Financial risk exposures in the airline industry : case of South African Airlines

Master Thesis


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University of Cape Town

The airline Industry has been recognised as a high value industry. The market carrying over 2 billion passengers each year and occupied over 35% of global merchandise in trade by value.Studies have been conducted globally to investigate the feasibility and return on investment for local or international airlines, with several analytical methodologies in use. The focus of this dissertation is to analyse the impact of financial risk factors, including interest rate exposures, currency fluctuations, and fuel price changes on the airline industry. This study investigates risk exposures in the South African airline industry and uses data on South African Airways (SAA) and Comair to calculate the impact of risk factors on exposure significance. The key results show that, on average, the exposures are more significant over the short-term horizons which becomes fundamental as the horizon length increases. In cases where the non-linear coefficient is slightly strengthened as the return horizon is lengthened, the sign of the exposure point coefficient does not necessarily point in the favourable direction of returns. Thus, a positive coefficient indicates a tendency of the risk factor and returns to move in the same direction, while a negative sign means that the impact on returns decreases as the exposure increases. Based on the financial ratio analysis of the airline characteristics, the results indicate that SAA shows a better return on investment better than Comair. Particularly SAA (SAA Annual Report: 2005) shows an improvement in performance with an increase in revenues and stable cost bases, despites the unexpected increase in oil dollar prices by 42%, which contrib tes to a large increase in returns. Lastly, structural changes in exposures are investigated, focusing on an extraordinary event of the global aviation industry the terrorist attack in New York on September 11 , 2001. No impact on SAA or Comair was found during the study period, which indicates that our study subjects may be less risk impacted by U.S. influences in comparison to other international airlines. The common financial speculation of higher risks are accompanied by higher returns may not be feasible to the airline industry, but strategic planning changes and future financial management adaptations to fit the global economy may bring a positive impact on the industry. This brings opportunities for further research.

Includes bibliographical references (leaves 131-134).