Tariq Project Report-24!06!2011

Final Year Project
Factors Affecting Profitability Of Airline Industry Of Pakistan

Submitted by Muhammad Tariq Ali Khan (52286) SUPERVISOR Syed Danish Aftab Zaidi
PROJECT REPORT SUBMITTED TO PAF-KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY
II. Factors Affecting Profitability of Airline Industry of Pakistan
TABLE OF CONTENTS
Letter of Approval:........................................................................................ iv Letter of Transmittal:.......................................................................................v Letter of Authorization:...................................................................................vi Acknowledgement:........................................................................................vii Abstract:....................................................................................................... viii 1.0.0 Introduction:.........................................................................................01 1.1.0 Background to the Problem:..............................................................01 1.2.0 Purpose of the Research Project:.....................................................02 1.3.0 Hypothesis::.......................................................................................02 1.4.0 Significance of Research Project......................................................03 1.5.0 Assumption of Project:.......................................................................03 1.6.0 Limitations:.........................................................................................03 1.7.0 Delimitations:.....................................................................................04 2.0.0 Literature Review:................................................................................05 2.1.0 Crafting and Executing Strategy:.......................................................06 2.1.1 Revenue Management:.....................................................................06 2.1.2 Managing The Fleet , Finance & Assets:..........................................07 2.1.3 Managing Staff:.................................................................................07 2.1.4 Fleet Utilization:.................................................................................07 2.1.5 Profitability and Load Factor for Airline:............................................08 3.0.0 Research Design and Methodology:.................................................09 3.1.1 Population of the Research Project:................................................09 3.1.2 Sampling Methods:..........................................................................10 3.1.3 Sample:............................................................................................10 3.2.0 Instrumentation:...............................................................................10 3.2.1 Data Collection:...............................................................................11 3.2.2 Ethical Consideration:......................................................................11 3.4.3 Data Presentation: ..........................................................................12 3.2.4 Operational Definition of Research Variables:................................12
TABLE OF CONTENTS
II. Factors Affecting Profitability of Airline Industry of Pakistan 1
3.2.5 Procedure for testing hypothesis:..............................................13 4.0.0 Data and Interpretation of Results:....................................................14 4.1.0 Research Variables.......................................................................... 14 4.2.0 General Description of Data:.............................................................14 4.3.0 Data Presentation:.............................................................................15 4.4.0 Results of Hypothesis........................................................................20 5.0.0 Conclusion & Recommendations:.....................................................26 5.1.0 Conclusion:........................................................................................26 5.2.0 Suggestion of further Studies:...........................................................28
Annexure :.....................................................................................................29 References:....................................................................................................34
Letter of Approval
Project Title : Factors Affecting Profitability of Airline Industry of Pakistan
By
: Muhammad Tariq Ali Khan MB-2-07-52286
Supervisor
: Syed Danish Aftab Zaidi
Academic Year
: Spring 2011
This Research Project has been approved by the Board of Advanced Studies at PAF KIET. The project is being submitted for the partial fulfillment of the requirements for the degree of Master of Business Administration.
Approval Committee:
Mr. Syed Danish Aftab Zaidi (Supervisor) (Director Academics)
LETTER OF TRANSMITTAL
To Mr. Syed Danish Aftab Zaidi PAF Karachi Institute of Economics & Technology City Campus Karachi. June 30, 2011 Respected Sir: This project has been prepared with the experience and knowledge I have acquired while studying in the institute and the methodologies learned during the course of conducting business research. I have tried to fulfill all requirements to the best of my knowledge as per the advice and guidelines provided by you. I hope that my report will rise to the expectation of yours.
Sincerely,
Muhammad Tariq Ali Khan
52286
LETTER OF AUTHORIZATION
JUNE 30, 2011
Dear Reader
I have been authorized by Mr. Syed Danish Aftab Zaidi to prepare Report on Factors Affecting the Profitability of Airline Industry of Pakistan.
This project has been prepared with the experience and knowledge I have acquired while studying in the institute and the methodologies learned during the course of conducting business research.
Sincerely,
Muhammad Tariq Ali Khan
52286
Acknowledgement
First of all, I am deeply grateful to Almighty Allah for enabling me to accomplish this research project. I am deeply indebted to my supervisor Mr. Syed Danish Aftab Zaidi of the PAF KEIT whose guide lines, suggestions and encouragement helped me to complete this report. I also want to thank Sqd. Ldr. Mr. Abdul Hameed for all his sincere help and assistance in the final version of the paper for English style and grammar, correcting both and offering suggestions for improvement. At the end, I would like to give my special thanks to my family whose patient love enabled me to complete this work.
III. Factors Affecting Profitability of Airline Industry of Pakistan
Abstract
This study was carried out to examine the relationship between the Profitability and the other factors of Airline Industry of Pakistan. The data used was collected from various annual Financial reports of Pakistani Airlines, data recorded by P.C.A.A. (Pakistan Civil Aviation Authority ), Internet and Articles & Journals from 2005 until 2010. The data was analyzed using statistical data analysis (Regression analysis). The dependent variable was the Net Profit and set of independent variables comprised of Operating Cost, Flights per Aircraft, Expenditure per Flight and No. of Passengers per Flight. The main objectives were to examine the influence of independent variables on the Profitability of Airline Industry of Pakistan. The findings reveal that Operating Cost, Flights per Aircraft, Expenditure per Flight and No. of Passengers per Flight have strong relationships with the Profitability of Airline industry of Pakistan. Finally, this study confirmed that Operating Cost and No. of Flights per Aircraft are the most dominant factors that influence the Profitability of Airlines of Pakistan.
III. Factors Affecting Profitability of Airline Industry of Pakistan
1.0.0 INTRODUCTION:
The airline industry has altered the life in which people live and conduct business by shortening travel time. The concept of distance has been changed. Now it is not considered impossible to visit and conduct business which was considered remote earlier. (Jane's airlines & airliners by Jeremy Flack, 2003) states that airline main aim is to provide air transport service to passengers & freight forwarders. Airlines supply services by owning or leasing their own aircrafts. According to (Robertson & David, October29, 2008 ) its an intensely competitive market for an airline industry. During the past years, the air line industry has completely changed their business strategies; they are now expanding their domestic and international services. Previously airline industry was generally owned by the government however in most of the countries, all major airlines have been privatized. (DELAG, 22-08-2010) Deutsche Luftschiffahrts states that Aktiengesellschaft was the world's first airline. It was founded on November 16, 1909 with government assistance, The five oldest airlines are Netherlands' KLM, Colombia's Avianca, Australia's Qantas, Czech Republic's Czech Airlines, and Mexico's Mexicana. KLM first flew in May 1920, while Qantas was founded in Queensland, Australia, in late 1920.
1.1.0 Background to the Problem:

