Financial Risk Liquidity Management - IATA - Home · Ben, the KLM Station Manager of Schiphol, received a call from OCC that the KL1233 is cancelled. Based on the PAM rules, the passengers

Financial Risk &

Liquidity Management

The Fintech impact on Banks, Startups And Corporate Treasury

Elizabeth LumleyDirector of FinTech and Content , VC Innovations & FinTECHTalents

FINTECH AS A MINDSET

How innovation and digital transformation is changing the face of corporate banking

Liz Lumley, director of FinTech, VC innovations

What is FinTech?The WEF define a FinTech to be:

“…a small, technology‐enabled, newentrant to financial services. Thisdefinition does not include largetechnology firms that enter financialservices (e.g. Apple with Apple Pay), orincumbent financial institutions whoincrease their focus on technology.”

*For the purposes of this talk, I am going to disagree -

Because FinTech is not a sector or a group of

products or companies. FinTech is a mindset

THIS IS FINANCIAL TECHNOLOGY

THIS IS FINTECH

The origin of 'FinTech'

Four Drivers

15 September 2008 –Trust as an advantage, for banks, began to be

chipped away

Markets segments that banks either

underserve, don't care to serve, or fail to serve

Remittances

SME Banking

LendingFriction within the business model or

infrastructure <==Pay attention to this one

Smartphones <==OK, and this one, as well

What do corporates want?

Operational efficiencyIncreased efficiency in trade and working

capital finance

More real-time cash, liquidity, and payment

management capabilities

Ready access to credit and better

utilization of corporate assets

Minimized financial and operational risks

I AM SURE EVERYONE IS

AWARE OF THIS ORGANISATION?

WHAT ABOUT THIS

COMPANY?

Ripple's Trillion Dollar Man“We want to create a payment network like SWIFT. But one where the settlement, the actual movement of money, the actual plumbing underneath the surface, would be a decentralized, open network,”

“The endgame is just money moving invisibly, as easily as information.”

David Schwartz is Chief Technology Officer at Ripple

64% of corporate treasurers ask for real-time payments tracking"Corporates expect greater transparency in cross-border payments. They want to know what is happening with the payment and when it has been credited on the beneficiary’s account. Until now, this has not been the case. This survey confirms the relevance of SWIFT gpi, because of its ability to address these key pain points."

Wim Raymaekers, Head of Banking Market and SWIFT gpi, SWIFT

Swift and Eurofinance Survey

■ 42% are looking for instant payments

■ 47% want increase visibility on the cost and deductions from a transaction

■ 47% want reduction and optimising exceptions

■ 41% want investigation handling

■ For cross-border payments, 86% of treasurers cited the need for efficient payment processes and effective customer support.

■ Only 30% saw payment innovation as a priority

Suggesting that innovation for its own sake is a relatively low prioritycompared to innovation leveraged to address fundamental concerns and needs.

INNOVATION THAT DOES NOT DIRECTLY IMPACT YOUR BOTTOM LINE, DOES NOT INCREASE PROFITABIITY OR CREATE GREATER EFFICIENCIES IS NOT INNOVATION

... IS JUST CREATIVITY

Global Corporate Banking 2018: Unlocking Success Through Digital

■ Over the next five years, BCG estimate that, in some segments, digital providers and channels (including bank's own digital channels) will capture at least 30% of corporate banking revenues

Source: BCG

IF YOU WAIT FOR BANKS

TO INNOVATE ON THEIR

OWN...You end up waiting 10

years for this

3 JANUARY 2012■ One of the most significant dates in corporate

banking history

■ Hint – It's the first working day after Christmas

IN 2011 APPLE INTRODUCED THE IPAD

ANY MANY OF YOU RECEIVED

ONE FOR CHRISTMAS IN

2011

BYOD■ IT Heads and CIOs hate it –

but can not avoid it

■ Advances in security – such as biometric identity and authorization – as well as the prevalence of cloud networks within enterprises is making BYOD more available to employees

■ Chart source: Gartner Group

THE PSD II –WHAT DOES IT

MEAN FOR CORPORATES?

Open banking offers opportunities for corporate banking innovation

“Many corporates are only just beginning to wake up to the opportunities that European regulations such as PSD2 will open up to them in terms of streamlining and reducing the cost of their payments while gaining access to exciting new services.”Shahrokh Moinian, Head of Cash Products, Deutsche Bank.

Such as Google,

Amazon & Apple

"In an open banking environment, banks must realise that they cannot do everything by themselves and will need to open their ecosystems to partnerships with fintechs and possibly with the big techs such as Google, Amazon and Apple."

