Tuesday 19 March 2024
 
»
 
»
Story

Global airlines face major challenges, says study

Geneva, July 1, 2013

The International Air Transport Association (Iata) called for new thinking on the relationships between partners in the air transport value chain in order to attract the $4 trillion to $5 trillion that will be needed over the next 20 years to meet the growing demand.

A study supported by analysis from McKinsey and Company, “Profitability and the Air Transport Value Chain”, revealed that returns on capital invested in airlines have improved in recent years, but is 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 $2.2 trillion worth of economic activity. By value, over 35 per cent 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 them,” he said.

During the 2004-2011 period, returns on capital invested in the airline industry worldwide averaged 4.1 per cent, against an average of 3.8 per cent generated in the previous business cycle over 1996-2004. However, this is less than the average cost of capital of 7.5 per cent 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, for most the 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.  

The biggest cost for airlines today is fuel and companies in this sector benefited from an estimated $16 billion to $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 per cent, followed by freight forwarders with an ROIC of 15 per cent.   

Over the past 40 years, it was found that the cost of air transport in real terms was halved, owing to better fuel efficiency, asset utilisation and input productivity. It 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.  

An agenda for governments is also outlined in the study. “Smart regulation is needed from governments around the world in order to maximise 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,” said Tyler.

“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,” he added. - TradeArabia News Service




Tags: Iata | challenges | McKinsey | study | Tyler |

calendarCalendar of Events

Ads