Pakistan airline industry is still in growth phase, it has to face a lot of competition from other regional airlines, The type of aircraft is a factor which must be considered while selecting for the airline fleet. The type of aircraft must be appropriate to suit the requirement for different markets. It must also be economical while considering the distances involved. The distance covered in a trip will also influence traveler behavior. The other consideration such as convenience to approach the airports, frequency of service, and intermediate stops also matters.
1
The cost of air travel depends on the length of the trip, Cost structure charged up for an airline service is upon per mile flown. But due to uncertainty in the business with respect to fares and limited routes a lot of airlines shut down their business. The national airline is also not in good condition. As investors and government arent taking any interest therefore it is facing losses since last few years. As a result, at present in Pakistan only three airlines are left in the business, i.e Pakistan international airline, Shaheen Air international and AirBlue, which are striving hard to give maximum services under constraint resources.
1.2.0 Purpose of the Research Project:

The main purpose of this research is to find out factors affecting the profitability of airline industry. How airlines are managing their Finance. How airlines are managing their Fleet. How airlines are managing their Employees & Services.
1.3.0 Hypothesis:
HO-1: There is significant relationship b/w OPERATING COST and profitability of the airline. (1 = 0) HO-2: There is significant relationship b/w FLIGHTS PER AIRCRAFT and profitability of the airlines. (2 = 0) HO-3: There is significant relationship b/w EXP. PER FLIGHT and profitability of the airlines. (3 = 0) HO-4: There is significant relationship b/w PASSENGERS PER FLIGHT and
profitability of the airlines. (4 = 0)
1.4.0 Significance of research project:
I.
Factors Affecting Profitability of Airline Industry of Pakistan
This study was conducted to find out the facts and the attributes which affect the overall efficiency / performance of an airline. This study also high lights the importance and the influence of these attributes as these are the basic parameters / indicators which reflect the health of an airline. These attributes even estimate the future of an airline whether it would survive in the current resources even though their inter-correlation which will help in evaluation of weakness and strength of the organization are also being calculated. Whereas, the dependant and independent variables are found it as they provide overall performance and help in formulating the future plans or future project viability.
1.5.0 Assumptions of project:

Before proceeding ahead it has been assumed that: Un-biased respondent data should be used. Competition between operating airlines must be fair. External factors (such as cultural, political demographical etc) should remain same. Theres no direct influence of government policies on any airline performance.
1.6.0 Limitations:
This study has some limitations:1. In accordance with essential service act it is very difficult to gather data and responses from employees as all operating airports work under Pakistans ministry of defense. 2. Due to the negligence towards this sector Literature with reference to the Airlines arent available.
I.
1.7.0 Delimitations: 1. Being an employee of CAA, its quiet convenient for me to get data and
records of all airlines to an extent as CAA deals with all airlines and the record. 2. It is pertinent to mention here that due to the nature of my duty, required information of airlines was easy to get from different airlines employees.
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2.0.0 Literature review:

Its been a decade that airline industry growth is at its peak but mostly all the airlines are consistently unprofitable. There are a number of aspects to run a successful airline. Many steps are taken towards the betterment of this airline business but mostly all of them are hitting back which are resulting great losses in the financial statements. According to ( Doganis Rigas, 2002 ) an Aviation Consultant and Strategy Adviser of Airlines there are three main aspects to make an airline profitable which are the unit costs, the unit revenues or yields and the load factors. To make a profitable combinations airline managers should make adjustments in costs, fares and load factors. Doganis states that airline industry are characterized by: short run marginal cost Marginal cost of carrying an extra passenger on a flight An airport passenger charge, The cost of ground handling and the fuel burnt as a result of extra weight.
These costs are short, if the seats remain unsold, the revenue will be lost forever. Therefore, he suggests that each airline must maximize revenues and their load factors. Thus, it was suggested by him that Combining passenger yields with low cost and relatively high load factors can be easily converted into profits. He emphasizes that low cost does not provide big profit interacting with low revenues, nor does high cost necessarily mean low profits if the revenues are high enough. Doganis ended his strategy by giving an opinion to start revenue management process, in this process profits are maximized by cutting down tickets pricing strategy and tariffs.
I.
2.1.0 Crafting and Executing Strategy

According to (Thompson, Arthur A., Jr., A. J. Strickland, and John E. Gamble. 2005.) Success factor of an airline industry are usually its competitive factors which rejoins and motivate all the industry members to be passionate at the work place. A success factor have a direct and several possible uses but according to strategy analysis, success factors are an analytical tools for examining the characteristics of the industry. According to (Richard McCabe, PhD, 2006) an airline, should be strong and focused on four general areas which could result in their success which are 1) Attracting customers 2) Managing its fleet 3) Managing its people 4) Managing its finances.
2.1.1 Revenue management:

(McGill and van Ryzin 1999) states that, Revenue management is also a vital factor for success, as many airlines keep an eye on their RM systems and related information technology to determine the industrys future success and all of these industries invest their money heavily for such systems. According to (Talluri and van Ryzin, 2004), revenue management has possessed a lot of attention in the airline business. According to (Kimes 1989) the major objective of revenue management is to give off the correct inventory to the correct recipient, on the required time and place. According to (Philips 2005 & McGill and van Ryzin 1999) Inventory allocation and dynamic pricing are the most common techniques for revenue management.
I.
2.1.2 Managing the Fleet, Finance & Assets.

