IATA laments low airline profits

The world’s airlines are not reaping the financial rewards they deserve, considering the amount they contribute to the global economy, the International Air Transport Association (IATA) has said.

Lamenting the industry’s thin margins and low profits, IATA, which represents 240 airlines worldwide, said other industries such as fuel companies and electronic distributors have been getting rich at airlines’ expense, and that “new thinking” was needed on the relationships between the aviation industry and its partners, in an effort to attract new investment.

“The airline industry has created tremendous value for its customers and the wider economies we serve,” said IATA’s director-general & CEO, Tony Tyler. “Aviation supports some 57 million jobs globally and we make possible US$2.2 trillion worth of economic activity. By value, over 35% of the goods traded internationally are transported by air.

“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$4-5trn 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 call followed an IATA study, supported by analysis from McKinsey & Company, which claimed that airlines will need up to US$5trn of investment over the next 20 years to meet rising demand for their services.

IATA stated that airlines are the “least profitable segment of the air transport value chain”, largely due to their fuel costs. In contrast to airlines’ combined annual net profits of US$7.6bn in 2012, fuel companies “benefited from an estimated US$16-48bn of their annual net profits generated by air transport”, according to the association.

It also claimed that distribution is the “most profitable part of the rest of the value chain”, with the computer reservation systems units of the three main GDS companies generating an average return on invested capital (ROIC) of 20%.

IATA added however, that much of the problem for airlines lies in the industry’s “highly fragmented and unconsolidated structure and the nature of competition, rather than in the supply chain”, although it added that distribution is “a key part of the puzzle”.

“More effective partnerships are required among stakeholders in the air transport industry,” said Tyler. “Efficiency gains are a win-win for all concerned. We have seen that with the adoption of 100% e-ticketing and the introduction of global self-service standards. Not only did partners in the industry benefit, but consumers gained great value through more efficient and convenient processes. This study points to the active collaboration needed to find even more such solutions.”