• Title Image

    The Aviation Advocacy Blog

    A cornucopia of news, opinion, views, facts and quirky bits that need to be talked about. Join our community and join in the conversation on all matters aviation. The blog includes our weekly round-up of the bits of European aviation you may otherwise have missed – That Was The Week That Was

Search

Categories

Month of Issue

Archive for September, 2015

How to become a millionaire in the airline industry

Written by Aviation Advocacy on . Posted in Airlines

Start as a billionaire and buy an airline. It’s an old joke that continues to be relevant, even as the industry posts record profits for 2015. It also captures the great anomaly of the airline industry: why do airlines continue to operate despite apparently never making a decent profit? Economists often talk about the Weighted Average Cost of Capital (WACC) as a benchmark for whether a firm’s profits are reasonable. The WACC is a calculation that attempts to capture the risk associated with an investment by estimating how much return potential investors would need to earn on their investment to be willing to invest in that firm, rather than in another firm. Profits below the WACC are typically seen as evidence that a firm is making insufficient profits. Theory dictates that should this continue, the firm would eventually go out of business. Yet, according to a 2013 report by IATA, between 2004 and 2011 the airline industry persistently made profits below its WACC. This suggests that either the estimated WACC is wrong, or that investors in airlines are irrational.

Previous Posts

Subscribe to receive notifications of new posts

[contact-form-7 404 "Not Found"]

Categories

Archive

Links

Feed

RSS