Fianc department of any business is the most important and the complex part. The same goes with the airline financing as all the financial matters take place on very high level. According to (Rigas Doganis, Routledge, 2001) Airlines dont only purchase aircraft and engines regularly but they also have to take long-term decisions to meet the demand of their market as well as they have to be relatively economical while operating and maintaining the fleet.
2.1.3 Managing Staff.

According to (Richard McCabe, 1998), productivity of an airline can be calculated through there management. Effectiveness of the employees clearly shows how well is passenger been treated on the board. Reports give a clear view of airline employees performance.
2.1.4 Fleet utilization:

Airplane utilization is a key performance indicator for an airline operations. Airplane utilization depends upon following elements such as,
airplane design features and characteristics, airline maintenance programs, airplane technical reliability, airline business philosophy, market demand characteristics, Availability of trained labor. point-to-point service and faster airplane turnaround.
Improved and performance base airline utilizations helps on fixed ownership costs over an increased number of trips, reducing costs per seat-mile or per trip. (Richard M.McCabe, 2006 ).
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2.1.5 Profitability and the load factor for airlines

The result indicates that there is profitability and the growth of load factor cause fatalities / accidents. Causality tests show that profitability does not cause fatalities/accidents. ( Adrangi, Chow and Raffiee 1997) &( Rose 1992).
I.
3.0.0 Research Design and Methodology

Here we will observe major factors affecting the profitability of airline industry while going through that data for the period of 2005 2009. Population of our study is based on 20 Airlines which are providing their services in Pakistan, out of which 17 are foreign airlines and 03 are locally operated. In this study will be collect and consider only those airlines which are being operated from Pakistan. The main source of data as follows:- Data recorded by P.C.A.A. (Pakistan Civil Aviation Authority ) - Annual Financial Reports of different Airlines. - Internet. - Articles & Journals. In this study, we will use both qualitative and quantitative approaches.
3.1.1 Population of the Research project

Population of our study is based on 20 Airlines which are providing their services in Pakistan, out of which 17 are foreign airlines and 03 are locally operated. A target population approach is used to identifying the local airlines, the static data used in this research report was obtained through company website. There are about 20 foreign and regional airlines operated in Pakistan from different countries of the world, such as:a) Air Blue b) Air Arabia c) Air China d) Biman Baangladash e) Cathypacific Airline f) Emirates Airline g) Etehad Air h) Fly Dubai i) Gulf Air j) GMG Air
I. Factors Affecting Profitability of Airline Industry of Pakistan 1
k) Iran Air l) Iraq Air m) Malaysian Airline n) Oman Air o) Pakistan International Airline p) Qatar Airways q) Shaheen Air International r) Saudia Air s) Thai Air t) Turkish Air
3.1.2 Sampling methods:

The convenience sampling method was adopted to determine the factors affecting the profitability of Pakistani Airlines, It is a non-probability sampling method . it is a least expensive of all sampling methods. In this method, we conveniently can add and delete our sample on the bases of accessibility and availability of data.
3.1.3 Sample:
To find out the factors affecting profitability of Airlines in Pakistan, the said research considered only (03) Airlines Currently operating in Pakistan such as Pakistan International Airline (PIA), Airblue and Shaheen Air International(SAI) from our targeted population. We will observe different ratio analysis in our study Such as:
Flights per Aircraft. Expenditure per Flight, Passengers per Flights, Operating Cost per Flight.
We will collect and analyze the data for the period of 2005 2009. The time frame of this research if 6,months. The sample selected for this research according to financial availability of the targeted companies.
3.2.0 INSTRUMENTATION
My study is purely based on statistical data
analyses. Study is about the factors that affect the profitability of Airlines operating in Pakistan. Best analysis tool for the study is Regression.
3.2.1 DATA COLLECTION:

The data used in this study was acquired from different sources. The main source of data is as follows: Data recorded by P.C.A.A. (Pakistan Civil Aviation Authority ) Annual Financial Reports of different Airlines. Internet. Articles & Journals. Passengers
The period covered by the study extends to five years starting from 2005-2010
3.2.2 ETHICAL CONSIDERATION:Ethical consideration are basically to protect the rights of research participants.
The undersigned assures that a procedure will be adopted to consider all relevant ethical issues. The results which will arise from my analysis will be based upon my independent judgment. And they will not affect the activities of the Airline industry. Following are some of the ethical consideration that I will try to follow.

All the participants are voluntary The research participants will be fully informed about the procedures The study will not put any participants in a situation where they might The information regarding the subject study will not be made available Tthe participant will remain anonymous where ever and as far as The participants will be provided with all treatment or program that
and risks involved in the research be at risk of harm both physical and psychological. to anyone who is not directly involved in the study. possible throughout the study. have beneficial effects.
3.2.3 Data Presentation

This research project would be done in the form of
I.
Charts Graphs
Factors Affecting Profitability of Airline Industry of Pakistan 3
Figures Tables
Tools The tools which will be used to complete the research are as under:
Microsoft Excel. Microsoft Word. Microsoft PowerPoint.
3.2.4 OPERATIONAL DEFINAITON OF RESEARCH VARIABLES. Net profit

Net profit is calculated by subtracting an airlines total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year). It is also called net income or net earnings.
Operating Cost:
An expense incurred by the Airline in transacting normal operations. Operating
expenses include wages for employees, research and development ,administrative and selling expenses but exclude interest, taxes, and cost of goods sold.
Flights per Aircraft:

