Aviation Industry Faces Profitability Crisis Amid Value Chain Imbalance

IATA and McKinsey research reveals an imbalanced profit distribution within the aviation value chain, with airline financial performance generally falling short of expectations, a situation exacerbated by the pandemic. The report emphasizes the need for stronger regulation of monopolistic suppliers and the promotion of collaboration in data sharing and decarbonization. These measures are crucial for achieving sustainable industry development and a fairer allocation of benefits across the entire value chain, ultimately improving the long-term viability and profitability of airlines.

GENEVA/NEW YORK — A groundbreaking report from the International Air Transport Association (IATA) and McKinsey & Company exposes profound imbalances in profit distribution across aviation's value chain, raising urgent questions about the sector's long-term sustainability. The analysis shows airlines consistently underperforming while airports, distribution systems, and service providers maintain healthier margins—a disparity exacerbated by the pandemic.

The Pre-Pandemic Landscape: Chronic Underperformance

Between 2012-2019, airlines generated operating profits but failed to meet investor expectations, with average returns on invested capital (ROIC) lagging weighted average cost of capital (WACC) by 2.4%—equivalent to $17.9 billion in annual capital destruction. This persistent shortfall contrasts sharply with other value chain segments:

Airports outperformed WACC by 3% ($4.6 billion annually)
Global Distribution Systems (GDS) and travel tech firms achieved 8.5% returns ($700 million)
Ground handlers delivered 5.1% margins ($1.5 billion)
Air navigation providers maintained 4.4% returns ($1 billion)

"The study confirms airlines improved profitability post-financial crisis, but clearly they haven't capitalized on this as effectively as their suppliers," said IATA Director General Willie Walsh. "There's disproportionate risk-bearing—airlines face the greatest volatility with the least financial cushion."

Pandemic Shockwaves: Accelerating Imbalances

The COVID-19 crisis magnified structural weaknesses, with airlines suffering ROIC deficits of -20.6% ($104 billion) compared to airports' -39.5% ($34 billion). Notably:

Full-service carriers initially outperformed low-cost airlines during the crisis
Cargo-only operators maintained near 10% ROIC, though still trailing freight forwarders' 15-40% returns
North American airlines demonstrated strongest pre-crisis balance sheets and fastest recovery trajectories

Root Causes: An Industry Designed for Struggle

Harvard Business School's Michael Porter identified enduring challenges in 2011 that remain largely unchanged:

Hyper-competition: Low entry barriers, high exit costs, and relentless price wars
Supplier power: Concentrated aircraft/engine manufacturers and fuel providers
Buyer fragmentation: Price-sensitive customers with low switching costs
Product commoditization: Limited differentiation beyond price

Public opinion aligns with regulatory concerns—85% of consumers across 11 nations believe airport charges should face utility-style oversight, per IATA surveys.

Pathways to Equilibrium: Data and Decarbonization

The report identifies two collaborative opportunities that could benefit all stakeholders:

1. Operational Data Integration

Shared analytics could optimize infrastructure planning, crew scheduling, and runway utilization. Early airport trials demonstrate efficiency gains from coordinated decision-making.

2. Net-Zero Transition

Achieving 2050 decarbonization requires unprecedented cooperation:

Affordable sustainable aviation fuel (SAF) production scaling
ANSP-optimized flight paths
Next-gen aircraft development (hydrogen/electric propulsion)
Airport electrification (ground vehicles/services)

"No silver bullet exists to rebalance the value chain," Walsh noted. "But improved regulation and cooperation on shared priorities—particularly data efficiency and emissions reduction—can drive meaningful progress."

Sector-Specific Profitability Analysis

Airlines: The Vulnerable Core

Despite generating $560 billion in annual pre-pandemic revenue, airlines face:

Fuel price volatility (30-40% of operating costs)
Rigid aircraft acquisition/leasing expenses
Labor-intensive operations with high unionization
Infrastructure fees consuming 15-20% of revenue

Airports: The Resilient Monopolies

Regional monopolies enjoy:

Dual revenue streams (aeronautical/commercial)
Captive customer bases
Long-term concession agreements
Retail/real estate income diversification

Technology Intermediaries: The Silent Winners

GDS and travel tech platforms benefit from:

Transaction-based fee structures
High switching costs for airlines
Data network effects
Scalable digital infrastructure

Post-Pandemic Rebalancing

The crisis presents opportunities for structural reform:

Digital transformation: AI-driven demand forecasting and personalized services
Sustainability investments: Fleet modernization and SAF adoption
Regulatory modernization: Monopoly oversight and competition policies
Ecosystem collaboration: Shared data platforms and joint infrastructure planning

As McKinsey partner Nina Wittkamp observed: "The value chain has never collectively exceeded capital costs. But win-win scenarios exist—deeper cooperation can better serve consumers while creating sustainable value."

The aviation industry stands at an inflection point, where addressing these structural imbalances may determine its ability to meet growing travel demand while achieving environmental and financial sustainability.