FYI Business Spectator article

Not open for further replies.


Established Member
Nov 1, 2011
Airlines are running themselves into the ground

The latest International Air Transport Association analysis of the state of the aviation industry highlights what a dysfunctional industry it is and provides context for the ongoing haemorrhaging and continuing shrinking of Qantas’ international business.
IATA expects the industry to make aggregate profits of $US18 billion this year (up from $US10bn last year but slightly down on its March forecast of $US18.7bn). That represents an average return on invested capital of only 5.4 per cent.
In a report issued yesterday, IATA says that the industry’s cost of capital is about 7.5 per cent and therefore the loss of shareholder value if the industry meets the forecast is more than two percentage points or about $US15bn. In fact, over the three years to end-2014, the industry would have cost its capital providers more than $US55bn.
Unlike many of its government-owned or sponsored competitors, there is no way Qantas -- a listed entity with private shareholders -- could convince those shareholders to give it capital to invest in activities that destroy capital.
The bizarre aspect of the industry is that it is actually growing solidly. IATA says air travel is accelerating, with growth of 5.9 per cent expected this year compared with the 5.5 per cent average over the past 20 years. Average one-way fares, however, are in real terms 3.5 per cent lower than last year.
The available seats in the industry rose 5.3 per cent last year and will rise, IATA says, another 3.5 per cent this year. In any other industry generating returns below its cost of capital there would be capacity reductions, not increases. The industry is expected to invest more than $US150bn in new aircraft this year.
The best-performing region in the industry is the US, where consolidation and a focus on managing capacity profitably saw profits rising from $US2.3bn in 2012 to $US7bn last year to a forecast $US9.2bn this year. As a percentage of revenue, the profit of the US carriers would be 4.3 per cent.
In the Asia-Pacific region, profits are expected to rise from $US2bn to $US3.2 billion, a margin on revenues of only 1.6 per cent despite (or because of) capacity growth of 7 per cent. For Middle Eastern airlines, which have the world’s lowest break-even load factors, profits are expected to rise from $US1bn to $US1.6bn, generating a margin of 2.6 per cent in the context of a 13 per cent rise in capacity.
It is, of course, the Asian and Middle-Eastern carriers that have decimated Qantas’ international market shares, forced it to cull its international route network and ultimately pressured it into its alliance with Emirates. Competition from competitors prepared to accept sub-economic returns has also forced Qantas into a brutal restructuring and cost-reduction program.
As IATA’s Tony Tyler said, in any other industry the response to the industry circumstances would be consolidation, which has been the key to the improvement in the condition of the US industry. The regulatory structures in the industry, national aspirations and non-level playing fields make rational responses to those circumstances almost impossible.
The growing trend towards alliances is, at least, a step in the right direction towards synthetic consolidation, but those ‘alliances’ and their benefits tend to be quite one-sided.
The jury is out on the longer term implications and benefits of, for instance, the Qantas/Emirates relationship. In reality, Qantas’ choices were to agree to that deal or simply exit routes to Europe (other than, perhaps, flights to the UK) completely.
In any event, there is nothing in the latest IATA analysis that offers any confidence that the industry won’t continue to undermine its own economics regardless of how favourable or otherwise the external environment might be. For Qantas, that means that there is no prospect of a growth dividend and no option but to continue hacking away at its costs.
Even if global conditions continue to improve, it is a fair bet that the industry will simply add even more capacity to compress margins and depress returns on capital.
Virgin Wines Australia Has Exceptional Red, White & Sparkling Wines On Offer. See Online. See Our Exclusive Wine Selections From Around Australia & Around The World. Shop Now! Advent Calendar 2021. Better Wines for Less. Cancel Anytime. No Membership Fees.

AFF Supporters can remove this and all advertisements

Not open for further replies.