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S3872865 Financial
sustainability
in the
Aviation
value chain

AV I AT I O N
FINANCIAL
SUSTANABILITY
VALUE CHAIN
What is value chain, its structure, features,...?

AIRLINE SECTOR
Some facts, some parameters of this sector in the
value chain
PERFORMANCE OF VALUE CHAIN
The value chian is evaluated based on 4 aspects:
Investment, Returns on investment, Credit rating,
Market power.
FINANCIAL SUSTAINABILITY AND
INVESTMENT IN AIRLINES INDUSTRY
Short description about sustainability and
conclusion about sustainability in aviation.
Answer the question: "is it worth investing in
airlines?"
CONCLUSION AND SOLUTION
A summary about key ideas. Suggest some
solutions for the whole chain

MISUNDERSTANDING 
VALUE CHAIN VS
SUPPLY CHAIN

VALUE CHAIN SUPPLY CHAIN

1. Definition

The process in which a The supply chain is all the steps

company adds value to its raw required to get the product to
materials to produce products the customer.
eventually sold to consumers

2. Activity

Adds values to the product Facilitates production and

distribution of the product

3. Purpose

Provides competitive Offers customers satisfaction

advantage

VALUE CHAIN STRUCTURE 

Manufacturers Infrastructure Service Providers 

Airframes Airports Insurance 

Engines ANSPs Ground services
Components Communications MROs
... Caterers

Lessors/
Capitals
Upstream factors

The airlines

Downstream factors

Distribution Distribution
Of Freight Of Passengers
Freight forwarders Global Distribution
Integrators Systems (GDSs)
Travel agents
i.g. FedEx, UPS, Integrator/ tour operators
DHL,...

Is a Global Value Chain because Consists of a number of

the operation of each sectors is interlinked sectors 
cross-border

Airline industry is the hub for

other sector in the chain

ICAO, national air

safety regulators
Establish standards
for sale, travel
documents, financial
Establish transactions between
standards and value chain partners
recommended
regulations,
facilities, AVIATION
operation,... VALUE CHAIN
i.g. standardize IATA
FEATURES
airport design 

HIgh degree of vertical Companies in the chain do not

disintegration  operate in isolation

Need the participation of Each participant performs a

diffeent sectors, companies limited subset of activities 

Create a finished product 

THE AIRLINE SECTOR

gENERAL
FEATURES  Did You Know?

Net profit: 
THE ANCHOR OF
THE WHOLE CHAIN In 2011 is 8.3 $billion
Airlines are indispensable
part, other sectors operate
based on input and output
$ In 2017 is 37.6 $billion
needs of airlines
In 2019 is 26.4 $billion
THE WEAKNESS
Although being the central
part, airline industry also be
the most vulnerable sector
! Outbreake
of covid:
In 2020 is -137.7 $billion
DEREGULATION
Deregulation acts
dramatically transformed
the industry resulting in both
% In 2021 is -51.8 $billion

pros and cons

PROFITABILITY
Keep improving but profit
margins continue to be
alarmingly thin
@
THE AIRLINE SECTOR
Influcing factors

Volatile fuel
prices Economic
downturns
Intense
competitions

Airline
profitability Impact of
terrorism 

Natural
disaters

Government
austerity Pandemics
measures

THE AIRLINE SECTOR

deregulation

Deregulation
of the industry
Increasing competition between Advantages
airlines to obtain the highest
benefits possible for users.
Strengthen safety, security, Removed
environmental regulations. unnecessary
government
Government control of pricing; regulations
route, ownership,... other
aspects of airline economic has Greater number of
largely been removed. flights, non-stop
destinations

Increase
productivity

Improvement in
drawbacks for capacity utilization
airlines

Too much competition, good for

customers but the substantial
cost in the form of lower
profitability for airline industry. Nowadays, airlines have
Airlines always compete for invested in certain supply
price down to the marginal cost
of providing service, lower
chain partners like:
overall fares.
Providers of fuel, ground
handling, in-airport
Airlines have limited or no customer services,
ownership interest in other
sectors of the value chain
catering, cargo terminal
facilities, trucking
operation...

