Investor relations - why they are so important September 2000

When operating a company in the comfortable environment of state ownership or under a single owner, it takes very little effort to keep the shareholder informed. In these circumstances investor relations is a simple process. However, as soon as a company comes to the markets through an IPO, with a resulting explosion in the number of outside shareholders, keeping investors informed and happy becomes far more complicated. This is no more so relevant than in reference to airlines. Why should the development of good investor relations be that important and does it really make a difference?

There is an example from a few years ago. The then CFO of Lufthansa, Dr Schlede, said over lunch with analysts that he saw no real reason to waste management time on analyst briefings and meetings since Lufthansa would never need to raise capital again. That was towards the top of the cycle after the successful full privatisation of the German flag–carrier.

Only a few years later CEO, Jürgen Weber, was saying publicly at the time of the publication of a set of results that the value of the shares should be €30 when they were trading at only €20. The two comments may appear incompatible, but are directly related.

Airlines are complicated beasts: management spends much time in the juggling many outside variables with the (sometimes forlorn) hope of making a profit. When they do manage to make a series of profits, some even fail to remember basic economics ("The industry is no longer cyclical", Gordon Dunlop, former CFO of BA, 1987).

In running an airline you are managing a long term asset (the route network and aircraft) attempting to match it to the short–term vagaries of demand and cost movements. Sometimes it is difficult to see beyond the end of the week. However, it is very important to remember why you are running the business.

Basic Principle: the company is owned by the shareholders. Under some non Anglo- Saxon regimes, it is sometimes thought that there are other stakeholders in the business — such as employees and debt providers — although these too can be shareholders.

All in any case can feel happier with a rising share price value. That should be the carrot to the management. The stick is the fear of higher funding rates, higher cost of capital and in a normal world the fear of takeover should the share price languish.

Who are the investors to which the relational programme should be directed, and for whom it would be important? Private investors are not that demanding. It is the professional institutional investors who will have the ability to invest sums sizeable enough to have an influence on the share price movements.

While the airline industry is one of the truly global industries, it accounts for less that 2% of total world equity market capitalisation. Outside the US and UK, there tends also to be only one airline quoted on any one stock market. Outside the US also, because of the regulation of international route rights, it is virtually impossible to envisage mergers or acquisitions — not withstanding the current negotiations between KLM and British Airways.

Even a global investment manager can only afford to spend 90 seconds a day considering this complicated industry; and very few investment companies can afford the luxury of an airline specialist. As a result of this, many new shareholders may have misconceptions, a lack of understanding of the minutiae of the business, and be confused by aviation’s every day jargon.

As it is such a public service business, passions fly in the press particularly about the flag carrier — and quite often such stories carry their own misconceptions that can have an impact on share price movements. The investors also fly themselves. They will want a focal point for contact with the company, they will demand answers to their questions, and get very annoyed if the answers are not available immediately.

You cannot afford to stand still and merely relate with existing investors. Share price performance reacts to the balance of buyers over sellers — and you have to try to ensure that you will attract new investors to keep the momentum in the right direction.

Dealing effectively with the middlemen — the "sell–side" investment analysts — is essential. These, a small select group, distil the complications of the industry and the company into a single word (buy or sell) and then attempt their salesmen and clients to act on the recommendation.

Each of these, the buy- and sell–side of the investment community are important for investor relations. So how does a newly quoted airline go about tackling the thorny problem of investor relations?

Solutions

• Investor relations becomes the Finance Director’s responsibility. However, his priority should be to make sure the airline is making money and he can ill–afford diversions. The investor community will always prefer to talk to the CFO, but he will have access to certain information at board level that should not be disclosable. Although the CFO has a full working knowledge of the budgets, management accounts and accounting principles, he will easily get bored defining an RPK for the umpteenth time.
• The CFO designates a colleague — the treasurers, controller, for instance. However, he is likely to be too involved with the minutiae of the business.
• A PR/Media Communications expert is appointed. Here the problem is that they will tend to be good at only giving a positive slant on a story. They are unlikely to be able to cope with the financial details. In addition, they would have to understand the requirements and accounting principles across all markets in order to be able to make valid comparison’s between your airline’s performance and that of rivals.
• Use someone from the operational departments is used — pilot, for instance. Generally not a good idea; there is one at the moment at a major European carrier who is distinctly off–putting.
• Hire an analyst from the buy or sell side to act as investor relations advisor. However, an airline would likely balk at the salaries demanded by the best analysts. Whoever is put in place to respond to investor queries has to have a full understanding of analysts' and fund managers' requirements across all accounting backgrounds and all cultural differences. So a final choice might be to involve Aviation Economics — a consultancy whose team has a combined 40 years of multicultural investor communication!