They could also work to make their operations more agile and nimble-that is, they could improve their ability to reduce supply quickly and cost-effectively when demand abruptly falls, by increasing the variability in their cost base. They could increase their cash reserves, voluntarily or by regulation, which would reduce the need for bailouts every time a crisis hits. The Gulf War, 9/11, the 2010 volcano eruption in Iceland, and the 2008 global financial crisis all affected the airline subsector dramatically, though not as profoundly as the pandemic did.Īirlines need to bolster their resilience. What’s more, airlines are especially vulnerable to external shocks beyond their control, because they have high fixed costs and mostly variable revenues. For example, a national carrier may continue offering flights on unprofitable routes, to its own distress and that of other airlines offering the same route. In addition, national carriers may find that the interests of their countries may sometimes supersede their business interests. Despite the best efforts of airlines to differentiate themselves, an airline seat remains relatively commoditized. On the customer side, passengers hold significant buying power and are mostly price driven, an added challenge in an age when passengers can easily compare the ticket prices of different carriers online. Furthermore, the large field of carriers means that suppliers-OEMs and airports-have stronger negotiating power. The subsector grapples with high capital intensity but fluid supply and low entry barriers. The reasons for the persistent weakness of airlines even before the pandemic are well documented. The IATA estimates that even though global revenues for airlines rose by 27 percent last year compared to 2020, they were still 44 percent less than what they were in 2019. While the full data from 2021 is still unavailable, we expect airlines’ 2021 performance to remain weak, with net losses of around 11 percent. Even previously reliable value creators, such as airports and manufacturers, were not spared the pandemic’s economic impact. All subsectors reported massive losses in 2020, except for freight forwarders and cargo airlines, which benefited from a rise in demand for air cargo (Exhibit 2). This is the difference between the returns a company makes after taking into account its invested capital and the alternative returns of equal-risk opportunities investors have access to, measured by the weighted average cost of capital (WACC).Īs we have noted, the pandemic wreaked financial devastation across the aviation value chain, most notably for airlines. We have looked at all value chain players: original equipment manufacturers (OEMs) of aircraft lessors air navigation service providers (ANSP) airports catering operations ground services maintenance, repair, and overhaul (MRO) airlines freight forwarders and global distribution system (GDS).Īs a measure of value creation, we look at economic profit. Since 2005, McKinsey, often in collaboration with the International Air Transport Association (IATA), has assessed the performance of the entire aviation value chain-that is, the degree to which each subsector earns its cost of capital. Breaking down the global aviation value chain by subsector Fiscal year 2021 data are not yet available for all the companies covered in this analysis, so this article draws insights mostly from the 2012–20 data, supplemented by observations of key developments in 2021. The second article explores what airline executives could consider doing to generate more value for their carriers-for instance, examining their cost base and accelerating capital turnover. This article, the first in a two-part series, provides an overview of global aviation’s performance during the pandemic, by subsector. Although the temptation is to pin the blame solely on the pandemic-induced plunge in passenger traffic, that would be to ignore the airline industry’s underlying and long-term health problems. The COVID-19 pandemic is entering its endemic stages in some parts of the world at the time of writing, and airlines hemorrhaged $168 billion in economic losses in 2020.
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