Aspects of a value chain 

INVESTMENT
Showing how money flows in and be distributed inside the value chain  by the
parameter from IATA in 2011

RATE OF RETURNS ON INVESTMENT

Illustrating returns on investment of each sector, which sector earns the least? the most?
by analyzing a major study of McKinsey which is commissioned by IATA

CREDIT RATING 
Another metric can be used to examine sustainability performance along the value chain

MARKET POWER
Showing some part of the chain is manipulating the airline as well as other partners
along the calue chain

ASPECTS OF VALUE CHAIN 

INVESTMENT
Capital investment in the Aviation Value
Chain in 2011 (USD Billion)

69
27
48

506
293

source: IATA
Airlines (53.66%) Airports (31.07%) Lessors (5.09%)
Manufacturers (2.86%) Others (7.32%)

Lessors
Airlines primarily It is often 5%
invest in new or unnoticed that
replacement airport Manufacturers
aircraft engines, investment is 3% 
other substantial,
components, also 31% 
in ground Have low asset Others, 7% including
equipment and turnover Air Navigation
corporate compared to Service Providers,
resources airlines Freight forwarders,
Largest Low ratio of Ground service
investment, 57% annual providers, travel
Low ratio of revenue to agent, Maintainance-
annual revenue to invested Repair-Operations,
invested capital, capital, only Global Distribution
only 1.0 0.2% Systems,...

ASPECTS OF VALUE CHAIN 

RETURNS
Estimate the returns on
investment in the aviation 
- by McKinsey, commissioned by IATA in
2013

Airlines provide the The airline sector is

The rate of returns the worst-
lowest rate of return
on invested capital performing 
on invested capital
varies widely The rate of return for
for shareholders
between different compared to other airlines falls short of
sectors of the value sectors of the the cost of capital
chain  aviation supply invested in this
chain  industry
Return on Invested Capital in the commercial
aviation value chain 2004-2011
CRS or GDSs
Travel Agents
Freight forwarders
All Services
Lessors
ANSPs
Manufacturers
Airports
Airlines

0 10 20 30 40

Return on Invested capital Cost of capital

Source: McKinsey & Company, Air Travel Value

Chain Analysis, February 2013.

ASPECTS OF VALUE CHAIN 

RETURNS
Return on Invested Capital in the commercial
aviation value chain 2004-2011
CRS or GDSs
Travel Agents
Freight forwarders
All Services
Lessors
ANSPs
Manufacturers
Airports
Airlines

0 10 20 30 40

Return on Invested capital Cost of capital

The airline industry is the worst The airport

Top performers performer Somewhat better
Global Distribution Return on invested capital varies
than airlines in
by region. (i.g. airlines in the
Systems (20%) Middle East, Asia, Latin America terms of financial
Travel usually have higher return) returns
agents (44%) The return also differs by the
But still the second
Freight forwarders business model. (i.g. top-
(15%) performing airlines often follow lowest earner in the
some variant of the Low Cost chain
Carrier, although not all LCCs are
profitable)

Summary
The airline sector is the center of the value chain but is the least profitable node
in the chain
For many years the industry has failed to achieve sufficient returns to cover the
cost of capital
Investors derive no benefit from the improved cost performance as the value is
entirely passed on to the customers downstream
This poor return puts other members of the value chain at some risk

ASPECTS OF VALUE CHAIN 

CREDIT RATING
Credit rating for High credit rating
firms in different Airport are generally
aviation sectors can rated as investment
be used to examine grade
sustainability Similarly, Air traffic
performance along control providers (i.g. Air
the value chain Services Australia, Nav
Canada...) are also rated
as investment grade.

In contrast, airlines are the

low credit rating and not
rated as investment grade 

Even airline shares are rated

as "junk" or "speculative"
Low credit rating grade.
results in an increase
in the cost of capital
for airlines

This is problematic for airlines in particular

and the value chain in general.  Rising two
issues:
It narrows the pool of potential investors and
thus limits access to capital for airlines and
impede the expansion of activity in the chain
Who should bear risk in the industry?