It means that how many flights are carried out by a single Aircraft in the year. It is calculated by dividing total no. of flight in one year by total No. of A/C.
Expenditure per Flight:

it means how much is the expenditure of Airline per flight. It is obtain by dividing total expenditure by dividing by total No. flight in one year.
Passengers per Flight:

It means how many passenger had travelled by each flight. It is obtain by dividing total No. of passengers by total No. of flight in one year.
3.2.5 Procedure for testing hypothesis:
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The Regression analysis is a statistical method used to describe the nature of the relationship between variables, that is, positive or negative, linear or nonlinear. Applications of regression analysis exist in almost every field. In economics, I will be using regression analysis for the purpose of hypothesis Testing. The dependent variable will be an Profitability of the Airline and the independent variables will be the Operating Cost, Flight per Aircraft, Exp. Per Flight and Passengers per Flight and other factors that would affect the air lines expenditure patterns.
4.0.0
Data Analysis & Interpretation of Results.
In this chapter, the collected data from different sources Such as :(a) Data recorded by P.C.A.A. (Pakistan Civil Aviation Authority ) (b) Annual Financial Reports of different Airlines.
(c) Internet (d) Articles & Journals has been calculated in average through statistical tools. The values of variables including, Net Profit, Operating Cost, Flights per Aircraft, Exp. Per Flight and Pax. Per Flight have been separately calculated . In his study, we wil l use quantitative approaches. Best analysis tool for the study is Regression because It shows the relationship b/w the variables in a better way. 4.1.0 RESEARCH VARIABLES. Following are the research variables which are used in this study :a) Net Profit b) Operating Cost c) Flights per Aircraft d) Exp. Per Flight e) Pax. Per Flight ( Dependent Variable )
( Independent Variable ) ( Independent Variable ) ( Independent Variable ) ( Independent Variable )
4.2.0 General Description of data :

Variables Net Profit Operating Cost Flts. Per Aircraft Exp. Per Flt Pax. Per Flt. Means -4754.55 16870.41 119 1042 170.47 Median 82.88 875.95 1071 627 187.6 Standard Deviation 8402.82 28144.51 447.53 779.32 48.62 Standar d Error 4851.37 16249.24 258.38 449.94 28.07 Range 14570.02 48999.86 871 1383 92.6 Min -14455.27 361.71 814 558 115.6 Max 114.75 49367.57 1685 1941 208.2
This table gives the descriptive statistics of Airline Industry of Pakistan for the period of five years from 200509. The table state that the average value of Net Profit is ( 4754.55) million and the standard deviation is 8402.82. the minimum and maximum values of Net Profit is (14455.27) million and 114.75 million respectively. The average value of Operating Cost is 16870.41 million and the minimum and maximum value of Operating Cost is 361.71 million and 49367.57 million. The average No. of
Flights per Aircraft is 119 and the minimum and maximum No. of Flights per Aircraft is 814 and 1685 and the standard deviation of Flights per Aircraft is 447.53% this mean that No. of Flights can deviate from mean to both sides by 447.53%. Information from the descriptive statistics also indicate that the mean of Exp. Per Flight is 1042 ( thousand ), the standard deviation is 449.94% which means that the Exp. Per Flight can deviate from mean to the both sides by 449.94% and the minimum and maximum value of Exp. Per Flight is 558( thousand ) and 1941(thousand). The average No. of Pax. Per Flight mean is 170.47 passengers, standard deviation is 48.62 which means that No. of Passengers per Flight can deviate from mean to the both sides by 48.62% and the minimum No. of Passengers per Flight is 115.6 and maximum No. of passenger per flight is 208.2
4.3.0 Data Presentation
Net Profit
Air Line PIA Airblu e SAI 2009 582243100 0 361013000 93223288 2008 3588015700 0 51917000 60313536 2007 1339870600 0 89914000 173518880 2006 1276342000 0 152994000 67403616 2005 4411657000 -82067000 19943304
My data analysis shows that in case of PIA, net profit is decreasing day by day due to
certain decisions taken by the government as it is semi government airline. PIA has faced great loss during 2007-08 due to excessive operating cost, fuel crises and over employment. As far as air blue is concerned, air blue is maintaining its net profit. Air blue came into existence in 2005, the net profit of that year was in negative however data analysis revealed that later on they have maintained their fleet well and gradually increased their net profit. The results show that they are in progress and maintaining profit.
Operating Cost
Air Line PIA Airblu e SAI 2009 9862876000 0 581351000 1267179000 2008 7208499000 0 411805000 1049809000 2007 7176415000 0 417902000 772820000 2006 7916437000 0 286319000 712312000 2005 6707558000 0 141149000 577630000
Operating cost of PIA is excessively increasing from the day one due to over employment, not using resources properly, less fuel hedging. PIA has also inducted 12 new ATRS in place of Fokkers . AIR blue and Shaheen airlines have also faced increase in operating cost however it is manageable.
Flights per Aircraft

Air Line PIA Airblu e I. 2009 1028 1775 2008 927 1598 2007 693 1820 2006 698 1453 2005 724 1781 1
SAI
1007
1015
1049
1186
1098
In case of flight per aircraft, Airblue is maintaining high efficiency due to proper use of fleets, maintaining proper schedules and selective routes. While in this case PIA is in average position whereas Shaheen airline is facing problems.
Expenditure per Flight

Air Line PIA Airblu e SAI 2009 1912 858 699 2008 2244 801 664 2007 2079 564 625 2006 1963 404 593 2005 1508 163 553
In case of PIA, expenditure per flight is very high as some of the routes are made mandatory by government whether the routes are unprofitable or not.
In case of air blue and shaheen as they are private airline, they have very selective routes especially in coastal areas. As a result they have lower rate of expenditure per flight. As compare to PIA.
Passengers Per Flight

