The aviation industry is still recovering from the pandemic, but there’s progress. While all sectors within aviation showed improvement in 2022, the overall industry remains unprofitable. There’s been a significant decrease in losses though, dropping from $159 billion in 2021 to $69 billion in 2022. Airlines continue to be the weakest performer in the aviation value chain.
Measuring value creation
Aviation’s bumpy ride continues. Despite improvement across most sectors in 2022, airlines remain the biggest drag, with losses exceeding $45 billion. A new analysis by McKinsey and IATA highlights the industry’s struggle to turn a profit.
Airline losses have slowed, and more carriers are showing profits
Airlines have been financially troubled for decades due to high fixed costs, budget-conscious flyers, and easy entry into the industry. Rising fuel, parts, and labor costs further strain profits.
There are steps that airlines could take to emulate the small group of carriers that consistently show strong results. For example: building resilience for unexpected turbulence is key, but it’s not enough. Learn to maximize your planes’ flying time, squeeze extra revenue from ancillary services, and create flight networks that leave competitors grounded with envy. With economic uncertainty looming and competition heating up, these tactics become even more essential for airlines to take flight.
Low traffic volumes affected airports and ANSPs
Contrary to popular belief, airports aren’t swimming in cash. Despite airlines being forced to use them, airports share a similar financial struggle. Over the past decade, their profit margins have closely mirrored airlines’, both hovering around -6%. In 2022, things got even bumpier: airports actually lost more money than airlines, with a margin of -21.9% compared to airlines’ -6.2%. High fixed costs, lower passenger volume (which hasn’t fully recovered from the pandemic), and a shift away from profitable long-haul flights seem to be the culprits. This financial strain isn’t limited to just airports – air traffic control services (ANSPs) are also feeling the pinch, facing a -10.4% profit margin due to similar cost structures and lower traffic volume.
Fuel suppliers posted profits, helped by a rise in the price of jet fuel
The economic performance of jet fuel production is complex because refineries produce various products, and jet fuel only makes up a small portion of that. However, researchers estimate that jet fuel production generates an average annual economic profit of $1.6 billion. This profit is sensitive to crude oil prices.
In 2022, the jet fuel production subsector saw a profit margin of 3.3%, which is much higher than the average profit margin of 1% between 2012 and 2022. This rise in profit is most likely due to the spike in jet fuel prices in 2022. In fact, jet fuel production, along with freight forwarding, was one of the only two profitable subsectors in the airline value chain in 2022.
Freight forwarders maintained standout profitability
Freight forwarders, the middlemen of air cargo, have been profitable for a decade (since 2012) with 5.4% profit margin in 2022, the highest in the industry. This profit surge likely comes from a trifecta of factors: sky-high freight rates, low asset needs, and continued strong demand. But buckle up for turbulence – future demand is uncertain. As passenger flights return, cargo space will increase, pushing cargo yields (revenue per unit) down from their peak, though likely staying above pre-pandemic levels. Airlines are still enjoying a comfortable 12% return on invested capital in 2022, but that’s down from a stellar 15% in 2021.
Manufacturers and lessors show smaller losses with some firms achieving positive margins
Aircraft manufacturers are bouncing back from pandemic losses. In 2022, they lost $1.7 billion, which is a big improvement from the $4.4 billion loss in 2021. Airlines are ordering more planes (2,250 in 2022 compared to 470 in 2020), but factories are struggling to keep up due to supply chain issues and new technology problems.
Lessors, the companies that rent out planes to airlines, are also recovering. They lost money in 2022 (7% of revenue), but lease rates are going up because there aren’t enough planes to meet demand. For example, leasing an Airbus A320neo costs about $360,000 per month now, which is close to pre-pandemic levels.
GDS providers show continued losses impacted by a high rate of acquisitions
Travel technology companies, like those providing Global Distribution Systems (GDS), were hit hard by the pandemic. In 2022, they still lost money ($0.5 billion), though this was an improvement over 2021’s losses. The slow return of business travel, a key market for GDS bookings, is a big reason behind this. While direct airline bookings are nearing pre-pandemic levels, indirect bookings facilitated by GDS remain significantly lower. However, the high barriers to entry in this industry suggest GDS profits should rebound as corporate travel recovers.
Catering, ground services and MRO providers
Airline catering and ground services took a financial hit in 2022, with catering losing $0.1 billion and ground services losing $1.1 billion. However, this is an improvement from previous years, and both sectors are expected to recover as passenger traffic increases.
Maintenance, Repair, and Overhaul (MRO) services, on the other hand, showed some positive signs. While revenue hasn’t reached pre-pandemic levels, MRO turned a small profit in 2022 and its return on invested capital (ROIC) actually surpassed 2019 levels. This makes MRO one of the few bright spots in the aviation industry right now.
Click to read more: https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/checking-in-on-the-aviation-value-chains-recovery
