Front of Auditorium

Back of Auditorium

STAGE

REAL ESTATE

MATERIALS CONSUMERS

ENERGY

INDUSTRIALS

TECHNOLOGY

HEALTHCARE

UNASSIGNED AND NEW MEMBERS

THE INDUSTRY REVIEW

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SEPTEMBER 22, 2009

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AGENDA• Industry Review Presentation• Choosing a Micro Industry• Conducting Industry Research• Semester Schedule• Announcements

WHO WE ARE

The BU Finance & Investment Club manages Boston University’s Undergraduate Investment Fund through its Dyrect Investing Ltd, Subsidiary. We focus on creating global finance professionals and generating returns to our fund.

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OUR NETWORK

AND GROWING…

Learning

• Industry evaluation• DCF valuation• Capital markets• Understanding strategy

Presentation• Make a pitch• Manage high pressure Q&A • Make quantitatively based

recommendations

Networking• Senior alumni • Wall Street executives• Recent graduates• Strategies, Tactics, and etiquette

Industry Services• Bloomberg• Wall Street Training Inc.• FactSet • Capital IQ

Industry leading financial analyst

Competitive edge for internships/jobs

Stellar classroom performance

Deeper investment insight

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WHAT YOU WILL LEARN

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WHAT DO WE DO?Research Approach

President

VP of Investor Relations

VP of Finance

VP of Investment

Management

VP of Investment

Research

VP of Human

Resources

VP of Operations

Managing DirectorInvestment Research

Managing DirectorTrading

Managing DirectorRisk

ENERGYCONSUMER

FINANCIALS

HEALTHCARE

TECHNOLOGYMATERIALS

INDUSTRIALS

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CLUB STRUCTURE

SectorDirector

Senior Analyst

Junior AnalystTeam

Research AnalystTeam

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SECTOR STRUCTURESECTOR DIRECTOR• Organize investment discussions• Meet with IM team and Sector

SENIOR ANALYST• Lead Jr Analyst in research process• Meet with IM team and Sector

RESEARCH ANALYST• 2 person teams• Research for Sector Director and IM• Maintain industry coverage

JUNIOR ANALYST• 15-20 person teams• Learn industry research/valuation• Prepare Industry Review presentation

NATIONAL AIRLINESINDUSTRY REVIEW

Services SectorSenior Analysts Junior Analysts

Mike Murphy

Alex Corbacho

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INDUSTRY DEFINITIONThe National Airline Industry consists of commercial airline companies that operate exclusively in North America and do not participate in contract flying.

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INDUSTRY BREAKDOWN

Major57%

National12%

Regional15%

Cargo16%

Marketshare by Category2008 Operating Revenue

2008 Operating RevenueU.S. Airline Industry: $186.0 Billion

National Airlines: $21.8 Billion

Major:Delta, American, United, Continental, U.S. Airways

National:Southwest, JetBlue, AirTran, Alaska Air, Hawaiian Air

Regional:ExpressJet, SkyWest, American Eagle, Frontier

Cargo:FedEx, UPS

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Delta22%

American16%

United14%

Continental10%

Southwest9%

US Airways7%

JetBlue3%

AirTran2%

Alaska2%

Other14%

U.S. Airline Marketshare2008 Revenue Passenger Miles

MARKETSHARE

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MARKETSHARE

Southwest51%

JetBlue18%

AirTran13%

Alaska13%

Hawaiian5%

National Airline Marketshare2008 Revenue Passenger Miles

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REVENUE GENERATION

Ticket Fares

CRS

Flight Route

s

Ancillary Fees

Frequent Flier

• Online Reservations

• Travel Websites

• Travel Agents

• Computer Reservation Systems are programmed to book and adjust prices

• Hub and Spoke

• Specific Direct Routes

• Perishable Inventory

• Bag Fees• Switching

Fees• Cocktails• Movies• Leg Room

• Customer loyalty

• Discounts retain customers

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Labor25.8%

Fuel21.3%

Transport Fees14.1%

Professional Services

8.7%

Aircraft Rent/Own

7.5%

Equipment4.9%

Landing Fees2.2%

Food & Bev-erage1.4%

Other14.1%

Operating Costs BreakdownIndustry Average 1Q09

MAJOR COSTS

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LOW COST MODEL• Southwest, JetBlue, and AirTran started as

low-cost carriers• Fly direct routes to (near) major cities only

– As opposed to Hub & Spoke and regional contracts• Significantly reduced industry fares