Air Line PIA Airblu e SAI 2009 107 217 156 2008 112 220 169 2007 127 210 212 2006 118 216 208 2005 114 178 193
Air blue passenger per flight ratio is very attractive as they have maintained attractive and economical prices, better services, time schedules. 35 % of PIA s fleet based on ATR this is the main reason that their passenger per flight ratio is low. Results also show that Shaheen airline has not been able to manage their fleet properly and their flight cancellation is also very high.
4.4.0 Results of Hypothesis 1:

HYPOTHESIS FOR OPERATING COST AND NET PROFIT
H-O: There is significant relationship b/w Operational cost and profitability of the airline.( = 0) H-1: There is no significant relationship b/w Operational cost and profitability of the airlines. ( 0)
Statistically:
H0:1=0 HA: 1 0 I. Factors Affecting Profitability of Airline Industry of Pakistan 1
SUMMARY OUTPUT
Regression Statistics 1. Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df 1. Regression Residual Total 00 1. 00 2. 00 Coeffici ents 284. 15 (0.3 0) 3.44 7,1 84.53 141,214,76 7.97 84.53 SS 141,207,58 3.44 7,1 MS 141,207,58 4.38 F 19,65 Significan ce F 0.0 0454 00 1. 00 1. 00 84. 76 3. 00
Standard Error 60.71 0.00213 4.68
t Stat (1 40.19)
P-value 0.13 0.0045 3)
Lower 95% (487.2 (0.3 3)
Intercept operating Cost
Upper 95% 1,055 .53 (0 .27)
Dependent Variable: Net Profit Independent Variable: Operating Cost.

Y = a + bX After putting the values of the result the equation will become as under:Net Profit = 284.15 0.30x
Interpretation of the Result:
The regression analysis shows, the
correlation b/w the Net Profit and Operating Cost is 100% and there is 100% of variation in Net Profit ( dependent variable ) is explained by the Operating Cost ( independent variable ) which shows the relationship b/w Net Profit and Operating Cost is very strong. The F value of the regression model 0.00454. The slope of the Operating Cost is negative it means when the operating cost will increase ,the Net profit will decrease. The coefficient of Operating cost is (0.30)
is found statistically
significant , because F- value 19654.38 is greater than the significant value of
which means that the amount of as change in the predicted value of the Net Profit associated with a one unit change in the value of the Operating Cost . P-value is 0.0045 which is less than 0.05 it means that p-value lies in the rejection area so we will reject the Null Hypothesis.
2:
HYPOTHESIS FOR FLIGHTS PER AIRCRAFT AND NET PROFIT
H-O: There is significant relationship b/w FLIGHTS PER AIRCRAFT and profitability of the airlines.( = 0) H-A: There is no significant relationship b/w FLIGHTS PER AIRCRAFT and profitability of the airlines. ( 0)
Statistically:
H0:2=0 HA: 2 0
SUMMARY OUTPUT
Regression Statistics 0 Multiple R R Square Adjusted Square R .06 8,135. Standard Error Observations 48 3 .00 .73 0 .53 0
ANOVA df 1 Regression Residual Total .00 1 .00 2 .00 .30 66,186,082 .67 141,214,767. 97 SS 75,028,685 30 66,186,082. 67 MS 75,028,685. .13 F 1 Significanc eF 0 .48
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Intercept Flts per A/C
Coefficien ts (21,038.9 7 13 .69
Standard Error 16,00 1.52 1 2.85
t Stat ( 1.31) 1.06
Pvalue 0 .41 0 .48
Lower 95% (224,356.6 6) (149. 64)
Upper 95% 182,278. 71 177 .01
Dependent Variable: Net Profit Independent Variable: FLIGHTS PER AIRCRAFT

Y = a + bX After putting the values of the result the equation will become as under:Net Profit = - 21084.97 + 13.69x
Interpretation of the Result: The regression analysis shows, the

correlation b/w the Net Profit and Flights per Aircraft is 73% and there is 53% of variation in Net Profit ( dependent variable ) is explained by the Flights per Aircraft ( independent variable ) which shows the relationship b/w Net Profit and Flights per Aircraft is not strong. The F value of the regression model is found statistically significant , because F- value 1013 is greater than the significant value of 0.48 Beta is 13.69. It means that the slope of independent variable (Flights per Aircraft ) is positive, when the Flights per Aircraft will increase the Net Profit will also increase. P-value is 0.48 which is > then 0.05 it means that p-value lies in the accept ion area so we will accept the Null Hypothesis.
3:
HYPOTHESIS
FOR EXPERDATURE PER FLIGHT AND NET PROFIT
Statistically:
H-O: There is significant relationship b/w EXP. PER FLIGHT and profitability of the airlines.( = 0) H-1: There is no significant relationship b/w EXP. PER FLIGHT and profitability of the airlines. ( 0)
H0:3=0 HA: 3 0
SUMMARY OUTPUT
Regression Statistics
I.
Multiple R R Square Adjusted Square Standard Error Observations R
.00 .00 .00 .92 .00
1 1 1 501 3
ANOVA df Regression Residual Total .00 .00 .00 1 1 2 91 06 97 SS 140,962,847. 251,920. 141,214,767. MS 140,962,847. 251,920 F 55 559. Significanc eF 0.0 3
91 .06
Intercept Exp. Per Flt
Coefficient s 6,470. 09 (0. 01)
Standard Error 555 .93 0.00
t Stat .64 .65) 11 (23
P-value 0. 05 0. 03
) )
Lower 95% (593.65 (0.02
Upper 95% 13,533. 83 (0. 00)
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Dependent Variable: Net Profit Independent Variable: EXP. PER FLIGHT

