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Are Airlines Engaged in a Profitable Business?

Are Airlines Engaged in a Profitable Business?

Before you get away with a wrong notion, let us establish that the business of transporting people and goods is a very good and necessary business to be engaged in. Our question is more about the need for airlines to become more profitable and sustainable; certainly not at the expense of their customers, but rather at their service.

We all understand the critical contribution airlines have made to the global economy either directly, indirectly or inductively over the past century of existence. Therefore, it is only normal to support the idea of a more financially viable and sustainable air transport industry. Unfortunately, commercial aviation is heavily dependent on oil. In fact, not only is jet fuel price a major cost-driver, it is also a major airline profits driver.

The recent financial outlook released by IATA for the end of 2016 and for the first part of 2017 supports that statement. As a matter of fact, when jet fuel price fell below US$70 over the last couple of years, airlines have posted record profits collectively. And now that oil price is rising again the airline industry is anticipated to report lower profits. The only consolation is that some airlines will continue to post higher profits, at least for a while before economic reality catches up again.

Yet, the profits margins are very low compared to other less vital industries. In general or rather in normal business circumstances, demand drives revenues, thus profits.  For airlines, however, it is rather jet fuel that drives both costs and profits, even though demand for air travel is constantly on the rise.

There are two ways to look at this. Firstly as a fatality, in which case one can say that airlines are stuck in the wrong business. Certainly, not everyone will agree with that. Secondly, as a choice each and every airline, either old or new, has made on its own: to play the game as it has always been played since 1914. And to that, we can at least agree that this is a simplistic way of looking at one of the greatest challenges airlines have faced since the beginning. For instance, many recipes have been introduced in an attempt to make it work, to make more profits and grab a bigger share of the air travel pie. From the hub-and-spoke, the low-cost, the ultra-low-cost models, overbooking, fuel surcharges, reservation and cancellation fees, checked bag fees, other ancillary fees, and more recently the “basic economy” class, airlines have tried different avenues to maximize revenues and increase profits. Yet, despite all that the airline industry average net profit per passenger has never reached US$10. And the net profit margin has never reached 6% over the last twelve years; not even in the best of times.

So, this begs the question: is there something wrong about the airline business or are airlines engaged in a wrong business? Having established earlier that the airline business in itself is not wrong, then we can safely say that there is at least something fundamentally wrong about the airline business. This is why at Airline Profits, we are convinced that the time is right for airline CEOs and their teams to rethink the airline business from the ground up. In the process of doing this necessary collective soul searching, nothing should be taken for granted, every underlying business assumption should be questioned to establish its validity and soundness. Innovation does not come as a result of improving old habits of thinking, it rather comes as a result of thinking differently. And to paraphrase Stephen R. Covey, there is no need to climb faster on a ladder that is leaning against the wrong wall. It is far better to find the right wall first.

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Kofi Sonokpon

Kofi Sonokpon

Managing Editor of Airline Profits, the first aviation magazine devoted to improving airline effectiveness and profitability, Kofi Sonokpon has more than 20 years of international experience in aviation. Kofi holds an IATA sponsored Master of Business Administration (MBA) in Air Transport Management from the John Molson School of Business at Concordia University in Montreal. Kofi Sonokpon is a speaker, an airline business thought-leader, and author an innovative book series intended for the 21st century airline, namely Airlines for Business and Airlines for Technology.