Audit Integrity Updates Airline Corporate Governance Rankings

by: Research Recap

Audit Integrity updates its corporate governance rankings for airlines in a new report. Winners include Hawaiian Holdings, Aegean Airlines, Air France – KLM and easyJet. Not faring so well are SkyWest and Icelandair.

Selected Excerpts:

The Airline industry occupies a particularly vulnerable position. In addition to disruptive events such as 9/11, any factors impacting the general economy – from the declining employment rate to the eruption of Eyjafjallajoekull – severely limit the airlines’ ability to take corrective action for their own survival. They are so susceptible to volatile fuel prices, increasing fees and taxes, the declining passenger base, labor problems, weather, and chronic uncertainty, that analyst Michael Bell recently held them up as a model for lessons in corporate governance to cope with economic stress.

The industry review published earlier this month by the Air Transport Association Office of Economics provides a crystal-clear picture of an industry besieged on all sides, even as the general economy begins to revive.

  • Pretax profits have trended sharply downward since 2007, currently ($16 billion) versus the U.S. corporate average of $6 billion.
  • Airlines did not benefit from the stimulus package.
  • They have received no regulatory or legislative support to help them manage the 2009 oil price bubble driven by oil futures speculation. Despite reductions in service, U.S. airlines spent $16 billion more on fuel in 2008 than in 2007, and $42 billion more than in 2003. For 2010 year-to-date, the price per gallon of jet fuel averaged 136% of the average price from 2001-2009 as trading in oil futures surged.
  • Airfares rose only 10.9% from 1995 to 2001, compared to a 40.7% inflation rate.
  • Leisure travel is the largest segment of airline revenues, and is discretionary. In a slow economy with high unemployment, the public doesn’t travel, or elects shorter trips and other means of transport.
  • Domestic air travel has not recovered from 9/11. Annual passenger revenue in 2009 was $37.5 billion less than the average for the decade 1991-2000. Although international capacity is at an all-time high, domestic capacity in 2009 was the lowest in aviation history.
  • Taxes and airport fees have increased dramatically since 9/11, now accounting for approximately 20% of the ticket price, making it difficult for airlines to maintain a price point acceptable to consumers. In addition to corporate taxes, FAA, Homeland Security, and airport charges were $16.6 billion in 2009.
  • The widespread popularity of discount travel websites forces airlines to cut prices in order to fill empty seats, even as fuel costs rise.

Holding up Southwest Airlines (NYSE:LUV) as a model of good management, Mr Bell offers several lessons to be learned from companies navigating this difficult environment. Lesson No. 1 is to balance the interest of all stakeholders: customers, investors, employees, regulators, suppliers, and others. In other words, don’t jeopardize long-term survival by favoring short-term returns to shareholders which provoke a labor strike, which drives away consumers, which in turn worsens the company’s financial condition.

For details of Audit Integrity’s AGR corporate governance rankings of airlines, click here.