Y = a + bX After putting the values of the result the equation will become as under:Net Profit = 6470.09 - 0.01x

correlation b/w the Net Profit and Exp. Per Flight is 100% and there is 100% of variation in Net Profit ( dependent variable ) is explained by the Exp. Per Flight ( independent variable ) which shows the relationship b/w Net Profit and Exp. Per Flight is very powerful. The F value of the regression model is found statistically significant , because F- value 559.55 is greater than the significant value of 0.03. The slope of the Exp. Per Flight is negative it means when the Exp. Per Flight will increase ,the Net profit will decrease. The coefficient of Exp. Per Flight is (0.01) which means that the amount of as change in the predicted value of the Net Profit associated with a one unit change in the value of the Exp. Per Flight. P-value is 0.03 which is less than 0.05 it means that p-value lies in the rejection area so we will reject the Null Hypothesis.
4:
HYPOTHESIS
FOR PASSENGER PER FLIGHT AND NET PROFIT
H-O: There is significant relationship b/w PAX. PER FLIGHT and profitability of the airlines.( = 0) H-A: There is no significant relationship b/w PAX. PER FLIGHT and profitability of the airlines. ( 0)
Statistically:
H0:4=0 HA: 4 0
SUMMARY OUTPUT
Regression Statistics Multiple R R Square 0.98 0.96
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Adjusted Square
R 0.91 2,49 5.46 3.00
Standard Error Observations ANOVA
df Regression Residual Total 1.00 1.00 2.00 21
SS 134,987,461. 21 6,227,306. 76 141,214,767. 97 .76
MS 134,987,461. .68 6,227,306
F 21
Significanc eF 0.13
Intercept Pax. Per Flt
Coefficients (33,557. 09) 16 8.97
Standard Error 6,35 2.32 3 6.29
t Stat ( 5.28) 4.66
P-value 0.12 0.13
Lower 95% (114,270.6 1) (292. 17)
Upper 95% 47,156. 43 630 .12
Dependent Variable: Net Profit Independent Variable: PAX. PER FLIGHT

Y = a + bX After putting the values of the result the equation will become as under:Net Profit = -33557.09 + 168.79x

correlation b/w the Net Profit and Pax. Per Flight is 98% and there is 96% of variation in Net Profit ( dependent variable ) is explained by the Pax. Per Flight ( independent variable ) which shows the relationship b/w Net Profit and Pax. Per Flight is very strong. The F value of the regression model is found statistically significant , because F- value 21.68 is greater than the significant value of 0.13. Beta is 168.97 The slope of PAX. PER FLIGHT is positive when the Pax. Per Flight will increase the Net Profit will also increase. P-value is 0.13 which is > then 0.05 it means that p-value lies in the accept ion area so we will accept the Null Hypothesis.
I.
5.0.0 Conclusion and Recommendations

Here we had observed major factors affecting the profitability of airline industry. We had collect and analyze the data for the period of 2005 2009. Population of our study is based on 20 Airlines which are providing their services in Pakistan, out of which 17 are foreign airlines and 03 are locally operated. So that the data set analyzed in this study had collected and consider only those airlines which are operated from Pakistan. In this section of the project, the following areas are further to be discussed:
1- Discussion: Discussing about summary of findings/ results 2- Implementations: Applied different methods to find out how effectively and
efficiently airlines are managing their Finance, Fleet, Employees & Services in order to improve/ enhance their profitability. 3- Conclusion: To summarizing the main area covered in the report, further comments and judgment 4- Recommendations: Giving suggestions to improve the profitability. and study
about what is left for future to be further explored. 5. Suggestion for further studies. :Revenue, operating cost and fleet utilization must be consider for further study, as far as my project results/study shows we/Pakistan is lacking in these major areas.
5.1.0 Conclusion:
My research study results reveals that Pakistan is effectively using its resources in airline industry but lacking behind in some areas where it need more focus for improving its airline industry s well as its economy as airline industry plays major role in any countrys economy. Research shows that factors such as Operating Cost, Flts per Aircraft, Exp. Per Flt and PAX. Per Flight have strong relationship with the Net Profit of the Airline Industry of Pakistan. In order to increase their Revenue, the Airlines of Pakistan should put in their best, minimize their Operating Cost and should utilize their Aircrafts efficiently. It is revealed that PIA is operating 68.95% of total flights and facilitating 56.30% of total passengers flying from Pakistani Airlines. It is also revealed that PIA profitability is effected by the excessive Operating Cost, poor utilization of aircrafts ( fleet ) and overcrowded employees. Their Average operating cost per Flight is Rs. 20,724,14/=, Flights per Aircraft is 814(flights), Passengers handling per Employee is 213(passengers), Aircraft handling per Employees Passengers per Flight is 115.6(passengers ), is 0.76 which are also not good . Air Blue is operating only 17.63% of the total flights and facilitating 25.94% of the total passengers flying from Pakistani Airlines. It is viewed that their Average operating cost per Flight is Rs. 1,379,35/=, Flights per Aircraft is 1685(flight), Passengers handling per Employee is 1010 (passengers), Aircraft handling per Employees are 501(employees), Passengers per Flight is 208.2 (passengers ), profit earned per flight is Rs. 101598 /=, Lost baggage per flight average is 0.049 and Average flight cancellation is 0.027. Air Blue is required to induct more aircrafts
are
445(employees),
profit earned per flight is Rs.
47114 /= , Lost baggage per flight average is 0.088 and Average Flight cancellation
in order to bring good impact on the revenue and profitability. Their Fleet Finance and Staff utilization is already quite effective. It is also revealed that Shaheen Air International is operating only 13.42% of the total flights and facilitating 17.76% of the total passengers flying from Pakistani Airlines. Their Average operating cost per Flight is Rs. 1,512,54/=, Flights per Aircraft is 1071(flights), Passengers handling per Employee is 332 (passengers), Aircraft handling per Employees are 397(employees) and Passengers per Flight is 187.6 (passengers), profit per flight is Rs. 74437 /=, average flight cancellation is 0.121 which is high in all and their lost baggage per flight is 0.074. Shaheen Air International have to reduce their Operating Cost. They have to upgrade their fleet which will not only reduce their maintenance Cost but also improve the fleet utilization so that their flight cancellation and delay will be reduced and profit / revenue will increase.
5.2.0 Scope for further Studies.