Nicolas Cailly, Deputy Director - Products, Payments & Cash Management, SocieteGenerale

Remember these stats?

64% of corporate treasurers ask for real-time payments tracking

42% of treasurers are looking for instant payments.

THIS IS AN ACTUAL PICTURE OF INTERNAL IT

INFRASTRUCTURE AT MOST BANKS*

*I AM JOKING, BUT NOT BY MUCH

BANKS KNOW (AND YOU SHOULD ALSO)That future innovation will come from here

THANK YOU■ Liz Lumley, director of FinTech

■ VC Innovations

■ @LizLum

■ [email protected]

This list gets trotted out at every other FinTech Conference

Uber, the world’s largest taxi company, owns no vehicles.

Facebook, the world’s most popular media owner, creates no content.

Alibaba, the most valuable retailer, has no inventory.

And Airbnb, the world’s largest accommodation provider, owns no real estate.

*And I hate it…because

The largest universal bank in the world - HSBC

Doesn’t create nor does it own any of the money!

As of the end of 2017 reported over US $2.5 Trillions dollars in assets

The Future Relationship between Banks and Corporate Treasurers

Andrea SottorivaGroup Treasury Director, SITA

37

The Future Relationship between Banks and Corporate Treasurers

Business Performance

Context

The relationship will continue to be based on TRUSTand RESPECT.

38

� Technology = Free up time = Focus on more value added tasks

� High creditworthiness (counterparty risk) issue

Context: Digitalized, pressurized and regulated environment.

Emerging technologies: Robotics, fintech, artificial intelligence, blockchain technology.


Banks – Corporate Treasurers Banks will have to become IT companies focused on delivery excellence Î the experiences of J.Dimon (JPM) and S.Ermotti (UBS).

39

At the same time, Treasurers now enjoy a larger remit. This framework is leading to a significant increase in the number of risks to be handled.

Corporate Treasurers are facing an uncertain and complex environment with a significant increase in regulatory pressure.

Business Performance40

The Dual Role of the Corporate Treasurer

“Afternoon Treasurer” focused on his job of business partner to advise on wide-ranging financial issues and on strategic projects. Îthey expect their banking partner to be a subject matter expert, providing tailored suit business intelligent solutions . Data enrichment.

“Morning Treasurer” involved in day to day transactions, cash flow and liquidity related operations Îthey expect their banking partner to be fully digitized with no layers nor delays. Î Efficiency and speed are critical factors.


Needs of Corporate Treasurers from Banks & Fintechs

A STRATEGIC PARTNERSHIP !

Banking Compliance

Global & Real- time operations

Cyber security adviser

Working Capital Allocation adviser

Global Payment Innovation

Know Your Client AI Data Management

Technological Best Practices

Industry Knowledge

Transparency

M&A Adviser

Process efficiency

Business Performance42

Main Key TakewaysTo earn the trust of Corporate Treasurers, the Banks will have to demonstrate:

Credibility Reliability Relationship excellence

The role of the Senior Banker will be even more crucial.

Example #1: Optimization of bank footprint: global multi currency accounts for payments, centralized collection, H2H solution ÎAdam Smith Award for Cash Management.

Example #2: Treasury Benchmarking performed. Thanks to his relation with a portfolio of other corporates, the banker can share the evolution of best practices of our pairs.

Business Performance43 | Treasury/Cash Mgmt - Aug 2018 | Confidential | © SITA 2018

Thank you

Accelerating the finance world and simplifying payment: Smart contracts

- Fast, Secure and Affordable

Linda Bos - Product Manager – Blockchain - KLMBernard Paul - Head of Projects, FDS Projects, IATA

Blockchain tokens for flight disruptions

Linda Bos (KLM Blockchain Lead)

Deniz Yilmaz (Kryha)

IATA World Financial Symposium

September 20th, 2018

Madrid Marriott Auditorium, Madrid

BLOCKCHAIN?

A secure, immutable, tokenized and distributed database.Blockchain enables independent entities to establish a consensus around a shared ‘ledger’, without relying on a central coordinator within the system.

A DAY AT SCHIPHOL AIRPORT

Flight disruptions are inevitable. But we can reduce their impact for everybody involved, by offering compensations without a hassle.

● Lengthy and disorganized distribution process of compensation

vouchers, causing frustration to both passengers and airline employees;

● Matching spent vouchers to invoices is inefficient and often impossible,

since vouchers aren’t always returned;

● Lack of transparency in the process creates a high probability of fraud,

since airliners have little evidence to challenge the billed amounts;

● Lack of proper documentation and administration during flight

disruptions cause lack of oversight and forecastability for finance

departments.

OUR CHALLENGE

Ad-hoc chaos when flight disruptions occur.