– Limit aircraft type (easier labor, maintenance)– Higher yield

• Focus on simplified operations and customer service

• Able to enter market by leasing planes

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COMPETITIVE ENVIRONMENT

Barriers to Entry

Moderate• Low at

regional level, high at major

Power of Buyers

Low• Little

Influence on industry prices

Threat of Substitute

sModerate

• High for short distance, low for long

Power of Suppliers

High• Boeing

and Airbus only major suppliers

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TRENDS: FUEL COSTS

2003 2004 2005 2006 2007 20082009E0%

5%

10%

15%

20%

25%

30%

35%

40%

Jet Fuel Expense % of Revenue

$0

$20

$40

$60

$80

$100

$120

$140

Jet Fuel PricesPer Gallon

Oil Crack Spread

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TRENDS: REGULATION

2000 2001 2002 2003 2004 2005 2006 2007 2008$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Airport and Airway Taxes

2000 2001 2002 2003 2004 2005 2006 2007 2008$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Homeland Security Taxes

2000 2001 2002 2003 2004 2005 2006 2007 2008$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Airport Passenger Facility Charges

• Increased regulation and adverse tax policies have negatively affected profits in the industry

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TRENDS: ANCILLARY FEES• Baggage Fees,

Switching Fees, Entertainment, Cocktails, etc.

• No influence on demand or loyalty

• Most customers do not even consider costs until arriving at airport

2007 20080.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%

Total Revenue Growth vs. Other Revenue Growth

Total Revenue Other Revenue

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BALANCE SHEET STRENGTH

Airline Debt/Capital

Southwest 39.66%

SkyWest 58.25%

JetBlue 69.66%

Hawaiian Air 71.20%

AirTran 72.11%

Alaska Air 72.74%

Delta 94.42%

Continental 96.18%

US Airways 108.00%

American Air 142.30%

United 150.72%

• High risk of bankruptcies

• Exceptionally high Debt/Capital due to post-9/11 demand

• Upcoming Refinancing Cliff

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RISKS• Unpredictable Fuel Prices

– Each $0.01 rise in the price of fuel costs the industry $190-$200 million; 2008 fuel prices were 49% higher than 2007

• Labor– Union disputes and contract negotiations could disrupt

schedules and negatively impact customer service

• Regulation– Increased taxes, security, and safety standards could

decrease the bottom line by 1-5%

• Prolonged Recovery– Flat or negative growth in business and leisure flying– From both current downturn and 9/11

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RISKS – FARE WARS

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

YoY Change in Passenger Yield

Fare War

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KEYS TO SUCCESS• Strong Balance Sheet• Growth Opportunities• Proven Financial Management• Customer Loyalty• Significant Free Cash Flow Generation• Positive Profitability Trends

FINANCIAL PERFORMANCE &

VALUATION

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REVENUE GROWTH

2000 2001 2002 2003 2004 2005 2006 2007 2008-15.0%-10.0%-5.0%0.0%5.0%

10.0%15.0%20.0%25.0%30.0%

Annual Revenue Growth

General Airline National Airline

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INDUSTRY PERFORMANCE

All Airlines National

2008 % Change 2008 % Change

Revenue Passenger Miles (RPM) 811,440 -2.2% 147,724 2.0%Available Seat Miles (ASM) 1,020,147 -1.7% 196,866 2.7%Load Factor 79.50% -0.5% 78.1% -0.5%Yield (cents) 13.75 5.9% 13.72 10.3%Rev./ASM (RASM) (cents) 10.93 5.3% 11.54 10.9%Operating Revenue $186.0 6.5% $21.8 14.4%

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INDEX PERFORMANCE

0

20

40

60

80

100

120

140

160National Airlines vs. S&P 6005-Year Relative Performance

National Airline Index: LUV, JBLU, AAI, HA, ALKS&P 600 (^SML)

