New research shows the global airline industry continues to generate the lowest return on invested capital (ROIC) out of a sample of nearly 30 industries.
The airline industry only managed ROIC of 4.1% from 2004-11, while top performers such as pharmaceuticals, software and information technology had returns of 15-33%.
Airlines recent return just beat the 3.8% it registered from 1996-04, according to a study conducted by consultants McKinsey & Company.
The industry's ROIC, used by investors to measure profitability, was well below the 7.6% cost of capital or the return investors should expect to earn on assets of similar risk, McKinsey said in its report for the International Air Transport Association (IATA).
McKinsey pointed out the airline industry has over a 40-year period shown the lowest ROIC of almost 30 industries.
Such poor profitability is of grave concern as the industry seeks to attract US$4-5 trillion in new capital for new aircraft over the next 20 years, IATA director-general Tony Tyler said in the report.
From 2004-11, airlines only generated sufficient revenue and profit to pay suppliers and service their debts, with almost nothing left to pay investors for providing equity capital, he said.
The study shows airlines are surrounded by stronger firms in the supply and distribution chain that earn higher returns.
Yet it concludes that airlines have been successful in cutting costs, with unit costs falling by more than 60% in real terms in the past 40 years.
This has not improved ROIC because unit revenue fell by a similar amount, creating tremendous value for consumers and the wider economy but leaving equity investors unpaid for providing capital.
The study concludes new partnerships and new thinking are required to make the changes necessary to attract the capital required in coming decades.
About the author
- Writer: Boonsong Kositchotethana
Position: Deputy Editor Business