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Tue 2 Jul 2013 09:00 AM

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Airline investment returns fail to fly, says report

IATA warns industry may struggle to attract $4-5trn needed for growth over next 20 years

Airline investment returns fail to fly, says report
airline generic, aeroplane

The International Air Transport Association (IATA) has warned the global airline industry will struggle to attract the $4-5trn needed over the next 20 years after a study revealed investors in 2004-2011 would have earned $17bn more annually if they had instead put their money into bonds and equities of similar risk.

The analysis by IATA and McKinsey & Company showed that during 2004-2011 returns on capital invested in the airline industry worldwide averaged 4.1 percent.

It was an improvement on the average of 3.8 percent generated during 1996-2004, however, was far below the average cost of capital, which the report says was 7.5 percent, representing the return that investors could have expected if they had put their money into assets of similar risk outside the airline industry.

“While some airlines have consistently created value for equity investors, these are few in number,” IATA, which represents 240 airlines, said.

“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 than the airline industry.

Airlines, significantly weighed down by fuel costs, which account for more than half of total costs in some cases, were the least profitable segment of the air transport value chain.

Oil companies generated an estimated $16-48bn in annual profits from the air industry, the IATA report says.

The most profitable segment of the air transport value chain is distribution, with the computer reservation systems businesses of the three global distribution system companies generating an average return on investment of 20 percent, followed by freight forwarders at 15 percent.  

The cost of air transport in real terms has more than halved in the past 40 years, thanks to better fuel efficiency, asset utilisation and input productivity.

But the efficiency gains have only contributed to lower air transport yields – and better value for customers - rather than improved investor returns, the report says.

IATA said the study showed relationships between partners in the air transport value chain needed to change or the industry would fail to attract the enormous amount of capital required to meet future demand.

“More effective partnerships are required among stakeholders in the air transport industry,” IATA director general and CEO Tony Tyler said.

“Efficiency gains are a win-win for all concerned. We have seen that with the adoption of 100 percent 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.

In May, Etihad Airways president and CEO James Hogan also commented on the changing shape of the global airline industry as emerging markets’ influence grew and new cities evolved as international hubs.

“Airlines would need to dramatically change their business models if they wanted to survive in the new era of air travel, in which traditional markets were declining and regions such as India, Africa and the Middle East were experiencing rapid growth,” Hogan said.

Government regulation also needed to be improved, Tyler said, to maximise economic benefits of the aviation industry, including jobs and growth.

“Unfortunately, high taxation and poorly designed regulation in many jurisdictions make it difficult for airlines to develop connectivity,” he said.

“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.”

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