There is a great scope for further studies in Revenue management, operating cost and fleet utilization. My study results show that Pakistan is lacking behind in these areas. It is also revealed through the study that the major areas for further studies are as under:- How to decrease the level of corruption - How to improve the quality of customer services - How to overcome overstaffing How to overcome the influence of Government officials on rules and
regulations - The usage of state of art technologies.
I.
- How to motivate crew for good performance - How to create co-operative environment - Study of developing safety culture. These are the major areas which need more importance for further studies.
ANNXURES: I
Total Revenue
Air Line PIA Airbl ue SAI 2009 94563765 000 99492190 00 31391785 53 2008 89201257 000 80403050 00 26431730 07 2007 70480734 000 59418330 00 23908423 95 2006 70587146 000 39720820 00 21716194 33
Avera 2005 ges

64074470 000 15160610 00 16652362 26 77781474 400 58839000 00 24020099 23
Total Expenditure
Air Line PIA Airbl ue SAI 2009 78629427 000 91433850 00 30547288 97 2008 85275811 000 76830600 00 25728943 19 2007 66221976 000 54162840 00 22088712 03 2006 69882217 000 35239730 00 21524125 36 2005 58940836 000 14521860 00 18372365 04 71790053 400 54437776 00 23652286 92
Operating Profit
Air Line 2009 2008 2007 2006 2005
I.
PIA Airbl ue SAI
40649960 00 21314600 0 16830564 3
31377642 000 -54560000 70278688
59350760 00 14399200 0 18197119 2
76481480 00 20218800 0 19206897
17594420 00 -74487000 17200027 8
10157060 800 86055800 53552428. 4
Net Profit
Air Line PIA Airbl ue SAI 2009 58224310 00 36101300 0 93223288 2008 35880157 000 51917000 60313536 2007 13398706 000 89914000 17351888 0 2006 12763420 000 15299400 0 67403616 2005 44116570 00 -82067000 19943304 14455274 200 11475420 0 82880524. 8
No. of Passengers
Air Line PIA Airbl ue SAI 2009 4388431 2306417 1191957 2008 4231288 2109969 1193017 2007 4037070 2016775 1440281 2006 4215735 1893939 1533222 2005 4458388 1501218 1364019 4266182.4 1965663.6 1344499.2
No. of Flights
No. of Employees
Air Line PIA Airbl ue SAI I. 2009 23163 2471 5609 2008 22036 2286 5106 2007 18149 1979 4257 2006 18282 1643 3532 2005 19263 1468 3081 1 20178.6 1969.4 4317
No. of Aircraft
Revenue per passenger

Revenue per Flight

Expenditure per passenger

Air Line PIA Airbl ue SAI Air Line PIA Airbl ue SAI 2009 17917 3964 2563 2008 20154 3641 2157 2007 16403 2686 1534 2006 16576 1860 1404 2005 13220 967 1347 16854 2623.6 1801
Expenditure per Flight

2009 1912 858 699 2008 2244 801 664 2007 2079 564 625 2006 1963 404 593 2005 1508 163 553 1941.2 558 626.8
Profit per Flight

Air Line I. 2009 2008 2007 2006 2005 2
PIA Airbl ue SAI
-41572 143888 86191
-59041 123412 78525
-43576 132355 75551
-48503 127549 79177
-42879 -19215 52742
-47114.2 101597.8 74437.2
Profit Per Passenger

Air Line PIA Airbl ue SAI 2009 -388 663 552 2008 -527 561 465 2007 -343 630 356 2006 -411 591 381 2005 -376 -108 273 -409 467.4 405.4
Revenue per Employee

Air Line PIA Airbl ue SAI 2009 4082535 4026394 559668 2008 4047976 3517194 517660 2007 3883450 3002442 561626 2006 3861019 2417579 614841 2005 3326298 1032739 540485 3840255.6 2799269.6 558856
PAX handled per employees

Aircraft handled per Emp

Air Line PIA Airbl ue SAI Air Line PIA Airbl ue SAI 2009 579 412 434 2008 537 381 426 2007 394 936 425 2006 358 411 392 2005 356 367 308 444.8 501.4 397
Passengers Per Flight

2009 107 217 156 2008 112 220 169 2007 127 210 212 2006 118 216 208 2005 114 178 193 115.6 208.2 187.6
I.
Flights per Aircraft

Air Line PIA Airbl ue SAI 2009 1028 1775 1007 2008 927 1598 1015 2007 693 1820 1049 2006 698 1453 1186 2005 724 1781 1098 814 1685.4 1071
No. of lost Baggage Claim

Lost Baggage per Flight

Air Line PIA Airbl ue SAI 2009 0.0995 0.0381 0.0838 2008 0.0979 0.0487 0.0707 2007 0.1255 0.0434 0.0853 2006 0.06612 0.0565 0.07615 2005 0.04905 0.0582 0.0516 0.087614 0.048980 0.073501
No. of Cancel Flight

Average Flight Cancellation

Air Line PIA Airbl ue SAI 2009 0.0995 0.03173 0.14476 2008 0.0979 0.02648 0.1334 2007 0.1255 0.01904 0.13208 2006 0.01239 0.04921 0.10061 2005 0.049 0.00999 0.09402 0.076858 0.02729 0.120974
Operating Cost
Air Line PIA I. 2009 98628760 000 2008 72084990 000 2007 71764150 000 2006 79164370 000 2005 67075580 000 77743570 000 4
Airbl ue SAI
58135100 0 12671790 00
41180500 0 10498090 00
41790200 0 77282000 0
28631900 0 71231200 0
14114900 0 57763000 0
36770520 0 87595000 0
Operating Charges per Flight

