Sunday, 16 March 2014


Somehow I always fall asleep every time I go through the financial reports and look at the numbers and all the financial jargons. I wonder if there is a better way of understanding the picture of a company without dwelling too much into numbers. Hence, I decide to read through business operation and developments over the years. Besides, I enjoy reading better than looking at data.

I find it is interesting that most of annual reports for aviation industries do put a lot of emphasis on general and external factors impacting its profitability. El Air, every year, "blames" the same factors:

(i) High competition from other airlines, especially from low-cost airlines
(ii) High fuel prices leading to higher input costs
(iii) Fluctuation in exchange rate
(iv) Unusual events such as epidemic, outbreaks or terrorists attacks etc.

Not a lot was mentioned in relation to the way the airlines were managed and the way that the board of directors made decisions, set policies and directions for the airlines. For example, in its annual reports, it blames interest rate increase affected its profitability. But what about admitting that the board has made the wrong decision in taking out a significant loan amount at VARIABLE rates to finance for new aircraft. Why did not they think about fixing the rate? Why did not they think about using interest rate swaps or futures to lock in the rates? I guess, it is commonsense that noone like to accept they make mistakes. But why make the same mistakes every year for the past 3 years???

Below is the list of external and internal risks factors and the effect of each risk on company's profitability (ranking as minor, moderate and major).

Interestingly enough, the company ranks majority of its specific-company risks are of material effect on profitability. However, there are not many strategic policies in place to overcome those moderate and major risks. Instead, years on years, it is convenient to blame of external factors for making losses. Perhaps, it is an industry standard which every other airlines does the same thing?


  1. Very interesting insights. The company I'm studying is China Eastern Airline (CEA). I have found, as you point out that the airline industry seems to lay blame on external factors. I suppose this is due to the marketing uses associated with the annual reports, I suppose if you are trying to attract interest in your company you don't want to allude to possible shortfalls. CEA like El Al talks about fuel consumption, economic and political developments and also the exchange rate. You mention that El Al says that interest rate increases affected its profitability. This is something that CEA has pinpointed as an area to reduce costs especially with their recent order of 70 Airbuses.

    I suppose one way of looking at the fact that a majority of the industry risks are of minor effect is because it would be feasible to suggest that as these effects are industry wide the competition are facing them as well, although I don't think this concerns the company's profit. I may have to think a little more on that one.

    Really liking the blog!

    Cheers Matt

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