● In the case of a disruption, airliners can configure digital tokens and

distribute them directly to the affected passengers;

● Tokens can be redeemed at pre-defined (partnering) service

providers, such as airport hotels and food joints;

● All token transactions are immutably registered on a shared ledger;

● In a future scenario, the platform could even enable real-time

settlement of the induced costs*.

THE CONCEPT

Issue blockchain tokens as airline vouchers.Leverage blockchain technology to create a distributed platform for issuing and exchanging digital tokens, meant to replace traditional airline vouchers.

*Out of scope: invoicing & payment

● Create full transparency and traceability on flight disruption

costs for all stakeholders involved;

● Drastically simplify invoicing and cost accounting through a

full digital audit trail;

● Advanced configuration of disruption tokens enables

controlling expenses;

● Direct distribution of tokens to passengers drastically

simplifies the issuance and distribution process;

● Hard-coded token metadata such as owner, value and validity

makes for a fraud-proof solution.

EXPECTED BENEFITS

Transparency and controllability.

DEFINITION OF A “PROOF OF CONCEPT”

Think big, start small.By not directly integrating with live systems and by using mock data instead of personal data, we create a safe environment for experimenting.

A PoC is a stand-alone application, based on today’s assumptions and built in a small time frame, in order to learn as quickly as possible.

ASSUMPTIONS

• The token does not represent a value (no Euros nor points);• We issue tokens to all passengers of a disrupted flight, with

the same amount (no segregation on type of passenger);• The tokens are applied on the current meal vouchers and

accommodation vouchers;• The current process has been taken as a starting point;• Business rules are hard-coded per airline in the smart

contracts;• The prototype application uses dummy data;• All passengers have their own digital device.

A DAY AT SCHIPHOL AIRPORT

Let’s see what that looks like...

Meet Sarah, Ben, Alex and Sandra. Four persons involved in the journey of a disrupted flight KL1233 from

Amsterdam to Paris at Schiphol Airport on July 5th 2018...

Meet everybody !

Alex – works

at CitizenM

Ben – KLM

Station Manager

Sarah – the

traveller

Sandra – KLM

Finance Controller

Meet SarahToday, Sarah is flying to Paris. She already passed the security check, and

is now walking to her gate.

But, due to bad weather in Paris, KLM decided that Sarah’s flight KL1233 is

cancelled. The KL1233 is the last flight of the day flying from Amsterdam

to Paris.

Meet BenBen, the KLM Station Manager of Schiphol, received a call from OCC that

the KL1233 is cancelled.

Based on the PAM rules, the passengers of the flight KL1233 are eligible for

receiving a meal and accommodation voucher from KLM. Ben issues a

meal voucher and an accommodation voucher.

Ben is able to see all impacted flights in the voucher system, which also includes the KL1233.

He issues both vouchers, while hearing the announcement in the background.

The accommodation vouchers are all worth €50 and the meal vouchers are all worth €5 to the impacted passengers.

Sarah feels her phone buzz, she receives an email from KLM with an apology for the flight cancellation.

With of course, the vouchers for compensation.

Sarah is bummed about the cancellation, but pleased with the offer for compensation.

Unfortunately the next flight to Paris will leave the day after tomorrow, so she needs an additional night at the airport. Sarah walks over to Ben and explains him the situation.

Ben fully understands and issues an additional accommodation voucher to Sarah.

Sarah walks to the CitizenM hotel and requests a room for two nights. As payment method she presents the voucher.

Meet AlexAlex works at the CitizenM hotel, and he opens the scanner functionality

in the voucher app to scans Sarah’s voucher.

He is very happy he can offer Sarah a room with a nice view over the

landing strip, and asks her about the trip she has planned.

At the end of the day, Alex makes up the balance for all the vouchers handed in by the passengers.

He sees the overview of the redeemed vouchers and sends it to the KLM Finance Service Recovery.

Meet SandraSandra works for the KLM Finance Service Recovery, and she receives

Alex’s invoice for all the redeemed vouchers of the disrupted flight KL1233.

Sandra verifies whether the amount of vouchers on the invoice matches the amount of voucher redeemed by Alex.

The amount stated on the invoice matches the amount of redeemed vouchers, and therefore she makes a payment to CitizenM.

DEMO

Removing the Friction from Bank Connectivity

Anis RahalCEO, Treasury Xpress

REMOVING THE FRICTION FROM BANK CONNECTIVITY

CONNECTIVITY AND PSD2

y Treasury is the last bastion of finance that hasn’t been broadly touched by actual real disruption until the API

y The revised Payment Services Directive (PSD2) is all set to usher in the era of AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers)

y open banking and APIs would be the way of the future for a more simplified treasury

y How can it be accomplished – Connect how modern technology is purpose-built to simplify and enable “omni-channel” (aka mobile) treasury

Client-Choice Bank Connections:

SWIFT, SFTP, API, etc.

