IATA-McKinsey study shows imbalanced aviation industry value chain

Α Decrease font Enlarge font
IATA-McKinsey study shows imbalanced aviation industry value chainKey areas include decarbonization and data-sharing

The International Air Transport Association (IATA) and McKinsey & Company published a study of profitability trends across the aviation value chain showing that profitability varies widely by sector. The study also shows that in aggregate, airlines underperform on the financial return that an investor would normally expect. 

While there is no clear path to rapidly re-balance the value chain, the study concludes that there are some key areas—including decarbonization and data-sharing—were working together and burden-sharing will mutually benefit all value chain participants. 

Highlights from the Understanding the Pandemic’s impact on the Aviation Value Chain study (pdf) include: 

Capital Destruction: Despite delivering consistent operating profits pre-pandemic (2012-2019), airlines collectively did not produce economic returns above the industry’s Weighted Average Cost of Capital (WACC). On average the collective Return on Invested Capital (ROIC) generated by airlines was 2.4% below the WACC, collectively destroying an average of $17.9 billion of capital each year.  
Value Creation: Pre-pandemic, all sectors of the value chain except airlines delivered ROIC in excess of the WACC, with airports leading the pack in the absolute value of return by rewarding investors with an average of $4.6 billion annually above the WACC (3% of revenue). When viewed as a percentage of revenue, Global Distribution Systems (GDSs)/Travel Tech firms topped the list with average returns of 8.5% of revenues above the WACC ($700 million annually), followed by ground handlers (5.1% of revenue or $1.5 billion annually), and Air Navigation Service Providers (ANSPs) at 4.4% of revenues ($1.0 billion annually).  
Pandemic Changes: Although the pandemic (2020-2021) saw losses across the value chain, in absolute terms airlines’ losses led the pack, with ROIC falling below the WACC by an average of $104.1 billion annually (-20.6% of revenues). Airports saw ROIC fall $34.3 billion below the WACC and generated the largest economic losses as a percentage of revenue (-39.5% of revenues). 
This research reaffirms that airlines improved their profitability in the years following the Global Financial Crisis. But it also clearly shows that airlines, on average, were not able to benefit financially to the same degree as their suppliers and infrastructure partners. Rewards across the value chain are also disproportionate to risk. Airlines are the most sensitive to shocks but have limited profits with which to build a financial buffer,” said Willie Walsh, IATA’s Director General. 

The pandemic saw all players fall into economic losses. As the industry recovers from the crisis, the study’s most important question is: can a more balanced distribution of economic returns and risk be realized in the post-pandemic world?” said Walsh. 

Several changes in the profile of airline economic returns are noted in the study: 

While network carriers underperformed the low-cost sector (LCCs) pre-pandemic, average economic returns by network carriers exceeded those of the LCCs during the pandemic. The gap between the two, however, has narrowed as the recovery progressed. 
Airlines solely operating cargo flights have a profitable financial performance with an ROI of nearly 10%. Thus, the profitability of all-cargo carriers was the reverse of airlines carrying both passengers and cargo. By comparison, the performance of all cargo carriers is still well below the average ROIC for freight forwarders which began the crisis at nearly 15% of revenues and grew to 40% of revenues by 2021. 
Regionally, it was clear that in aggregate North American carriers entered the crisis with the healthiest balance sheets and strongest financial performance. The picture of recovery was less clearcut in 2021, but having fallen the deepest in the crisis, the trajectory of the region’s recovery is also the steepest.  

Why do airlines generate insufficient economic returns?

An updated analysis of the forces shaping airline profitability originally done in 2011 with Harvard Business School’s Professor Michael Porter demonstrates there has been little positive change.  

Competitive Fragmented Industry: The airline industry is intensely competitive, fragmented, and subject to high barriers to exit with low barriers to entry.   
Structure of suppliers, buyers, and channels: A high concentration of powerful suppliers, the emergence of increasingly efficient alternatives to air travel, commoditized product offerings with low switching costs, and a fragmented buyers’ community are characteristics of the operating environment.  
“It is difficult to see how these entrenched forces will change significantly in the near term. In most cases, the interests of those in the value chain are simply too divergent to work as partners to drive change that could meaningfully alter the profitability profile across the value chain. That is why IATA will continue to call on governments to better regulate our monopoly or near-monopoly suppliers like airports, ANSPs and GDSs,” said Walsh. 

