By Chinelo Obogo
International Air Transport Association (IATA) has said trends across the aviation value chain reveal that in aggregate, airlines underperform on the financial return that an investor would normally expect.
The aviation body and McKinsey & Company published a study of profitability trends across the aviation value chain shows that despite delivering consistent operating profits pre-pandemic (2012-2019), airlines collectively did not produce economic returns above the industry’s Weighted Average Cost of Capital (WACC). On average the collective Return in Invested Capital (ROIC) generated by airlines was 2.4percent below the WACC, collectively destroying an average of $17.9 billion of capital each year.
The body also stated that pre-pandemic, all sectors of the value chain except airlines delivered ROIC in excess of the WACC, with airports leading the pack in the absolute value of return by rewarding investors with an average of $4.6 billion annually above the WACC (3% of revenue). When viewed as a percentage of revenue, Global Distribution Systems (GDSs)/Travel Tech firms topped the list with average returns of 8.5percent of revenues above the WACC ($700 million annually), followed by ground handlers (5.1% of revenue or $1.5 billion annually), and Air Navigation Service Providers (ANSPs) at 4.4percent of revenues ($1.0 billion annually).
IATA said although the pandemic (2020-2021) saw losses across the value chain, in absolute terms airlines’ losses led the pack, with ROIC falling below the WACC by an average of $104.1 billion annually (-20.6% of revenues). Airports saw ROIC fall $34.3 billion below the WACC and generating the largest economic losses as a percentage of revenue (-39.5% of revenues).
IATA’s Director General, Willie Walsh, said: “This research reaffirms that airlines improved their profitability in the years following the Global Financial Crisis. But it also clearly shows that airlines, on average, were not able to benefit financially to the same degree as their suppliers and infrastructure partners. Rewards across the value chain are also disproportionate to risk. Airlines are the most sensitive to shocks but have limited profits with which to build a financial buffer.
“The pandemic saw all players fall into economic losses. As the industry recovers from the crisis, the study’s most important question is: can a more balanced distribution of economic returns and risk be realised in the post-pandemic world?”
Airlines solely operating cargo flights has a profitable financial performance with an ROI of nearly 10percent. Thus, the profitability all-cargo carriers was the reverse of airlines carrying both passengers and cargo. By comparison, the performance of all cargo carriers is still well below the average ROIC for freight forwarders which began the crisis at nearly 15percent of revenues and grew to 40 percent of revenues by 2021.