CONNECTIVITY WORKFLOW

Is your risk policy bullet proof?

Tarquin FollissInnovation Director, Othrys Consulting

This Presentation has been produced by Othrys solely for the benefit of the named Client. Accordingly the contents of this Presentation may not be referred to or relied upon by any third party without Othrys’sconsent.

Save where otherwise indicated, Othrys does not express any opinion on the accuracy or completeness of any information provided by the Client or any third party.

This document has been prepared to accompany an oral presentation by Othrys. Therefore it may not be complete or fully understood without the accompanying commentary.

Is your risk policy bullet proof?

19 September 2018

What’s the big difference?

Vasili Mitrokhin Edward Snowden

Man and machine

Cybernetics – man with machine

The routes to compromise

• Human Error• Compromised credentials• Malign Intent – the insider

HUMAN ERRORSocial media, digital shadows, social engineering and targeting

HUMAN ERRORPhishing, Spearphishing, Whaling, Smishing -

nearly all hacks start with a phishing campaign

COMPROMISED CREDENTIALS

The malign insider

• Usually home grown• Motive

– Money– Revenge– Ideology– Ego

• Disproportionate impact

INSIDER THREAT

INSIDER VULNERABILITY

The path to resilience

• Identify what is important• Protect only what you must• Understand your vulnerability• Know your people• Manage your people well

What’s the big difference?

Vasili Mitrokhin Edward Snowden

Fuel & Hedging: What are core principles for doing it right?

Julian KeitesDirector – Global Fuel and Energy Price Risk Management, Kinect Energy

(WFS)

Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.

Be energy confident. Partner with hedge consultancy experts.

IATA 19th-20th September 2018

Fuel & Hedging: What are the core principles for doing it right?

Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.65Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.

Jet Fuel VolatilityChallenge

Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.

66Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.

Airline fuel price risk – methods of mitigation

The main ways to manage fuel price risk:

1) Seat Price - fuel cost incorporated?

2) Surcharges – pass-thru variable costs

3) Jet fuel direct cost control –“hedging”

Understand the jet price cost impact on your specific business

Competitive Seat PricingLittle Seat Price Deviation

20% of OI 50% of OI



Airline Hedge Analysis

Source: “The Empirical Analysis of Ryanair’s Hedging Policy and its Effectiveness” - R O’dowd 2016



Hedge Value? Share Price-to-Sales ratio vs % fuel hedged

Source: “The Empirical Analysis of Ryanair’s Hedging Policy and its Effectiveness” - R O’dowd 2016

This reinforces Carter, Rogers &Simkins (2004) and O’Donnell (2014) findings that,

fuel hedging increases airline’svaluation by 12 to 16%, mainly due to airlines

returns being negatively exposed to theprice of jet fuel, which is found in Carter. et al

(2004).



Fuel up, profit down…

Clear Inverse Relationship – but a large variation in industries approach to the fuel volatility problem



Reuters EMEA Airline hedges – different approaches & results…

Subjective by airline: Tenure, Hedge %, Prices & Tools – all differ

$%



Unifying Your Specific Hedge Approach

Your fuel approach needs to be tailored to your business philosophy – and reviewed periodically

Build your risk solution:

1. Purpose & Scope

2. Risk Governance 3. Risk Categories4. Risk Metrics5. Hedge Strategy

Risk Categories2nd order risk: Index, Margin Call, Basis Risk, Tools, Reporting MTM, etc

Risk MetricsReviewing your specific daily market risk data

Hedge Strategy…

Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved. 72Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.

Generic Hedge Strategies

Index OptimisationUsed by companies in acompetitive marketwhere energy cost is asignificant part of totalcost and where the costlevel sets the competitiveedge

Spot OptimisationUsed by companiesthat can forward theirenergy costs to theircustomers (i.e. energysupplier, back-to-back)

Starting Price OptimisationUsed by companies thatare budget driven (i.e.often state- andmunicipalities).When time to delivery isshort, also private industryand other customers tendto have budget focus andmay use this method

AdvancedOptimisationUsed by companies thatwant to take advantageof market opportunitiesand to secure as lowcosts as possible



Method: Index (Optimised)

Policy is systematic, but balanced with predefined deviation limits/boundaries

Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.74Copyright © 2016 Kinect Energy Group. Proprietary & Confidential. All Rights Reserved.