Recent IATA polling shows a public understanding of the need to regulate monopoly suppliers. Some 85% of consumers polled in an 11-country survey agreed that the prices that airports charge should be independently regulated, like utilities. 


The value chain study also revealed some areas of common interest where greater cooperation would deliver benefits for all. Two of the examples noted in the study include: 

Data-driven efficiency gains: Aviation generates vast amounts of data. At the operational level, sharing data to build a more complete picture of how day-to-day decisions impact customers, airport terminals, airline schedules/crew movements, and runway utilization is already helping to drive efficiencies for all industry players at some airports. This same principle can be applied across the industry to make better long-term decisions in areas including infrastructure development, process improvements, and skills development.  
Decarbonization: Achieving net zero carbon emissions by 2050 cannot be done by airlines alone. Fuel suppliers need to make sustainable aviation fuels available in sufficient quantities at affordable prices. ANSPs need to provide optimal routings that minimize emissions. Engine and aircraft manufacturers must bring to market aircraft that are more fuel efficient and take advantage of low or zero-carbon propulsion means such as hydrogen or electricity. Those offering services in the airport environment will need to convert to electric vehicles.  
There is no magic solution to rebalance the value chain. But it is clear that the interests of governments, travelers, and other value chain participants are best served by financially healthy participants—and particularly airlines. A combination of better regulation and cooperation in areas of mutual interest could move the needle. And there are at least two areas ripe for collaboration and burden sharing—pursuing data-driven efficiency gains and decarbonization,” said Walsh. 

We are proud to have partnered with IATA since 2005 on understanding the value created across the aviation value chain. Over that time, the aviation industry has seen several crises and comebacks. But never has the aviation value chain overall returned its cost of capital. Airlines have consistently been the weakest element, even in their best years not quite returning the cost of capital. But there are win-wins, and companies across the value chain can work better together to serve customers, and improve value,” said Nina Wittkamp, Partner at McKinsey. 

RELATED TOPICS: GreeceGreek tourism newsTourism in GreeceGreek islandsHotels in GreeceTravel to GreeceGreek destinationsGreek travel marketGreek tourism statisticsGreek tourism report

Photo Source: pixabay.com

  1. 07/02 22:13

    Media Report: Revolutionary Hydrogen Car has finally arrived in Greece

  2. 07/02 20:04

    Greek FM meets with his Uruguayan counterpart in Montevideo on Tuesday

  3. 07/02 17:52

    Greece's Energy Minister: Subsidy for photovoltaics requires installation of batteries

  4. 07/02 16:09

    New draft bill aiming to speed up courts to be tabled in Greek Parliament

  5. 07/02 15:57

    EU greenlights €1.36 bln Greek scheme to compensate energy-intensive firms

  6. 07/02 14:47

    All National Theatre plays cancelled on Wednesday due to actors' strike

  7. 07/02 13:41

    Barbara weather front hits Greece for third day

  8. 07/02 13:19

    Apartments prices continued upward momentum in Cyprus during Q4 2022

  9. 07/02 12:33

    Seamen's union to launch 48-hour nationwide strike in Greece from Wednesday

  10. 07/02 11:02

    IATA inks cooperation deal with Federal Republic of Somalia government

  11. 06/02 20:07

    FM: Greece mobilised resources and is ready to assist Türkiye and Syria

  12. 06/02 19:52

    Inspirational project promoting Hellenism and love for Greece globally (video)

  13. 06/02 19:39

    Tri-city winter luncheon unites upstate New York Philoptochos chapters

  14. 06/02 19:25

    UNWTO, Antigua and Barbuda share vision of sector for growth and opportunity

  15. 06/02 16:44

    International air cargo sector finishes 2022 near pre-pandemic levels

  16. 06/02 14:52

    Air passenger demand recovery continued in December and for the full 2022

  17. 06/02 13:48

    Severe weather front to continue across Greece until Wednesday (video)