Operating Charges per passenger

Air Line PIA Airbl ue SAI 2009 22475 3252 3963 2008 28478 3195 3880 2007 18929 3207 3537 2006 18778 3151 3465 2005 15045 3094 3423 20741 3179.8 3653.6
Reference:
I.
1. Adrangi, B., Chow, G. and K. Rafiee (1997) Airline Deregulation, Safety and Profitability in the U.S. Transportation Journal 46, 44-52. 2. "DELAG: The World's First Airline". Airships.net. http://www.airships.net/delagpassenger- zeppelins. Retrieved 2010-08-22.
3.
Doganis, R. (2002) Flying off Course The Economics of International Airlines. 2nd edition. New York: Routledge.
4. Jane's airlines & airliners By Jeremy Flack, First Edition, 2003, ISBN 9780007151745 5. Kimes, S.E. 1989. Yield management: a tool for capacity-constrained service firm. Journal of Operations Management 8, 348-363. 6. McGill, J. and G. van Ryzin. 1999. Revenue management: Research Overview and Prospects. Transportation Science 33, 233-256. 7. Philips, T.C. and M. Hersh. 2005. A model for dynamic airline seat inventory control with multiple seat bookings. Transportation Science 27, 252-265. 8. Richard M. McCabe, "Why Airlines Succeed or Fail: A System Dynamics Synthesis." (Ph.D. diss., Claremont Graduate University, 1998). 9. Richard M. McCabe, PhD U.S. Department of Transportation, Aviation Consumer Protection Division. Air Travel Consumer Report. Retrieved 17 May 2006 from http://airconsumer.ost.dot.gov/reports/, selected dates. 10. Rigas Doganis, Routledge "The Airline Business in the 21st Century.", New York, 2001. 11. Robertson, David (October 29, 2008). The Times (London). Retrieved April 23, 2010. 12.Rose, N. L. (1992) Fear of Flying: Analyses of Airline Safety Journal of Economic Perspectives 6, 75-94. 13. Talluri, K. and G. van Ryzin. 2004. The theory and practice of revenue management. Kluwer Academic Puslishers 14.Thompson, Arthur A., Jr., A. J. Strickland, and John E. Gamble. Crafting and Executing Strategy: The Quest for Competitive Advantage Concepts and Cases. Boston, et al.: McGraw-Hill Irwin, 2005.
Other References:
www.pcaa.com.pk www.Orient airways-history.com www.pia.com www.airblue.com www.shaheen air international.com www.secp.com.pk www.kse.com.pk www.Google.com www.airline history.com
I.

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Final Year Project

Factors Affecting Profitability Of Airline Industry Of Pakistan

PROJECT REPORT SUBMITTED TO PAF-KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY

II. Factors Affecting Profitability of Airline Industry of Pakistan

Annexure :.....................................................................................................29 References:....................................................................................................34

II. Factors Affecting Profitability of Airline Industry of Pakistan

: Muhammad Tariq Ali Khan MB-2-07-52286

: Syed Danish Aftab Zaidi

Mr. Syed Danish Aftab Zaidi (Supervisor) (Director Academics)

II. Factors Affecting Profitability of Airline Industry of Pakistan

Muhammad Tariq Ali Khan

II. Factors Affecting Profitability of Airline Industry of Pakistan

JUNE 30, 2011

Muhammad Tariq Ali Khan

III. Factors Affecting Profitability of Airline Industry of Pakistan

III. Factors Affecting Profitability of Airline Industry of Pakistan

1.1.0 Background to the Problem:

1.2.0 Purpose of the Research Project:

profitability of the airlines. (4 = 0)

1.4.0 Significance of research project:

Factors Affecting Profitability of Airline Industry of Pakistan

1.5.0 Assumptions of project:

Factors Affecting Profitability of Airline Industry of Pakistan

Factors Affecting Profitability of Airline Industry of Pakistan

2.0.0 Literature review:

Factors Affecting Profitability of Airline Industry of Pakistan

2.1.0 Crafting and Executing Strategy

2.1.1 Revenue management:

Factors Affecting Profitability of Airline Industry of Pakistan

2.1.2 Managing the Fleet, Finance & Assets.

2.1.3 Managing Staff.

2.1.4 Fleet utilization:

Factors Affecting Profitability of Airline Industry of Pakistan

2.1.5 Profitability and the load factor for airlines

Factors Affecting Profitability of Airline Industry of Pakistan

3.0.0 Research Design and Methodology

3.1.1 Population of the Research project

3.1.2 Sampling methods:

My study is purely based on statistical data

3.2.1 DATA COLLECTION:

3.2.3 Data Presentation

3.2.4 OPERATIONAL DEFINAITON OF RESEARCH VARIABLES. Net profit

Flights per Aircraft:

Expenditure per Flight:

Passengers per Flight:

3.2.5 Procedure for testing hypothesis:

Factors Affecting Profitability of Airline Industry of Pakistan

Data Analysis & Interpretation of Results.

( Independent Variable ) ( Independent Variable ) ( Independent Variable ) ( Independent Variable )

4.2.0 General Description of data :

4.3.0 Data Presentation

Flights per Aircraft

Factors Affecting Profitability of Airline Industry of Pakistan

Expenditure per Flight

Passengers Per Flight

4.4.0 Results of Hypothesis 1:

Standard Error 60.71 0.00213 4.68

P-value 0.13 0.0045 3)

Lower 95% (487.2 (0.3 3)

Intercept operating Cost

Upper 95% 1,055 .53 (0 .27)

Dependent Variable: Net Profit Independent Variable: Operating Cost.

Interpretation of the Result:

The regression analysis shows, the