Fuel & Hedging: What are the core principles for doing it right? r

Kinect Advisory – experts in fuel risk management from Policy to Execution

¾ Systematic fuel price risk approach & build value –‘O'Dowd’

¾ Align on method of mitigation – approaches will vary, and results matter

¾ Build an Enterprise Risk Management Framework & Policy - your MI is critical

¾ Execution – monitor conditions and remain flexible on your position

How do credit ratings affect countries and airlines?

Craig FraserManaging Director, Corporate Ratings, Fitch Ratings

Craig Fraser, Managing Director – Corporate [email protected]. 19, 2018

The Role of Credit Ratings in the Air Transport IndustryIATA 5th World Financial SymposiumFinancial Risk Management and Liquidity Track

78

Contents

1 Credit Rating Basics in the Air Transport Sector

2 How Sovereign Ratings Affect Air Transport Ratings

3 The Impact of Credit Ratings and Credit Profiles –Financing, Liquidity, and Risk Management

4 How Other Ratings Influence Unrated Airlines

5 Innovation in the Air Transport Credit Markets

Appendix

79

Credit Rating Basics

•Main global rating agencies: Fitch, Moody’s, Standard & Poor’s•Ratings describe an issuer’s ability to meet its financial commitments

•Provide information to investors and other users of the ratings

Basic rating types -

•Long-term ratings (AAA to D) and Short-term ratings (F1 to D)

•Investment grade (BBB-and above) vs. non-investment grade (BB+ and below)

•Public and Private

Ratings Most Relevant to Air Transport –

• Corporate Ratings

• Sovereign (or Country) Ratings plus the Country Ceiling

• Issue Ratings

80

Air Transport Credit – Importance and Characteristics

Why are credit markets and ratings important to the air transport sector?

• Sector is capital intensive and debt-heavy – hundreds of billons of debt

• Large annual aircraft financing requirement

• Above-average risk profile and mostly speculative grade - intensely competitive, low margins, fuel and FX exposure, subject to exogenous shocks

Differentiating characteristics of the air transport credit market:

• Large percentage of aircraft fleet is leased – more than 40%

• Substantial sovereign involvement

• Heavy exposure to US$ - aircraft, fuel, etc.

• Commercial aircraft – good collateral for secured transactions

81

Aircraft Collateral – Central to the Aviation Credit Market

- Many investors view aircraft as better risks than air transport credits

- Aircraft characteristics:• Mobile

• Serve a growing, global market

• Standardized in some ways

- Aircraft-specific bankruptcy laws:

• Cape Town Convention

• Section 1110 in U.S.

Aircraft

Airlines/Air Cargo

Aerospace ManufacturersAircraft Lessors

82

Sovereigns Rated by Fitch

Investment Grade

Speculative Grade

Not-rated by Fitch

83

How Sovereign Ratings Affect Air Transport Ratings

1. Drivers of government-related airline ratings changes:

• Government rating changes

• Airline’s credit profile changes

• Re-assess govt. support

4. Other sovereign rating considerations:

• Country ceiling and piercing the ceiling

• Financial market access

• Foreign exchange risks

3. Stand-alone rating can be enhanced by government support based on:

• Incentive to support - social, political, and financial implications of the airline’s default

• Strength of linkage –ownership, control, and support track record

Examples – Aeroflot, Etihad

2. Airline rating likely equal to government rating if:

• >75% of debt guaranteed

• Legal status as good as a guarantee

• Airline generates > 10% of government’s revenue

84

The Impact of Credit Ratings and Credit Profiles

Financing Options• Ratings aid diversification of funding

• Capital markets and unsecured funds

• Investment grade vs. high-yield debate

Liquidity• Broader access to capital markets

• Can influence PDP’s, maintenance reserves, etc.

• Investment guidelines

Cost of Funding and Terms• Stronger credit profile, lower cost of capital

• Can help lower the cost of aircraft ownership

• Terms – security, covenants, etc.

Risk Management• Hedging cost and duration

• Fixed interest rates

• More transparency in the market if ratings are public

85

How Other Ratings Influence Unrated Airlines

Long-Term Debt/Hybrids

Bonds

Term Loans

Aircraft EETCs

Aircraft ABS

Convertible Debt

Derivatives

Credit Default Swaps

Foreign Exchange

Interest Rates

Fuel Hedging

CDO’s/CLO’s

Short/Med-Term

Loans

Credit Facilities

Commercial Paper

PDP’s

Other Uses

Trade Credit

Letters of Credit

Rating Triggers

Pricing Grids

Investment Guidelines

Users of RatingsCredit Investors

BanksInsurance Companies

Counterparties Lessors

Aircraft Manufacturers ECA’s

RegulatorsEquity Investors

Most airlines are not rated by rating agencies ……but other ratings affect unrated airlines

