After four years of significant profits, IATA economists anticipate 2019 to be the year in which the Return On Invested Capital (ROIC) of the airlines starts to stabilize.
However, the fuel price volatility could lead the industry to its break-even level once more.
It’s still not realistic to consider that the price of oil could reach 2014’s levels in 2019, but it’s important to bear in mind that even a 10% swing in oil price could affect airline profits worldwide to the tune of +/- US $20 billion. This means that profits must outlast the fuel cycle.
AIRLINES’ RETURN ON CAPITALSource: McKinsey, The Airlines Analyst, IATA
SHOULD STABILIZE IN 2019
Irrespective of whether the rise in fuel price is transient or structural, its volatility poses a risk. The operation of old, less-efficient aircraft will only remain economical as long as oil prices stay at low levels.
Over the long term, new generation aircraft represent a natural operating hedge against surging oil prices. Fuel efficiency represent the best approach in order to reduce the impact of oil price volatility.
The benefits of new generation aircraft go beyond fuel burn reduction, including improved range and payload capability, emission mitigation and noise reduction, enhanced passenger living and stowage space and, of course, maintenance cost reduction.
Although cost is critical for an airline’s ability to remain competitive over the long term, profit and returns are better measures of success.
The economic performance of the airline industry will mostly depend on how far costs will rise, and to what extent it can sustain a healthy revenue environment.
Profitability remains elusive for carriers facing the challenge of surplus capacity. The traditional over-reliance on large aircraft results in inefficiencies that, in turn, generally lead to deep fare discounting in order to fill excess capacity.
History might not repeat itself, but at the very least it provides a useful guide to airlines.
The newly arisen market dynamic offers a different strategic mindset that charts a bold new path, moving away from the traditional “one-size-fits-all” mindset. A more nuanced competitive positioning will be increasingly important.
With rising costs – not just jet fuel, but labor –, the line separating winners and losers in the global airline industry looks likely to be drawn along how well they manage profits. Right-sized, new generation aircraft not only maintain a low cost structure, but also catalyze revenue management.