IATA bemoans its poor returns to investors – and calls for more airline consolidation
In a recent IATA study, they say that returns on capital invested in airlines are still far below what investors would normally expect to earn. Investors can make much more money investing elsewhere. IATA’s director general, Tony Tyler, said: “Unless we find ways to improve returns for our investors it may prove difficult to attract the $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.” IATA says during 2004-2011 period, returns on capital invested in the airline industry worldwide averaged 4.1% but that is nowhere near the average cost of capital of 7.5% which represents the return on capital that investors would expect. “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.” Tony Tyler said: “Airlines . . . face a hyper fragmented industry structure owing to government policies that discourage cross-border consolidation. There is plenty of room for some fresh thinking.” Tony Tyler also said that net profits per airline passenger worldwide were just $2.56 in 2012. So little profit – for so much environmental damage and so much CO2.
|“Despite the clear value being created for customers, the
airline industry has found it difficult to make an adequate
level of profits. Last year was a fairly typical point in the
middle of the cycle. Airlines generated revenues averaging
a little over $228 per passenger. That included just over $12
per passenger in ancillary revenues. However, after paying
tax and debt interest, net profits per passenger were just
$2.56.”Tony Tyler (page 10 of IATA profitability report)
Iata calls for more airline consolidation
By Andrew Parker
1.7.2013 (Financial Times)
Airlines will struggle to pay for the next generation of more fuel-efficient passenger jets unless governments and carriers take steps to improve industry profitability, the sector’s representative body warned on Monday.
The International Air Transport Association used a report about the sector’s weak earnings record to urge governments to take a more relaxed view on global mergers because consolidation is seen as a key driver of profits.
Full FT article at
More consolidation; ever larger multinational companies; ever more chance to avoid tax due to be paid to the UK or other national government…..
Study: Airlines will be challenged to meet forecast demand growth
1.7.2013 (IATA press release)
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 $4-5 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% 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 $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 $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.”
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 $16-48 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%, followed by freight forwarders with an ROIC of 15%.
However, high profits and inefficient costs in the value chain are only part of the explanation for persistently poor airline profitability. In fact over the past 40 years the airline industry has more than halved the cost of air transport in real terms, owing to better fuel efficiency, asset utilization and input productivity. Yet these efficiency gains have ended up in lower air transport yields rather than improved investor returns. That has created tremendous value for customers and the wider economy, but has left equity investors in the airline industry unrewarded. The study shows this aspect of the airlines’ performance lies more in the industry’s highly fragmented and unconsolidated structure and the nature of competition, rather than in the supply chain, although distribution is a key part of the puzzle.
“More effective partnerships are required among stakeholders in the air transport industry. 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,” said Tyler.
An agenda for governments is also outlined in the study. “Smart regulation is needed from governments around the world in order to maximize the economic benefits of connectivity—jobs and growth. 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. There is plenty of room for some fresh thinking on all accounts,” said Tyler.
Read full report (pdf)