Airlines are subject to credit analysis from many parties in the global financial market

Do airlines need public ratings? Depends on size and financial strategy

86

Innovation in the Air Transport Credit Markets

• Non-bank lending or direct lending

• Insurance-supported aircraft finance• Aircraft Finance Insurance Consortium (AFIC) • Balthazar

• Non-US dollar aircraft financing

• Environmental, Social, and Governance (ESG)

• Rating agency analysis – increased focus on loyalty programs, IT, and more robust liquidity tests

• Cape Town Convention legal framework

Current innovation reflects key air transport sector risks and market evolution

87

Appendix

88

Evolution of Fitch’s Public Airline Ratings – 2005 to Present

Company 2005 2010 Today Outlook/RWNorth AmericaSouthwest Airlines A BBB BBB+ PositiveAlaska Air Group NPR NPR BBB- StableDelta Airlines D B- BBB- StableJetBlue B+ B- BB PositiveUnited Airlines CCC B- BB StableSpirit Airlines NPR NPR BB NegativeAir Canada NPR NPR BB- PositiveAmerican Airlines CCC CCC BB- StableHawaiian Airlines NPR NPR BB- Stable

EMEAEtihad NPR NPR A StableRyanair NPR NPR BBB+ StableWizz NPR NPR BBB StableBritish Airways NPR NPR BBB- StableAeroflot NPR BB+ BB- Stable

LATAMLatam Airlines BBB- BBB B+ PositiveAvianca Holdings S.A. NPR NPR B StableGol Linhas Aereas BB- BB- B Stable

* NPR = Not Publicly Rated

89

Fitch's Global Airline Sector Outlooks

2014 2015 2016 2017 2018F

EMEA Negative Stable Stable Stable Stable

North America Positive Positive Positive Stable Stable

LATAM Stable Stable Negative Stable Stable

Source: Fitch

90

Rating Airline Companies Corporate Rating Criteria + Airlines Ratings Navigator

Industry Profile Operating Environment

Country Risk

Management Strategy Financial Policy

Corporate GovernanceOwnership, Support, Group Factors

Accounting

• Profitability • Cash Flow Focus • Liquidity • Financial Flexibility• Capital structure

Company Profile Financial Profile

y Route Structure• Hub Position• Network Scope • Alliances/partnerships • Low-fare advantage

y Market Position• Market Share• Market Potential• State Support

Competitive Strength Cost Structure

• Fuel• Labour • Fleet Strategy• Non-fuel costs

Source: Fitch

91

Fitch Airline Rating Navigator – Air Canada Example

Corporates Ratings NavigatorAirlines

aaa AAA Positive

aa+ AA+ Positive

aa AA Positive

aa- AA- Positive

a+ A+ Positive

a A Positive

a- A- Positive

bbb+ BBB+ Positive

bbb BBB Positive

bbb- BBB- Positive

bb+ BB+ Positive

bb BB Positive

bb- BB- Positive

b+ B+ Positive

b B Positive

b- B- Positive

ccc CCC Positive

cc CC Positive

c C Positive

d or rd D or RD Positive

Air CanadaManagement and Corporate Governance

Business Profile Financial ProfileIssuer Default

RatingFactorLevels

Sector Risk Profile

Operating Environment Financial

FlexibilityFinancial Structure

ProfitabilityCost StructureManagement

Strategy/Effectiveness

Market PositionRoute Structure

92

Fitch Aircraft Tiers (Scale of 1 to 3, with 1 highest)

Note: These indicative ranges are designed only to serve as general guidelines for aircraft tier classifications. Tier assignments will change over time. This is not a comprehensive list of all major aircraft models.Source: Fitch.

Indicative Aircraft Tier ClassificationsNarrowbody ModelsAirbus A319-100 2Airbus A320-200 1/2Airbus A321-100 1/2Airbus A320neo Family 1Boeing B737-Classic Family 3Boeing B737-700 2Boeing B737-800 1Boeing B737-900ER 1/2Boeing B757-200 3McDonnell Douglas MD-80 Family 3

Widebody ModelsAirbus A330-200 2Airbus A330-300 1/2Airbus A340 Family 3Airbus A350 Family 1Airbus A380-800 3Boeing B747-400 3Boeing B767-300ER 2Boeing B777-200ER 2Boeing B777-300ER 1/2Boeing B787 1

Regional/TurbopropEmbraer E190/170 Family 1/2Embraer E 140 Family 3ATR ATR 42-500 2ATR ATR 72-500 2ATR ATR 42-600 2ATR ATR 72-600 1

93

Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed.The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk,

unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities.Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

@fitchratingsfitchratings.com

New York London33 Whitehall StreetNew York, NY 10004

30 North ColonnadeCanary WharfLondon, E14 5GN

EU PTD - Press To Detonate?? The Package Travel Directive –

A ticking timebomb!

