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Geneva - 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 $4-5trn that will be needed over the next 20 years to meet the growing demand for aviation-enabled connectivity.
An Iata study, supported by analysis from McKinsey & Company, 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.
“Aviation supports some 57 million jobs globally and we make possible $2.2trn 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 $17bn more annually by taking their capital and investing it in bonds and equities of similar risk.”
Unless the airline industry could, therefore, find ways to improve returns for its investors, it may prove difficult to attract the capital needed to serve the expansion in connectivity, especially to support growth in developing economies.
During the 2004-2011 period, returns on capital invested in the airline industry worldwide averaged 4.1%. This is an improvement on the average of 3.8% generated in the previous business cycle over 1996-2004.
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 $16-48bn 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%.
“More effective partnerships are required among stakeholders in the air transport industry. Efficiency gains are a win-win for all concerned,” said Tyler.
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,” said Tyler.
“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.”
- Fin24
An Iata study, supported by analysis from McKinsey & Company, 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.
“Aviation supports some 57 million jobs globally and we make possible $2.2trn 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 $17bn more annually by taking their capital and investing it in bonds and equities of similar risk.”
Unless the airline industry could, therefore, find ways to improve returns for its investors, it may prove difficult to attract the capital needed to serve the expansion in connectivity, especially to support growth in developing economies.
During the 2004-2011 period, returns on capital invested in the airline industry worldwide averaged 4.1%. This is an improvement on the average of 3.8% generated in the previous business cycle over 1996-2004.
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 $16-48bn 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%.
“More effective partnerships are required among stakeholders in the air transport industry. Efficiency gains are a win-win for all concerned,” said Tyler.
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,” said Tyler.
“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.”
- Fin24
