30 April 2018

Flying High on Lost Baggage and Delayed Flights

PanAgora is a highly regarded funds management business based in Boston, USA. They manage money for some of the largest investors in the world including sovereign wealth funds, university endowments, and large pension plans.

In Australia, Pengana have partnered with them to manage the Pengana PanAgora Absolute Return Global Equities Fund. This fund employs a diversified long/short equity strategy that seeks to generate attractive absolute returns for our investors.

As a firm, PanAgora employ quantitative techniques to assist them in making investment decisions, however this is a quant fund with a difference. The strategies they have developed are all based on logical intuition and fundamental research, in fact, PanAgora have gone so far as to neutralise the exposure of the fund to all of the investment signals that quant managers would typically look at. Quantitative techniques are only used in this fund for scaling strategies across an investment universe of approximately 5000 stocks - an impossible feat for a purely fundamental manager. 

Some of these signals are designed to assess things like management capability, strength of earnings and customer loyalty. These are obviously relevant to all companies in the investment universe because they help sort the good from the bad. Others are narrower in focus, and are designed to enhance the analysis for a particular industry or sector. 

PanAgora strives to be different in everything they do which we like, because differentiated thinking and differentiated process leads to differentiated outcomes. This means they can add value to an investment portfolio.

The example below will show some of the signals that PanAgora have developed to assess strength in the airline industry, but more broadly, it shows how they are able to use existing, but often underutilised data to enhance their analysis.

1. Departure and arrival times

Every time a commercial flight takes off or lands, the times of the departure and arrival are logged. PanAgora’s analysis of this has confirmed what many of us have long suspected; some airlines are more prone to delays than others are. This is often a sign of operational inefficiency, which is ironically compounded if the pilots try to make up for lost time by flying faster - thereby burning more fuel. Passengers also notice flight delays and are likely to remember disappointing experiences when they book their next flight.

2. Counting incidences of lost baggage

As with take-off and arrival times, in most parts of the world airlines are required to log lost baggage claims with the local aviation authority. Lost baggage is another indication of operational inefficiency and significantly, another disappointing airline experience for the affected passengers. 

PanAgora have identified the databases described in steps 1&2 above, and are able to extract the information described as a proprietary indicator of operational efficiency and potentially, customer satisfaction. 

3. Checking available seats

The last piece of the puzzle is to assess the likely revenue impact. PanAgora have developed software that is able to interrogate the flight booking sights, examining the ticket prices and seat availability prior to a flight’s departure.

As we would expect, airlines whose flights take off late, land late, and lose passengers baggage are more likely to have empty seats. This confluence of factors provides PanAgora with important information to consider when assessing which airline stocks they should buy and which they should sell short. 


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