Topic:

Progress Report of Project

Submitted To:
Sir Farman

Submitted By:
Group No. 3 MBS-09-02, MBS-09-23, MBS-09-27

Department of Business Administration

BAHAUDDIN ZAKARIYA UNIVERSITY

SAHIWAL CAMPUS

Introduction
The global financial crises 2008 have affected a series of banks, insurance companies, and global credit markets. By September, 2008 more public corporations had failed and announced to have bankruptcy in the U.S. than in all of 2007. These failures caused crises of confidence that make banks, reluctant to lend money themselves or to any other in the credit market. There are many factors that caused these crises which are the rise and fall of housing market, subprime lending, deregulation in banking industry etc. On October 3, 2008 Federal Govt. passed an Emergency Economic Stabilization Act known as Bailout Bill. This bill is passed to give immediate relief to the failing industries in the United States. There are many examples of Bailout Companies some of which are presented here. Bank of America that received $25 billion in the fall of 2008 through Troubled Assets Relief Program (TARP). Bank also received $20 billion federal bailout from government through TARP on January 16, 2009. It also received a guarantee of $118 billion in potential losses to the company. This additional payment was given after the deal with the U.S. Government to preserve Bank of Americas merger with the troubled investment firm Merrill Lynch. Wells Fargo & Company is an American multinational diversified financial services company. On October 28, 2008, Wells Fargo and Company was the receive of $25 billion of the Emergency Economic Stabilization Act Federal bailout in the form of a preferred stock purchase. General Motors is an auto company. The company served the country in the World War II by paying great wages and by building great cars. But gradually the company goes down, losing market share continually building cars that didnt match with its competitors, so to survive in US GM need help so it ask for help. Its total disbursed bailout commitment was $50,744,648,329 and its first loans came in mid-December of 2008. American Express is a financial services company. American express announced that they are becoming a bankrupt due to credit failure and consumer spending crashing so they decide to drive to in the world of banking in order to financially stabilize them through Govt. bailout. Its total disbursed bailout commitment was $3,388,890,000 and it has won approval from the US Federal Reserve in Nov. 2008, to become a bank holding company in order to qualify for TARP funds. Morgan Stanley was among the eight large U.S. banks to receive the Treasury Department's initial round of capital investments and due to mortgage related losses and some other financial crises they need bailout and its total

disbursed bailout commitment was $10,000,000,000. AIG (American International Group) is a multinational American insurance company. AIG suffered from a liquidity crisis when its credit ratings were downgraded below "AA" levels in September 2008. Government actually given $67.84 billion from a possible commitment of about $69.84 billion, the government owns 80% of the insurance giant. GMAC (now ally financial) is financial services company. GMAC's first aid came in mid-December of 2008, and then it received further aid in 2009. The company was renamed Ally Financial in 2010.Government actually committed to give $16.29billion to the company and actually disbursed $16.29 billion to company. The purpose of this report is to check out the impact of financial crises on the Airlines Industry. We will get annual reports of some selected companies and make debt to equity analysis to show the clear picture of those companies with respect to their operations that in what portion debts are used and where these debts are allocated.

Background of Airlines Industry

As the global economy gradually shifts gears and moves out of recession, the aviation industry has still not been able to fully recover from the crisis that engulfed it in the wake of the oil price hike and financial crises. IATA (International Air Transport Association) director general

Giovanni Bisignani says 2009 will be a "very difficult year for airlines", with revenues expected to fall much more dramatically. Speaking at the organizations annual global media day in Geneva, IATA chief economist Brian Pearce said the current crises in the banking sector and the housing markets would be "driving the outlook". This outlook from IATA includes a $5 billion loss for the industry in 2008, followed by a $2.5 billion loss in 2009. The global recession affects the Airlines Industry in the following ways: High oil prices which has a direct effect on the airline industry During recession there is a permanent change in peoples travel patterns that ensures the industry never easily returns to it pre-recession state. Video conferencing is also become a threat for the industry which reduces travel at a very big extent. The value chain of the industry is also a problem for the industry which are Cost of aircrafts, airport charges and large amount of taxes.

The industry is becoming far more segmented in the terms of customer base. The area of revenue will separate the winners from the losers in the coming years. So to sustain in the industry re-investment is very necessary. Financial institutions are reluctant to give finance in large amount due to financial crises and weak position of industry.

After its nosedive in the recession, the global airline industry is now enjoying far less turbulence. It lost $16 billion in 2008 and $9.9 billion in 2009 but in 2010 the industry brings out a total of $15.1 billion profits. And despite recent predictions of $5.3 billion, the International Air Transport Association (IATA) now foresees a 2011 net industry profit of $9.1 billion. With stable fixed costs, increased passenger numbers and revenues have gone right to airlines bottom lines.

