views of Spencer Stuart’s Financial Officer
Practice
Six Key Themes from The New Finance Leader Study

The CFO has emerged as a key business partner to the CEO with
broad responsibilities well beyond the traditional scope of finance.

A CFO must have an exceptional senior team.

CFO success defined by both quantitative and qualitative terms
(contribution to strategic decisions, credibility with top management,
investors, and analysts; influence with business units; ability to develop
talent)

A CFOs first 100 days are critical.

A CFOs’ necessary skill sets and capabilities continue to evolve.

Finance executives aspiring to be CFOs must make the career
decisions that accrue diversity of finance and business experience
A Review of the Global Airline CFO Population
 Review of over 65 global airline CFOs
 Airlines from all geographies
 Airlines of all sizes
 Airlines of different business models
 Airlines of varied ownership
Internal vs. External Appointments
Airline
Overall
 Internal promotion to CFO role
47%
47%
 External recruitment to CFO role
53%
53%
Functional Background of CFOs
Airline
Overall
 Accounting & control
26%
29%
 Broad-based finance
22%
 Treasury/corporate finance
19%
 Financial planning & analysis
11%
 Corporate development
 Other
17%
5%
16%
17%
27%
Functional Background of Recent CFO Appointments
 Airline CFO appointments within the last 3 years:




Treasury/corporate finance
Accounting & Control
Broad-based finance
Financial Planning & Analysis
24%
21%
18%
11%
 CFOs Surveyed in The Finance Leader Study rated three areas
highest going forward:
 Financial Planning & Analysis
 Accounting & Control
 Corporate Development
Tenure in CFO Role
Airline
Overall
 1 year or less
18%
18%
 2-3 years
27%
31%
 4-6 years
23%
25%
 7-10 years
23%
18%
9%
8%
4.6 years
4.2 years
 More than 10 years
 Average
 Importance of the First 100 Days!!!!
Gender Diversity in the CFO Role
Airline
Fortune 1000
 Women
10%
8%
 Men
90%
92%
External Sources of Some Global Airline CFO Appointments
 Aer Lingus
Bernard Bot
 Air Canada
Michael Rousseau
 British Airways
Nick Swift
 easyJet
Andrew Findlay
 Finnair
Pekka Vahahyyppa
 KLM
Erik Swellheim
 Vueling Airlines
Sonja Jerez
CFO as the Route to CEO?
 Most Recent CEO Promoted from CFO role
7%
 Most Recent CEO Promoted from elsewhere
93%
3 of the Top 10 US Airline CEOs have Finance Backgrounds

US Airlines CEOs with Finance Backgrounds
 Alaska Airlines
 American Airlines
 Southwest Airlines

Brad Tilden
Doug Parker
Gary Kelly
US Airline CEO with Non-Finance Background








Allegiant Air
Delta Air Lines
Frontier Airlines
Hawaiian Airlines
JetBlue Airways
Spirit Airlines
United Airlines
United Airlines
Maurice Gallagher
Richard Anderson
Barry Biffle (President)
Mark Dunkerley
Robin Hayes
Ben Baldanza
(Jeff Smisek)
Oscar Munoz
Commercial
Legal/Operations
Commercial
Commercial
Commercial
Commercial
Legal
Operations
Trends in the Airline CFO Role Overall

Decreasing importance of industry expertise

More and more appointments from outside the industry – best athlete vs.
“industry” function

Increasing geographic mobility of airline CFOs

Increasing trend toward external appointments vs. internal promotions

Long-term secular shift away from accounting & control

Rising importance of treasury/corporate finance, financial planning &
analysis, and corporate development backgrounds

Increasing value of CFO/finance background for CEO appointments
Now what?
What does this mean for
you and your organization?
Our Panel Today
>
>
>
Michael Doersam - Senior Vice President, Group Finance,
Emirates Airline
Hlynur Elisson - Senior Vice President, Finance, Icelandair
Maciej Dziudzik - Chief Financial Officer, LOT Polish Airlines
Panel Discussion
Moderator:
 Michael Bell, Partner- Aviation, Aerospace & Defense, Spencer Stuart
Panelists:
 Michael Doersam, SVP Group Finance, Emirates
 Maciej
Dziudzik,
CFO, Symposium
LOT Polish Airlines
World
Financial
2014
 Hlynur Elísson, CFO, Icelandair
World Financial Symposium 2015
World Financial Symposium 2014
Networking Break
World Financial Symposium 2014
World Financial Symposium 2015
World Financial Symposium 2014
What are the strategies that airlines
should adopt to maximize their returns?
Alex
Dichter
World Financial Symposium 2014
Partner
McKinsey
World Financial Symposium 2015
World Financial Symposium 2014
Panel Discussion
Moderator:
 Alex Dichter, Partner, McKinsey
Panelists:
 Nick
Swift,Financial
CFO, BritishSymposium
Airways
World
2014
 Bill Carroll, SVP Finance, Delta Airlines
 Daniel Ho, CFO, Qatar Airways
World Financial Symposium 2015
World Financial Symposium 2014
Key Takeaways:
High level set of actions for the industry, led by IATA, to
support “Sustained Airline Financial Health”
Michael Doersam
World Financial Symposium 2014
SVP Group Finance, Emirates &
Chairman of IATA Financial Committee
World Financial Symposium 2015
World Financial Symposium 2014