The Tight Margins in the Aviation Industry
As airlines in the United States extended their unbroken operating profit streak to eight years in 2018, they are facing tough choices, accompanied by rising costs and shrinking margins. American airlines are consolidating, passenger numbers are on the rise, especially in Asia, and forecasts suggest global profits could reach almost $20 billion in 2014 at a margin of 2.6% – pitiful in other sectors but stellar for airlines. Despite the risks, commercial airlines have experienced several periods of sustained growth.
Despite incredible growth, airlines never came close to recouping the cost of capital, and the average rate of return over the period was less than 1%. The passenger air travel sector is already resource-intensive, with low profit margins. As a result, low-margin airlines will be in financial danger from rising carbon prices.
It all starts with aircraft manufacturing costs. In today’s world, aircraft manufacturing costs are extremely high due to the use of high-grade materials, such as titanium and aluminum alloys, that can withstand the intense pressures of flight. In addition, many aerospace manufacturing companies produce the high-quality components that make up the aircraft, including engines, wings, landing gear, and fuselage, which further drives up production costs. These costs, combined with the already low-profit margins of airlines, make the industry particularly vulnerable to rising carbon prices.
With many ways to increase costs for the aviation industry, combined with today’s specific circumstances, they create a unique environment for declining margins. The perception that air travel is a test makes it very difficult for airlines to charge the higher prices needed to return to profitability. Tough competition from competitors. Airlines face the challenge of low competition in the sectors that supply them.
Airlines provide vital services, but factors such as the continued existence of unprofitable carriers, inflated cost structures, vulnerability to external events, and a reputation for poor service combine to represent a huge barrier to profitability. For many airlines of all types and sizes, the challenges of improving operational efficiency while maintaining or even increasing profitability are real and seem only to get harder.
One can only guess how the aviation industry will recoup its losses from the almost two-year decline in business travel – its most profitable segment – plus rising hygiene and labor costs. Relying on the global fight to cut greenhouse gas emissions, industries are likely to face increasing pressure from governments and the public to do their part, even as available miles and flights increase. Operating costs have skyrocketed as airlines are heavily regulated in terms of safety.
Basically, this means that when airlines make money, they also spend most of that free cash flow buying their own shares, again having a negative impact on the aviation industry these days as they now need help. negative consequences of this turn, causing stress on profit margins and revenues in general. According to the Harvard Business Review, the average economic profit of airlines was negative for twenty years until 2015, when the shale gas revolution generated the largest recorded profit for airlines in history. Based on current trends and pressures, US airline operating margins are forecast to decline by 5-6% in 2019, less than 40% from the industry’s 15% peak in 2015.