Keys to airlines profitability

Few days ago I read the following tweet from IATA (International Air Transport Association):

It linked an interesting article from its website, where some (brutal) keys about the airline business are summarized:

  • It is estimated that $4 trillion to $5 trillion will be needed to buy the aircraft necessary for growth in the next 20 years (see Airbus and Boeing forecasts here).
  • 75% of the world’s airlines are at least majority owned by the private sector
  • According to a new IATA study, Profitability and the Air Transport Value Chain [PDF, 3.5 MB], in the airline industry — hyper-competitive and suffering from numerous structural problems —investors have never reached WACC.
  • During 2004–2011, the airline industry worldwide  averaged a ROIC of 4.1%. This is an improvement on the average of 3.8% generated in the previous business cycle 1996–2004 but it is nowhere near WACC (7.5%).
  • In 2012 airlines made just 2.56$ per passenger.
  • Fuel has risen to become more than 30% of an airline’s operating costs despite far more efficient operations and engines.
  • Air transport generates somewhere between $16 billion and $48 billion in profits for fuel companies every year.
  • The airline industry has done a pretty good job at cutting cost, with a 60% fall in real terms over the past 40 years.
  • The problem from an investor perspective is that all of those cost reductions have been passed through to customers, leaving equity investors unpaid for risking their capital.
  • Looking at the overall investment picture, investors would get $17 billion more per year if they put their money in equities and bonds of a similar risk profile outside the airline industry.
Air transport generates (...) profits for fuel companies.

Air transport generates (…) profits for fuel companies.

Sad situation of the sector from the point of view of an aviation enthusiast. Nevertheless, all these conclusions necessarily lead me to the following two quotes from remarkable businessmen:

Warren Buffett: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

Richard Branson: “The quickest way to become a millionaire in the airline business is to start out as a billionaire.”

Advertisements

Leave a comment

Filed under Aerospace & Defence

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s