Ask around and I bet you’ll be hard pressed to find someone you know who has never flown in an aeroplane before. Once a luxury experience, reserved for once-in-a-lifetime trips or for high-flying (excuse the pun) business executives, flying is now relatively common. In fact, passenger kilometres are currently estimated at more than 5 trillion a year. That works out as roughly 714 kilometres for every person on Earth!
So, with so many customers around the world, how is that airlines have for so long struggled with low profit margins? I stumbled across this interesting article in The Economist which explores this topic, asking the question “why has a booming business failed to prosper?”
One reason is that in the beginning airlines were state-owned, and as such relied heavily on government subsidies. Profit wasn’t a vital component as really the purpose of the airline was to convey a sense of national pride. If you aren’t actively trying to make a profit, then you’re likely not going to – it’s as simple as that. Compounded with government inefficiencies, airlines were essentially not positioned to be profitable. This later became an obstacle they had to overcome in terms of a shift in mind-set and a streamlining of business models.
Fast forward a few years, and in the ’80s the liberalisation of air travel brought with it the low-cost carrier. Previously nationalised legacy carriers simply couldn’t compete with these new upstarts, and were hampered by their “older fleets, large networks, uppity unionised workforces and vast pension liabilities.”
Aside from this new competition, airlines also struggle with the fact that there is little competition amongst their suppliers. How can they keep costs down if there is no competition? For example, with only two leading aircraft manufacturers – Airbus and Boeing – you are basically going to have to pay the going rate as there aren’t many places you can go to buy a commercial aeroplane.
Add to that external factors like terrorism, global pandemics, increasing oil costs and so on, and airlines find themselves in a vulnerable position. Simply focussing on one’s own business model isn’t enough to guarantee profitability – there is always the potential of external risk factors that can adversely affect the bottom line.
That said, “the outlook is brightening.” Struggling airlines are consolidating (like American Airlines and United), more and more people continue to fly, and “forecasts suggest that global profits could hit nearly $20 billion in 2014, with margins of 2.6%.” These margins aren’t huge, but they are a step in the right direction, and it will be interesting to see how this trend may continue.