Tag Archives: IATA

September 29, 2013 · 10:00 am

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.”

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November 8, 2010 · 12:00 pm

The cost of flying low

Last 12th October, I came from Amsterdam to Madrid by plane. That day there was an air controllers strike in France. While flying, the pilot commented that the company had tried to re-route the flight in order not to lose the slot it had, this proved almost impossible so what they did was to fly at a lower level. The pilot explained that this was very “costly as the engines consume much more” at that lower level.

How much more? How costly was this measure? I wanted to check it out, and some weeks later I have made the numbers that I show here.

We flew in an Airbus A321. Since it was the early flight in the morning I assume it carried maximum fuel and the weight was limited by Maximum Landing Weight (75.5 tonnes, MLW), so the takeoff weight would be the MLW plus the fuel weight we would consume in the flight, in the order of 5,500 kg (an average of 2,400 kg/hour according to some operators). Thus I used a takeoff weight of ~81,000 kg.

When flying at a lower level, the air density is higher and this increases drag. Normally, planes in this route fly at ~ 33,000 ft or ~ 10,000 m. What flight level did we use? This I don’t know, so I took the worst situation: say we flew at FL210, or 21,000 ft (~ 6,400 m). We can find at the chart the Standard Atmosphere and see the difference in density at both altitudes (~ 0.53ρ0 compared to ~ 0.33ρ0).

 

Flight levels, image from Wikipedia.

 

 

Standard Atmosphere, image from Wikipedia.

 

Using the Breguet range equation, all other things being equal (same distance, same aircraft, same weight at the departure…), we can relate the weights and densities of the initial flight plan the company had and the one used after trying to re-route.

 

Breguet range equation.

 

The result I got is that by flying at FL210 instead of FL330 the aircraft would have consumed over 1,400 kg of fuel more, a whole 26% more.

I checked the prices for fuel at IATA (International Air Transport Association) and at the moment is 746$/mt. The 1,400 kg of extra fuel would cost about 1,050$ (~ 760€), or about 4.2€ more per passenger (assuming we were around 180 passengers).

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May 15, 2010 · 11:00 am

Starting up an airline?

Some days ago I came across a post in the blog of Randy Tinseth, VP Marketing  for Boeing Commercial Airplanes, where he explains the concept of StartupBoeing and invites entrepreneurs to take up the opportunity. StartupBoeing is a website which offers information to entrepreneurs in order to help them build their business plan or run their operations. As it is stated in the web itself:

“The StartupBoeing team assists entrepreneurs in launching new airlines. From concept through launch, StartupBoeing offers guidance, review, analysis, data, resources, contacts, and referrals to qualified startup airlines.”

The first thing I thought was “yes, there is the opportunity to lose your investment”. To be fair, Tinseth points at different moments the difficulty of the business and that it is tough to start-up an airline. Airbus does also have the same concept available to entrepreneurs, in this case is called: Start Me Up.

I looked for the last industry outlook from the International Air Transport Association (IATA), the industry association. The figures are appalling (see the table below):

IATA Financial results of the last decade.

Airlines around the world have lost during the last decade 50 billion dollars, with only 2 out of ten years with profits. On average the net profit, loss in this case, was -1.4% of the revenues (over 4 trillion dollars in the decade). Of course, there are airlines making profits, but the industry is not doing well (just remember the last achievements of G. Díaz Ferrán).

I then remembered this other comment from Warren Buffet about the airline industry since its inception:

“I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.

But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You’ve got huge fixed costs, you’ve got strong labour unions and you’ve got commodity pricing. That is not a great recipe for success.

I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: “My name is Warren and I’m an aeroholic.” And then they talk me down.”

So, yes, if you are considering whether to start-up an airline, do yourself a favour: call that 800 number, and put your cash somewhere else where it returns more than -1.4%…

The one thing we should definitely praise from these initiatives is the information resources available to the general public, something commented by readers of Randy’s blog and a purpose expressed in the Startup website as well:

“StartupBoeing.com also has a wider purpose as a resource to pass on information to our customers – and also as a resource for existing airlines, financial institutions, consultants and the leasing community. It’s a place for neutral industry data. We want to help make the industry healthy and make airlines safe, reliable and profitable.”

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