Running an Airline: An Analytical Perspective
Running an airline isn’t for the timid. Weather events, infrastructure failures, and fickle passenger demand can make an already-tough business even more challenging. As this article goes to publication, economic uncertainty and geopolitical tension are both threatening to alter travel flows, piling yet more stress on airline executives.
The Current State of the Airline Sector
These business challenges show up on ledger sheets. Since 2005, we’ve analyzed the financial performance of the aviation value chain. Our research demonstrates that, compared with other asset-intensive sectors, airlines in aggregate have a long record of mixing positive growth with negative economic profit.
But recent results suggest that this losing streak could at last be nearing an end. Many carriers and multiple regions performed well in 2023, and 2024 data indicate another decent year. Airlines that have reported detailed financial results as of the time of this writing recorded, as a whole, an economic loss of $5 billion (or –0.6 percent of industry revenue), but 41 percent of the airlines we track earned their cost of capital.
The Airline Sector in 2024
For the purposes of this analysis, we look at value creation from an investor’s perspective. Our measure is economic profit, which considers the alternative return from equal-risk opportunities available to investors. It’s calculated by subtracting weighted average cost of capital (WACC) from ROIC and then multiplying by invested capital. Positive economic profit—when ROIC is above WACC—signals that a company or sector is creating positive value.
Regional performance varied. Latin America and the Middle East and Africa were value creating, while Europe and North America recorded marginal losses. Asia–Pacific accounted for the bulk of the sector’s negative results.
But sector averages don’t tell the whole story. The number of value creators was historically high in 2023 and 2024, showing notable improvement compared with 2019.
How Airlines Create Value
Value-creating airlines operate in a mix of regions and employ a mix of business models. There is no single path to success. Based on our research, here are six key components of superior airline ROIC performance:
- Balancing capacity and demand
- Generating ancillary revenue
- Earning a great reputation through reliable, on-time performance
- Providing origin and destination (O&D) routes that other airlines don’t
- Ensuring high capital productivity
- Building strong organizational health
Recent performance improvement in the airline sector can be traced, in large part, to better execution in some of these areas.
Capacity Moving Largely in Line with Demand
In 2023 and 2024, there were fewer aircraft deliveries from manufacturers, resulting in undercapacity. This shift has led to a change in the supply–demand balance, moving from oversupply to undersupply, and yields have adjusted accordingly.
However, supply could soon increase, potentially affecting demand levels in the market.
Improved Returns from Ancillaries
Airlines continue to grow revenue from ancillary sources, which have become significant contributors to overall revenue. By focusing on personalizing offerings and optimizing pricing strategies, airlines can further enhance their ancillary revenue streams.
Reliability’s Relationship to Performance
On-time performance in the industry correlates with better financial performance. Data-driven operational decision-making can help airlines mitigate delays and improve overall performance.
The Power of Privilege
Network privilege plays a crucial role in airline performance. Airlines with privileged O&D routes tend to generate better ROIC, as these routes provide higher yields.
A Rise in Capital Productivity
Capital productivity is crucial for airline performance. Airlines can maximize capital productivity by ordering aircraft strategically and effectively managing demand seasonality.
The Value of Healthy Organizations
Organizational health continues to correlate with better airline performance. Focusing on clear direction, motivation, and external orientation can help airlines improve their health levels.
What Could Halt Airlines’ Progress in 2025?
Despite positive trends in 2023 and 2024, several developments could impact the airline sector’s performance in 2025. Demand uncertainty, tariffs, and geopolitical tensions are among the factors that could affect airlines’ financials.
FAQ
Q: What are the key components of superior airline ROIC performance?
A: The key components include balancing capacity and demand, generating ancillary revenue, ensuring high capital productivity, and building strong organizational health.
Q: How can airlines improve their organizational health?
A: Airlines can improve organizational health by focusing on clear direction, motivation, and external orientation within the organization.
Conclusion
Airline performance has been climbing, but there are potential challenges ahead. By focusing on strategic areas such as capacity management, ancillary revenue generation, and organizational health, airlines can navigate the complexities of the industry and improve their financial performance.