Introduction of Selected Companies

Pakistan International Airlines (PIA) Pakistan International Airlines Corporation commonly known as PIA is the Government owned and flag carrier airline of Pakistan enjoys preferential rights or privileges, accorded by the government, for international and local operations. The airline has its head office on the grounds of Jinnah International Airport Karachi and operates scheduled services to 24 domestic destinations and 38 international destinations in 27 countries across Asia, Europe and North America. Its main bases are at Karachi, Lahore Islamabad/Rawalpindi. PIA faces continuous losses form many years and operates in financial crises. AMR Corporation AMR Corporation was incorporated in 1982. All the operations of AMR fall within airline industry. AMR Principle subsidiary American airline was founded in 1934. Company provide the international services so compete with the international overseas airline companies and also state owned American airlines in terms of schedules passengers and the cargo services within the America and overseas. The company is follow the various laws and government regulation about health and safety of the passengers, and also as company is labor intensive so amendable agreement about their wages and salaries also about the incentives and benefits. Corporation faces losses from past 3 years.

British Airways British Airways is one of the worlds leading and UKs largest international scheduled airline. The main business activities of British Airways include the international and domestic scheduled air services for the carriage of passengers, freight and mail and the provision of ancillary services. British Airways flying up to 148 destinations at specific and well-suited time, to the most suited airports. Company operating in loss from past 3 years.

Literature Review
Macario, Voorde (2009) Increase in economic activities, industrial production and expansion of trade relations has resulted in an ever-greater need for transport. Within the transport sector, air transport seems to be more sensitive to the changes occurred in this dynamic environment than other modes. By the end of 2008, the worldwide financial crisis had increasingly become a global economic crisis. Paul S. Ross. Many airlines have failed in the current economic crisis, some through no fault of their own. All told, at least 30 airlines had dropped badly in 2008. Some airlines went bankrupt, others merged to survive, while a handful managed to keep operating reasonably well through the downturn. Unpredictable challenges and change are the reasons of this downturn in a business that is so sensitive to economic, regulatory, safety, environmental and other external influences beyond managements absolute control. Macario, Voorde (2009) The consequences of this crisis for the transport sector especially for the airline industry are; a strong decrease of transport demand because of less transported passengers and Goods, a dramatic reduction of supply (e.g. through bankruptcies and reduction of frequency), changed transport flows (e.g. through mergers of routes and loops), lower company profits and a dramatic worsening of companies financial situation, changed strategies. Algoe (2005)

Increases in fuel prices affect the airlines in two ways; the cost of fuel has an direct impact on the cost of operation, and fuel cost increases have repeatedly happened economic recessions, which in turn result in a substantial decline in demand for air travel and air cargo. In US 9/11was major cause of reduce in the traveling and airline become bankrupt as they their revenue was not meet their expenses, huge losses has to bear by the company. Snyder (2008) Equate the financial crises with down time of the airline industry, due to increase in the fuel prices the demand decreases for the air travel. As oil prices and travel demand moving in opposite direction then it would make a ugly ending of airline industry. Winslow (2008) US stock market is in crisis

mode and some of America's greatest companies have lost almost all of their shareholder's value and most of the airlines become bankrupt. Mostly hit hardly was the US airlines there was the back order occur and also experience sell-off their stock because price of fuel increases. R. Ghosh (2010) The past decade was a nightmare for airlines firms around the world but now appears poised to come back as well in coming decades. Micheal. The primary risks facing the industry fall into four categorieshazard, strategic, financial, and operational. In general, airline risk management has been limited to hazard risk, such as the protection of physical assets, and significant attention of late has been given to safety and security issues. There has also been some experimentation with hedging financial risks, such as foreign currency exchange rates, interest rates, and fuel prices.

Bibliography
Algoe, S. (2005). How a rise in fuel prices affect the airline industry. Ghosh, P. R. (2010). Global airline industry poised to soar in coming decades. Macario, V. (2009). The impact of the economic crisis on the EU air transport sector. Paul S. Ross. (n.d.). Building Brand Value and Influence in the Airline Industry. The Yellow Papers Series . Synder, B. (2008). Arilines May Weather Financial Crisis Well. Thomas, J. (2010). 2010 Perspective of Global Airline industry. Industry Directory . Winslow, L. (2008). Airlines Hammered by Financial Crisie Big Time. Zea, M. (n.d.). Is Airline Industry Risk Unmanageable? Mercer on Travel and Transport .