FAAM Midterm

debt policy

a financial strategy that permits a company to determine whether it will borrow money or use cash on hand to fund its operation

dividends

investors’ reward for the risk of investing

dividend policy

dividing the firm’s after-tax profit into funds to finance long-term growth, funds to be distributed to shareholders, or both

asset management

how the firm plans to earn income on its assets

financial management in aviation

refers to the planning, organizing, directing and controlling of financial activities within airlines, airports, and aviation-related businesses

Importance of financial management in aviation

• High Operational Costs

• Safety requirements

• Capital-intensive industry

• Competitive Environment

• Risk Management

Accounting

involves recording, classifying, summarizing, and interpreting financial transactions

Common Accounting Procedures

Revenue Recognition

Expense Recording

Asset Management

Financial Reporting

Budgeting

Auditing Procedures

major financial activities in aviation

Cost Control

Financial Planning

Pricing and Revenue Management

Budgeting and Forecasting

Cash Flow Management

key functions of financial management

financial planning

investment decisions (capital budgeting)

financing decisions

profitability and cost management

cash flow management

risk management

financial reporting & compliance

Internal sources of financial information

financial statements

internal reports

payroll and HR records

inventory and maintenance records

external sources of financial information

government reports

industry data

market trends

financial institutions

financial statements

• these show the company’s financial performance and position

• formal records that present the financial activities and condition of an aviation business

payroll and HR records

important for identifying labor costs, overtime, benefits and staffing needs

inventory and maintenance records

used by MRO (Maintenance, Repair and Overhaul) systems

income statement

shows revenues, expenses, and profit or loss over a specific period

balance sheet

shows the company’s financial position at a specific point in time

cash flow statement

shows inflows and outflows of cash — how money is received and spent

importance of financial statements in aviation

decision-making

budgeting & forecasting

safety compliance

investor and stakeholder communication

cost monitoring

creditworthiness

recession

2 consecutive quarters of declining gross domestic product

bust period

time when there is a severe decrease in business activity leasing to high unemployment, low incomes and low corporate profits

depression

an economic condition in which business activity slows, prices drop, purchasing power is greatly reduced and unemployment is high

phases of the business cycle

prosperity, recession, depression & recovery

prosperity

rising production, employment wages and profits

recession

when cost and interest rates rise, demand weakens and that’s when __ begins

depression

if prolonged recession may become __

recovery

starts when consumer confidence returns, demand increases and economic activity begins to rise again

oligopolistic market

where only a small number of firms provide similar services and face high barriers to entry due to significant capital requirements and specialized technical expertise

mergers

allow airlines to increase market share, achieve economies of scale, gain market power, and improve purchasing advantages

Producer Price Index (PPI)

measures changes in prices of raw materials and production inputs

acts as an early warning signal for inflations

rising __ leads to higher consumer prices and airline operating costs

durable good orders

refers to high-value, long lasting items, large purchases such as aircraft, machinery and equipments

consumer price index (CPI)

measures inflation at the consumer levels

tracks prices of food, housing, transportation, clothing and healthcare

gross national product (GNP)

total value of goods and services produced by citizens and companies, regardless of location

includes income earned abroad and in the US by foreign companies

Gross Domestic Product (GDP)

measures total production within national borders

computed using: consumption, investment, government spending, net exports (exports-importa)

Debt Financing Process

1. Identify funding needs

2. Choose debt instrument

3. Secure lender approval

4. Disbursement and repayment

Equity Financing Process

1. Decision to raise equity

2. Regulatory Approval

3. Share Issuance

4. Investor Participation