Airlines will be challenged to meet forecast demand growth: IATA study
ETW STAFF – Mumbai
The International Air Transport Association (IATA) has called for new thinking on the relationships between partners in the air transport value chain in order to attract the US$ 4-5 trillion that will be needed over the next 20 years to meet the growing demand for aviation-enabled connectivity.
The call came in an IATA study supported by analysis from McKinsey & Company, ‘Profitability and the Air Transport Value Chain’, which 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.
“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 possible $2.2 trillion worth of economic activity. By value, over 35 per cent of the goods traded internationally are transported by air,” said Tony Tyler, director general and CEO, IATA. “But in the 2004-2011 period, investors would have earned US$ 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 the US$ 4-5 trillion of capital we need to serve the expansion in connectivity over the next two decades, the vast majority of which will support the growth of developing economies.”
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 US$ 16-48 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.