  18. 06/02 13:27

    Metro service to Athens International Airport restored

  19. 06/02 12:49

    Ferries remain docked at Greek ports due to strong winds

  20. 06/02 11:57

    Expert: Türkiye`s earthquake will not affect geological faults in the Greek area

  21. 05/02 14:30

    Greek authorities on alert as heavy snowfall continues

  22. 05/02 13:50

    Greek President attends opening ceremony of '2023 Eleusis European Capital of Culture'

  23. 05/02 12:40

    Experts: Greece won’t know about investment upgrade hope until elections

  24. 05/02 10:47

    Parthenon AHEPA Chapter 495 hosts Byzantium Presentation in New York

  25. 05/02 07:44

    Dangerous weather warning sent Attica region residents through 112 phone line

  26. 04/02 16:13

    Stadium of Ancient Nemea reopens in Southern Greek Region of Peloponnese

  27. 04/02 13:54

    Greek and foreign visitors in the renovated Agora Modiano of Thessaloniki

  28. 04/02 13:17

    Over €1,100 benefit per Greek household from power subsidies in last seven months

  29. 04/02 12:50

    Imminent cold weather front in Greece keeps municipalities on alert

  30. 04/02 11:21

    Home and loss: Outdoor exhibit commemorates Holocaust victims in Greece

  31. 03/02 15:25

    Cyprus and Egypt FMs talk further enhancing trilateral collaboration with Greece

  32. 03/02 15:21

    AP report: Olympic flame to take seaborne journey from Greece to 2024 Paris Games

  33. 03/02 15:06

    Tourism 2023 | Greece in top-10 European destinations for long-haul travelers

  34. 03/02 12:01

    Greek Tourism Minister: Pandemic management, vaccinations and sector take Greece higher on democracy index

  35. 03/02 11:18

    FinMin: Extrajudicial Debt Settlement Mechanism functioning satisfactorily in Greece

  36. 02/02 23:16

    Geneva court: Fifteen antiquities on their way back to Greece from Switzerland

  37. 02/02 23:11

    Public Health Organization says fall in Covid infections in weekly report

  38. 02/02 22:54

    National Observatory: January 2023 one of the warmest on record in Greece

  39. 02/02 22:41

    Greece-India relations promoted with visit of State Minister to Athens

  40. 02/02 22:25

    Media report: The old Hilton in Athens will transform into new hotel Conrad

  41. 02/02 21:47

    Hoteliers' Association of Athens and Attica: 2022 occupancy high, but lower than 2019

  42. 02/02 20:35

    Smart Attica Digital Innovation Hub for Greece launched at Demokritos center

  43. 02/02 19:00

    Berlin minister: Greece is ahead of Germany in digitization of public services

  44. 02/02 17:06

    Greece rises nine places on the Economist’s Democracy Index for 2022

  45. 02/02 07:19

    EFSF greenlights eighth reduction of step-up interest margin for Greece

  46. 01/02 23:24

    National Archaeological Museum will host 125,000 ancient treasures in Athens

  47. 01/02 19:14

    Cyprus and Greece sign deal on mutual academic recognition of university degrees

  48. 01/02 18:34

    IOBE report: Greek economic sentiment index rose to 104.9 points in January

  49. 01/02 18:04

    Greece and Japan ink MoC on improving business networking and investments

  50. 01/02 17:11

    Eurostat report: Greek inflation rate to slow down to 7.2% in January

  51. 01/02 15:46

    Greek Foreign Minister received United Arab Emirates Ambassador in Athens

  52. 01/02 14:20

    Greek unemployment dropped to 11.6% during December

  53. 01/02 10:59

    Greece reaches target of slashing road fatalities by over 50% in 2020

  54. 01/02 09:31

    One bid for long-term lease of Markopoulo Olympic Equestrian Center property

  55. 31/01 23:07

    Historic First Synaxis of Orthodox Hierarchs of Ecumenical Patriarchate in USA

  56. 31/01 19:13

    ‘Friends of the Kastro of Siphnos’ host gathering in Greek capital of Athens

  57. 31/01 19:10

    Bank of Greece: Demand for loans by Greek enterprises to increase in Q1

  58. 31/01 18:45

    Greece wins "Best Tourism Destination for 2023" title at Grand Travel Awards

  59. 31/01 18:17

    UNWTO announces winning start-ups for global "Awake Tourism Challenge"

