2013 July 5

The Master Resource Report  2013-07-05

IATA report on the airline industry

The International Air Transport Association (IATA) recently released its new Profitability and the Air Transport Value Chain report. The report should make one question why any investor would put money in an airline.

The weighted return on capital between 2004 and 2011 was 4.1% which doesn’t even balance out the 7.6% cost of capital during the period. The graph below from the report shows just how bad this performance has been.

IATA - WACC 2013-06

Click graph for larger view

Over the past 30-40 years the airline industry has generated one of the lowest returns on invested capital among all industries. Since the industry has survived and expanded while this state of extremely poor profitability has persisted it might be asked: does this matter?

The report then went on to point out why this poor performance may be important even though the industry has survived so far.

On current estimates for the number of new aircraft needed to supply this scale of expansion from the emerging economies, the airline industry will have to attract $4-5 trillion of new capital. Without an improvement in the return on capital invested in the airline industry it may well be difficult to attract such investment capital. [emphasis added]

Would you put your money in an airline?