ASPECTS OF VALUE CHAIN 

MARKET POWER
Market power refers to a Because the rate of return relative
company's relative ability to to the cost of capital is different
manipulate the price of a for each sector, some sectors even
marketplace. have outstanding high returns

Whether substantial market

power exists in other
sectors of the value chain?

1st case is the extremely high returns being

earned by Global Distribution System providers
GDSs were divested by Market power is still remain
their airline owners GDSs will discipline an
The government airline that seeks
removed regulation of
the GDSs alternative channels or
technology providers

DEREGULATION REALITY

ORIGINALITY POST- PRACTICAL

DEREGUALTION EXAMPLE
Trusting new The Lawsuit between US
This sector distribution channels or Airway, American Airway
war created against GDS providers:
by airlines technology providers
would emerge Sabre, Travelport
Creating the needed
competition to prevent Biasing display away from
market power abuse the US Airway and
American Airline
Charging excessive booking
fees.

Another sector with signs of market

power is freight fowarder
Since a large number of These players make critical
freight forwarders but much decisions in the air cargo
of the market is concentrated industry
among a small group of large (i.g. which airport gateway will
global players be used)

DEFINITION OF
FINANCIAL
SUSTAINABILITY

REQUIREMENTS

To be considered as Financial
In aviation 
Sustainability:
1. The industry or the value chain
must be able to cover the cost of Financial sustainability:
operation.
2. Can provide a reasonable Must be achieved not
return on investment so that only by a value chain as
capital can be renewed. a whole

But also by each sector

of the value chain
individually

Inadequate performance of
conslusion only one sector can still have
the potential to destroy the
There is no firm conclusion that sustainability of the entire
can be drawn to answer the system.
question: whether commercial
aviation is sustainable?
Some experts say the airline
industry can never reach a
financially sustainable
equilibrium 
Some experts believe in
general the aviation value
chain is financially
sustainable, but there are
profit problems that need to
be solved.
It depends on each person's
view.

IS IT WORTH IT?
INVESTMENT IN
AIRLINES

Airlines around the globe Airlines earn a small profit

consistently post low returns margin 
on invested capital 

Why is the investment in the

airline industry is largest?
How airlines can attract
investors?

Because the airline industry

is highly leveraged and
generates a higher return
on investor's equity or net
worth

Consider shareholder's equity from 6 airlines

Airline Net profit margin Return on Net Worth

The return on equity
WestJet 7.1% 16.5% (whether positive or
negative) exceeded the
United/Continental -1.9% -16.6% magnitude of the profit
margin by a factor of 2-
Southwest 2.5% 6.0% 3 or even higher
(Lufthansa and United)
Qantas -1.6% -4.1%

All Nippon Airways 2.0% 5.1%

Lufthansa 3.6% 14.9%

Source: InterVISTAS analysis based on 2012 annual reports

for All Nippon Airways, LAN, Qantas, and WestJet; 2012
operating statement for Southwest; 2012 financial
The airline sector has
statement for Lufthansa and K-10 Form for still attracted
United/Continental. investment

CONCLUSION AND
SOLUTION

Based on the structure and 4

aspects of the value chain

The central part, Certain segments in

receiving the largest the value chain have
investment, the market power and
airline sector itself is are able to transfer
the weakness node profit from airlines
in the chain to themself.

KEY PROBLEM
FACED BY THE
AIRLINE INDUSTRY
It makes profits for
everyone along the
value chain except
for itself.

It is still worth
to invest in
airlines
REMEMBER
Financial leverage Not only 2 times, 3
Return on investor's times profit
net worth will But also can be 2
generally be 2-3 times, 3 times loss.
times profit margin

CONCLUSION AND
SOLUTION

Commercial
aviation can be
considered
financially
sustainable or
not, depending
on individuals.

Several
solutions to
increase the
financial
sustainability in
the industry. Injecting
Rebalancing
competition in
the value
sectors that are
chain
earning huge
economic profits

Removing regulatory
impediments to air
carriers reaping some
benefit from other parts
of the value chain