Steve ForrestManaging Director, Financial Solutions Group Marsh

EU PACKAGE TRAVEL DIRECTIVEPOTENTIAL SOLUTIONS19 September 2018

Steve Forrest, Risk Finance PracticeLondon

© 2018 Marsh Ltd 97

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are intended solely for the entityidentified as the recipient herein (“you”). This document contains proprietary, confidential information of Marsh and may not be shared with any thirdparty, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal mattersare based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice,for which you should consult your own professional advisors. Any modelling, analytics, or projections are subject to inherent uncertainty, and the MarshAnalysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change.The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shallhave no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any servicesprovided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financialcondition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Alldecisions regarding the amount, type or terms of coverage shall be your ultimate responsibility. While Marsh may provide advice and recommendations,you must decide on the specific coverage that is appropriate for your particular circumstances and financial position. By accepting this report, youacknowledge and agree to the terms, conditions and disclaimers set forth above.

© 2018 Marsh Ltd

European Commission presented new rules on package travel in November 2015.– Extends protection of 1990 EU Package Travel Directive beyond traditional package holidays

organised by tour operators to consumers who book other forms of combined travel.– Combinations will be protected as a package, particularly where services are advertised as a

package, booked within the same booking process, or offered/charged at a total/inclusive price. – Directive applies in EU countries from 1 July 2018 to three categories of travel combinations:

UK Government announced “Airline Insolvency Review” for release in summer 2018 to consider:– Range of options to protect consumers if airline collapses.– How market could be reformed to ensure passengers are better protected.

Package Transport DirectiveEU directive applies to linked travel arrangements such as “click through” bookings.

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Pre-arranged packagesReady-made by tour operator with two or more elements

Customised packages Selection of components for same trip bought from single business

Linked travel arrangements such as “click through” bookings Traveller books service on website and is invited to book another service via a link

Applies to IATA member airlines

1

2

3

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Potential OptionsThe EU’s scoping of the regulations is vague, however there appear to be three high level options for complying with the regulations.

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1. Individual Arrangements

2. PTD insurance facility

3. Airline fund

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Proposed Solution Airline fund.

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• Each airline puts an amount into the fund (instead of providing security e.g. LoC fees or premium).

• Costs are independently verified and / or audited to ensure fairness.• Fund provides necessary guarantees to EU Member States for IATA airlines. • Fund buys “spike” cover where it would not survive a major airline default

(e.g. via insurance, Credit Default Swap, or a banking credit line).

How does it work?

• Each airline obtains a quote for security (e.g. an LoC), and the amount they would actually be charged for an LOC is put into the fund as premium.

How do we ensure

everyone pays the

appropriate amount?

• If losses do not exceed the net worth of the fund in one year, there is either: (i) a rebate; (ii) a fee reduction in year 2; or (iii) retention of the surplus resulting in a lower requirement for external support.

What happens if the fund is in credit?

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Airline Fund Each airline puts an amount into the fund (instead of providing their own security).

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AirlineFund

Airline

AirlineAirline

Airline

Airline

Airline

Each airline pays a fair share proportional to their risk

(i.e. the amount quoted by an LoC provider)EU Nations

Satisfy requirements of

Package Travel Directive

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Advantages and ConsiderationsEnsures accessibility of cover for all airlines so that financially stronger airlines are not subsidising the financially weakerairlines.

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Advantages

� Ensures accessibility of cover for all airlines so financially stronger airlines do not subsidise financially weaker airlines.

� More cost effective and easier to administer than each airline providing individual security.

� Fund independently managed (like Group Captive) but can be domiciled anywhere.

� Benefit to airlines in terms of:- Overall cost;- Accessibility of cover; and- In event of failure of an airline, flights will mostly be re-booked with another member, meaning revenue is retained within the industry.

Considerations

� Requires critical mass to be effective, as well as significant modelling in order to ascertain if the fund can handle every reasonable scenario.

� Unlikely to deal adequately with a systematic loss, such as another 9/11 event. However the fund could be disbanded with monies paid out to the fund participants upon such an event, if the members agree.

� Fund will be externally and expertly monitored with potential remedies, for example fund members will be asked to revalidate an LoC or alternative quotations, where necessary.

� No airline wants to bail out another.

� Requires accounting, actuarial, administration, contractual, domicile, legal and tax support.

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Alternative SolutionsThese include individual arrangements or Airline facility.