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AIRLINE COMPS

AAI ALK HA JBLU LUV IndustryPassengers 24.6 24.2 7.9 21.9 88.5 63.77

RPM 18,956 21,347 7,859 26,071 73,492 54,344

ASM 23,809 27,835 9,509 32,442 103,271 75,194

Load Factor 79.6% 76.7% 82.6% 80.4% 71.2% 74.31%

Yield 12.73 15.72 14.07 11.72 14.35 13.88

RASM 10.72 13.16 12.73 10.44 10.67 10.93

Fuel/Rev 45.5% 36.0% 36.2% 41.2% 35.1% 37.03%

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FINANCIAL COMPS

AAI ALK HA JBLU LUVStock Price $6.90 $27.26 $8.68 $6.48 $9.62

Market Cap $829.0 $957.3 $446.3 $1,940.0 $7,130.0

Revenue $2.4 $3.5 $1.2 $3.3 $10.6

Gross Margin 13.15% 11.93% 19.67% 26.80% 22.92%

EBITDA $179.4 $97.4 $189.8 $447.0 $835.0

LT Debt $1.1 $1.8 $265.7 $3.4 $3.4

EPS ($0.90) ($4.19) $0.87 ($0.09) ($0.29)

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TIME SERIES ANALYSIS

1999 2000 2001 2002 2003 2004 2005 2006 2007 20080.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

45.0x

-$0.60

-$0.40

-$0.20

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

Industry P/E Industry EPS

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CROSS SECTIONAL ANALYSIS

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.000.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

Forward EPS

Forw

ard

P/E

JBLU

HAALK

AAI

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CROSS SECTIONAL ANALYSIS II

(0.4) (0.2) 0 0.2 0.4 0.6 0.8 1.0 1.2 0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

Forw

ard

P/E

Forward PASM

JBLU

HAALK

AAI

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ADDITIONAL CONSIDERATIONS

• Most volatile industry in the market• Investors tend to sell after making

profits off of big swings• High inverse correlation to oil prices

– Although movements are much smaller (oil drops 10%, airlines up 2%)

• Investors play volatility before fundamentals

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RECOMMENDATION• Southwest is currently overpriced and

too large (>$2 billion) for S&P 600• JetBlue has strongest fundamentals,

although its current price level suggests a hold

• Based on cross-sectional analysis, Alaska Air currently has best value opportunity

QUESTIONS?

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INDUSTRY RESEARCH

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CHOOSING A MICRO INDUSTRY

• Use the S&P 600 Universe found on the Finance Club page on YouDo@BU

• Read descriptions to find companies in which you are interested

• Go to company websites, glance through 10-K’s, look at news on Yahoo! Finance and Bloomberg

• Work with sector team to create a micro industry of 4-5 peers

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QUESTIONS TO ASK• How big is the industry?• Who are the players?• Is the industry growing?• HOW DO COMPANIES MAKE MONEY?• What is the competitive environment?• What are current trends?• What are the major risks?• What makes companies successful?

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RESOURCES• Pardee Library

– Standard & Poor Industry Surveys, Datamonitor– Market Share Reporter– Bloomberg Terminal (Financials and News)

• 10-K’s, 10-Q’s, Annual Reports– Management Discussion & Analysis

• Earnings Call Transcripts– Seekingalpha.com

• Company Websites• Industry/Trade Associations• Mergent, Yahoo! Finance, Bloomberg.com• Wall Street Journal, Barron’s• Investopedia.com

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IMPORTANT TIPS• QUANTIFY EVERYTHING!• Visuals (Charts/Graphs) are better

than text• Use bullets, no block text• Some animation is okay to emphasize

a point, do not overkill• Understand how the business works

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YOUR SECTOR

• Meet with Senior Analyst after Meeting to discuss meeting time and develop a plan

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SEMESTER SCHEDULEOct. 1 – Josh Ciampa, GE (KCB)Oct. 6 – ValuationOct. 13 – Evolution of Investment ManagementOct. 20 – Industry Presentations (Pre-Valuation)Oct. 27 – Speaker/Networking (TBD)Nov. 3-5 – Full Presentation to E-Board, MD’sNov. 10/11 – Presentations to Dr. Stewart, FacultyNov. 17 – Semester End PresentationNov. 24 – Holiday: No MeetingDec. 1 – Feedback and Look at Spring Semester

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ANNOUNCEMENTS• Oct. 1st – Josh Ciampa, GE

– Former Club President– 6:30PM in Kenmore Classroom Building– Following GE Info Session 5PM in 208

• Sign up at YouDo@BU

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SECTORSSector Senior Analyst Meeting TimeConsumer John Savage/Amanda Wexler Tues. 7pmEnergy Amit Singh Weds. 6pmHealthcare Jesse Hou Mon. 6pmIndustrials Dennis Hauser Mon. 7pmMaterials Anthony Errico Weds. 7pmReal Estate Elaine Lin Thurs. 6pmTechnology Mike Cicuto Tues. 7pm