The call
came in an IATA study supported by analysis from McKinsey & Company,
“Profitability and the Air Transport Value Chain”, which shows that returns on
capital invested in airlines have improved in recent years, but are still far
below what investors would normally expect to earn.
“The
airline industry has created tremendous value for its customers and the wider
economies we serve. Aviation supports some 57 million jobs globally and we make
possible $2.2 trillion worth of economic activity. By value, over 35% of the
goods traded internationally are transported by air,” said Tony Tyler, IATA’s
Director General and CEO. “But in the 2004-2011 period, investors would have
earned $17 billion more annually by taking their capital and investing it in
bonds and equities of similar risk. Unless we find ways to improve returns for
our investors it may prove difficult to attract the $4-5 trillion[1] of capital we need to serve the
expansion in connectivity over the next two decades, the vast majority of which
will support the growth of developing economies.”
During the 2004-2011 period, returns
on capital invested in the airline industry worldwide averaged 4.1%[2]. This is an improvement
on the average of 3.8% generated in the previous business cycle over 1996-2004[3]. However, this is nowhere near the
average cost of capital of 7.5% which represents the return on capital that
investors would expect to earn by investing in assets of similar risk outside
the airline industry. While some airlines have consistently created value for
equity investors, these are few in number. On average industry returns were
just sufficient for the industry to service its debt, with nothing left to
reward equity investors for risking their capital.
The study
showed that over the past 40 years virtually all industries have generated
higher returns on invested capital (ROIC) than the airline industry. Moreover, airlines are the least
profitable segment of the air transport value chain while other segments
consistently generate good returns for their investors. The biggest cost for
airlines today is fuel and companies in this sector benefited from an estimated
$16-48 billion of their annual net profits generated by air transport. The most
profitable part of the rest of the value chain is in distribution, with the
computer reservation systems businesses of the three global distribution system
companies generating an average ROIC of 20%, followed by freight forwarders
with an ROIC of 15%.
However,
high profits and inefficient costs in the value chain are only part of the
explanation for persistently poor airline profitability. In fact over the past
40 years the airline industry has more than halved the cost of air transport in
real terms, owing to better fuel efficiency, asset utilization and input
productivity. Yet these efficiency gains have ended up in lower air transport
yields rather than improved investor returns. That has created tremendous value
for customers and the wider economy, but has left equity investors in the
airline industry unrewarded. The study shows this aspect of the airlines’
performance lies more in the industry’s highly fragmented and unconsolidated
structure and the nature of competition, rather than in the supply chain,
although distribution is a key part of the puzzle.
“More
effective partnerships are required among stakeholders in the air transport
industry. Efficiency gains are a win-win for all concerned. We have seen that
with the adoption of 100% e-ticketing and the introduction of global
self-service standards. Not only did partners in the industry benefit, but
consumers gained great value through more efficient and convenient processes.
This study points to the active collaboration needed to find even more such
solutions,” said Tyler
An agenda
for governments is also outlined in the study. “Smart regulation is needed from
governments around the world in order to maximize the economic benefits of
connectivity—jobs and growth. Unfortunately, high taxation and poorly designed
regulation in many jurisdictions make it difficult for airlines to develop
connectivity. On top of the
cost issues, airlines also face a hyper fragmented industry structure owing to
government policies that discourage cross-border consolidation. There is plenty
of room for some fresh thinking on all accounts,” said Tyler
