If your investment portfolio included airline stocks in recent years, you've likely experienced a rollercoaster ride. The COVID-19 pandemic devastated the aviation sector, but within this crisis lies opportunity. How can investors and industry participants cut through the fog to understand the true state of aviation's value chain and identify new engines for profitable growth?
1. The Aviation Value Chain: A Tale of Two Extremes
Since 2005, the International Air Transport Association (IATA) and McKinsey & Company have collaborated to track value creation across aviation's complex ecosystem. Their latest analysis examines all key segments:
- Aircraft and engine manufacturers (OEMs)
- Aircraft lessors
- Airports
- Air navigation service providers
- Ground handlers
- Maintenance, repair, and overhaul providers
- Catering companies
- Airlines
- Global distribution systems
- Freight forwarders
2. Measuring Value Creation: ROIC vs. WACC
The study evaluates economic value creation through the lens of return on invested capital (ROIC) versus weighted average cost of capital (WACC):
- ROIC measures how effectively companies generate profits from invested capital
- WACC represents investors' opportunity cost for comparable risk investments
When ROIC exceeds WACC, value is created. When it falls short, value is destroyed.
3. Pandemic Impact: An Industry Under Siege
The aviation sector suffered unprecedented losses during 2020-2021:
- Global passenger traffic plunged 66% in 2020 and 58% in 2021
- The value chain lost $244 billion in 2020 and $146 billion in 2021
- Only cargo-focused companies prospered amid supply chain disruptions
4. The Cargo Exception: Pandemic's Silver Lining
While passenger operations collapsed, cargo became the industry's lifeline:
- 2021 air cargo volumes exceeded pre-pandemic levels by 7%
- With belly capacity grounded, freight yields skyrocketed
- 7 of 9 value-creating airlines in 2021 had significant cargo operations
5. Regional Divergence: North America's Resilience
Performance varied dramatically by region:
- North America was the only region creating value pre-pandemic
- This reflects market maturity, consolidation, and disciplined capacity growth
6. Structural Challenges: The Airline Profitability Puzzle
Even before COVID-19, airlines struggled with fundamental issues:
- Low barriers to entry but high exit barriers
- High fixed costs
- Extreme sensitivity to demand shocks
- Fragmented industry structure
- Concentrated supplier power
7. The Path Forward: Collaboration and Innovation
Rebuilding a sustainable aviation ecosystem requires:
- Enhanced data sharing across the value chain
- Operational improvements like optimized flight routes
- New cooperation models for decarbonization
- Continued business model innovation
The aviation industry has demonstrated remarkable resilience throughout its history. As recovery takes hold, stakeholders now face both familiar challenges and new opportunities to build a more valuable, sustainable future for global air travel.