{"id":389,"date":"2015-09-03T16:41:46","date_gmt":"2015-09-03T14:41:46","guid":{"rendered":"http:\/\/www.aviationadvocacy.aero\/blog\/?p=389"},"modified":"2019-07-23T11:48:17","modified_gmt":"2019-07-23T09:48:17","slug":"how-to-become-a-millionaire-in-the-airline-industry","status":"publish","type":"post","link":"https:\/\/www.aviationadvocacy.aero\/blog\/?p=389","title":{"rendered":"How to become a millionaire in the airline industry"},"content":{"rendered":"Start as a billionaire and buy an airline.\t\r\n\r\nIt\u2019s 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?\r\n\r\nEconomists often talk about the Weighted Average Cost of Capital (WACC) as a benchmark for whether a firm\u2019s 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. \r\n\r\nProfits 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. \r\n\r\nYet, according to a 2013 report<\/a> 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. \r\n\r\nIn truth, the survival of many airlines has depended in part on support from governments, who value the jobs and connectivity the airlines provide as well as their flag-bearing status. The fact that legacy carriers have not succumbed to competition from low cost carriers can also be attributed to their continuing hold on highly desirable landing slots at key airports.\r\n\r\nIATA\u2019s latest industry economic performance report<\/a> estimates that the airline industry\u2019s profits in 2015 will be 0.7 percentage points above the estimated industry-wide WACC. However, performance varies across regions and this result is largely attributed to the performance of the North American carriers. Best not to get the chequebook out yet.\r\n\r\nAside from consolidation in North America, little else in the airline industry has changed significantly recently to suggest that these profits will continue. The airline industry\u2019s recent strong performance has been largely attributed to low oil prices rather than to a seismic shift in the industry. \r\n\r\nEven if oil prices remain low, this does not mean airlines will continue to be profitable. If the airline industry is competitive – and they keep telling us they are – we would expect these lower oil prices to be passed onto consumers in the longer term through lower fares rather than retained as higher profits.\r\n\r\nAirline attitudes also need to change if they are to operate as profitable businesses, rather than glorified flag-wavers. The legacy carriers continue to blame airports, ANSPs, manufacturers, bad weather, regulation, taxation and anything and anyone else but themselves for their historic poor performance. They need to build on recent capacity discipline and focus on giving customers what they want if they are to start making billionaires out of millionaires.","protected":false},"excerpt":{"rendered":"

Start as a billionaire and buy an airline. It\u2019s 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[],"class_list":["post-389","post","type-post","status-publish","format-standard","hentry","category-airlines"],"_links":{"self":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/389","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=389"}],"version-history":[{"count":1,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/389\/revisions"}],"predecessor-version":[{"id":391,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/389\/revisions\/391"}],"wp:attachment":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=389"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=389"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=389"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}