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Individual Arrangements

• Annual cost would be incurred, without potential for any “up-side” (i.e. in the proposed solution, there is potential for surplus in the fund which can reduce future payments).

• Reverse Trade Credit (TC) might work if regulations require only credit insurance rather than Surety or Letter of Credit (LoC).

• If Surety solutions are permitted, this may be preferred to an LoC or TC.

Airline facility

• Requires a critical mass to be effective.

• Agreement from an insurance market or markets they will provide cover for all airlines in exchange for IATA pushing airlines with good and bad credit ratings into the scheme.

• This would still result in differential pricing between the airlines.

• There may not be market appetite.

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Next Steps

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Discuss further within Airline community.

Co-ordinate with individual airlines, keeping everyone advised.

© 2018 Marsh Ltd

Further Information

� https://ec.europa.eu/info/law/law-topic/consumers/travel-and-timeshare-law/package-travel-directive_en

� http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015L2302

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http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015L2302

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015L2302

Registered in England and Wales Number: 1507274, Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU. Marsh Ltd is authorised and regulated by the Financial Conduct Authority.

© 2018 Marsh Ltd

Passenger claims - A growing risk?

Moderator: Chaitan Jain - Assistant Director, External Affairs, IATA

Jim Callaghan - Lawyer, Croon Callaghan Aviation Consulting LLPErik Swelheim - CFO, KLM

Passenger Claims:A Growing RiskIATA World Financial Symposium 2018

September 19, 2018

EU261: From Bad to Worse!

How Has It Gotten This Bad?

Originally intended to address denied boarding and commercial cancellations

ECJ case law has consistently broadened the scope

Delays/tech issues never intended to be included

Why Should Airline CFO’s Care?

Huge cost exposure, both direct and indirect

Proliferation and growing sophistication of CMCs (launch of APRA)

Likely to get worse

What Can We Do About It?

1

2

3

Better manage the current situation to minimize the cost/damage

Assist IATA to gather relevant “ammunition” for legislative change

Lobby national governments to support sensible changes

DiscussionPlease contact us at: [email protected]

For more information, please go to www.croon-callaghan.com

Integrating forward technologies and taking control of your cashflow

Antoine TrepantManaging Director, France, C2FO

Financial Digital Transformation

Integrating forward technologies and taking control of cash flow.

Brought to our membership by

116©2018 All rights reserved | C2FO Proprietary 116©2018 All rights reserved | C2FO Proprietary

Antoine Trépant, Managing Director C2FO

Antoine Trépant EXPERIENCE

Trade Finance:

Treasury:

Tech start-up (digital mobile migration)

FOCUS TODAY

• Drive financialinnovation

• De-risk supplychains

• Release trappedliquidity to fostergrowth

117©2018 All rights reserved | C2FO Proprietary

Fuel price volatility | Tariffs | PurchasingCompetition | Regulation | Safety | Security

The airline industry faces macro challenges

• Currency fluctuations• Fuel pricing volatility• Tariffs and trade wars• Competitive threats (low cost carriers)• Safety and security regulations• Supplier chain risks

of cash being trapped between your A/P and your supplier’s A/R


60DSO

Trapped cash & lengthy payments are global issues. The financial system is broken.


$US40T~

60DSO

The airline industry can put$500B of trapped cash to work.


$US500BANNUAL

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• Pay suppliers early• Increase ROCE • Reduce Cost of Goods

• Pay suppliers on time• Maintain Cost of Goods• Your balance sheet

• Increase liquidity• Receive small rebate• Third-party funded

• Increase liquidity• Increase DPO• Third-party funded

Supply Chain

FinanceTech

Open AccountP-cards

IncreaseCash

Balance

Increase Gross

Margin

Forward thinking and holistic trade finance


Approved invoices are made accessible to suppliers

who will offer their customers a discount in exchange for an early payment.

A collaborative industry-serving marketplace for cash

Airline suppliersneed cash

Collaborative Cash Flow

OptimizationTechnology

Buyers (airlines)can provide cash

Optimal Yield Optimal Rate

Suppliers


A vision for the airline industry…Capital is diffused across the air travel supply chain

— Market Member (illustrative)

Tier 1

Tier 2

Tier 3

TRAVEL

HOSTS GUESTS

WORKING CAPITAL (B2B)

SUPPLIERS BUYERS

AIRLINE TICKETS

CARRIERS FLYERS

TRANSPORTATION

DRIVERS RIDERS


Questions

Documents

Financial Risk Liquidity Management - IATA - Home · Ben, the KLM Station Manager of Schiphol, received a call from OCC that the KL1233 is cancelled. Based on the PAM rules, the passengers