  60. 31/01 16:55

    Extra four flights from Belgrade to Greek tourism destinations this year

  61. 31/01 15:59

    Foreign Minister: Greece and Israel forged enduring partnership at strategic level

  62. 31/01 15:55

    Revenue from tourism at €2.4 billion in Cyprus for Jan-Nov 2022

  63. 31/01 14:22

    Prime Minister: Greece is now an attractive destination for foreign investments

  64. 31/01 13:04

    Athens taxi drivers stage downtown protest over ‘pauperization cocktail’

  65. 31/01 12:50

    Electricity subsidy set at 40 euros per MWh for Greek households in February

  66. 31/01 00:11

    Booking.com: Greek region of Epirus among most welcoming places on earth

  67. 30/01 22:22

    Credit ratings agency Fitch upgrades credit rating of three systemic Greek banks

  68. 30/01 19:11

    Greek Foreign Affairs Minister to visit officially Israel on Tuesday

  69. 30/01 18:26

    Small and Medium-Sized Enterprises to get plenty of funding in Greece

  70. 30/01 17:15

    Traditional Greek handicrafts get their own museum in the center of Athens

  71. 30/01 16:21

    Greek PM and Japanese counterpart sign Joint Statement of Strategic Cooperation

  72. 30/01 11:39

    Four Greek ports get European Union financing for infrastructure upgrades

  73. 30/01 11:27

    Frost recorded in many parts of Greece on Monday

  74. 29/01 00:33

    Israeli Ambassador at Economist event: Greece-Israel relations at their highest point

  75. 29/01 00:00

    Ambassador to Athens: Even more United States investments coming to Greece

  76. 28/01 14:14

    Finance Minister at Economist event: Greece has turned a page

  77. 28/01 14:11

    Private sector deposits up by 5 billion euros in Greece during December

  78. 28/01 14:06

    Ambassador to Athens: Greek and American interests are identical

  79. 28/01 13:59

    Fitch upgrades Greece's credit to BB+ a mere one step below investment grade

  80. 28/01 09:03

    Three-hour work stoppage on metro Line 1 on February 2

  81. 27/01 15:09

    Minister: Crete plays a key role in Greece's new and active foreign policy

  82. 27/01 14:48

    Greek Tourism Minister: In 2023, direct flights from the USA will bring over €1 billion

  83. 27/01 13:01

    SNF support assists students put affordable housing theory into practice

  84. 27/01 10:57

    Hellenic Parliament displays slogan 'We remember' for Holocaust victims

  85. 27/01 09:03

    EU Commission calls on six member states to apply nvironmental directives

  86. 26/01 21:58

    AEGEAN Airways connects more Greek cities with Israel

  87. 26/01 21:53

    Finance Minister presents six priorities of Greek economy to ESM's new head

  88. 26/01 21:47

    Monica Bellucci at Greek Consulate in New York to promote "Maria Callas" movie

  89. 26/01 19:23

    New European Union rules for drone traffic management come into effect on Thursday

  90. 26/01 18:43

    Supreme Court hears arguments between funds and defaulted borrowers in Greece

  91. 26/01 18:12

    Drop in coronavirus and flu infections agency records in weekly report

  92. 26/01 12:33

    Stormy weather warning sent to residents of Attica region via 112 phone line

  93. 26/01 09:27

    Flights extended from Saudi Arabia and Bahrain to Mykonos and Santorini islands

  94. 26/01 08:38

    Athens to host two European football finals over the coming 16 months

  95. 26/01 07:16

    All 22 flights to and from Cyprus to be affected by Thursday's island-wide strike

  96. 26/01 03:19

    Media report: Hamptons to bring New York-style luxury to Northern Greece

  97. 26/01 03:12

    Greece to transform "green" commercial shipping fleet with new fund

  98. 26/01 03:01

    AIRDNA: Average price of Airbnb in Greece at €193 in 2022 up by 35% from 2019

  99. 25/01 20:50

    1.7 million pensioners to see 7.75% pension rise in Greece this month

  100. 25/01 19:46

    IATA welcomes restoration of ‘Class A’ ATC services over Somalia airspace