How bad a business is an airline?
Stunningly bad. Especially if we’re talking about an airline serving one or more of the world’s developed economies. All you have to do is look at what a recovery in the industry looks like.
The International Air Transport Association (IATA) is calling 2010 a recovery year for the industry. Global airlines in aggregate will actually make a profit in 2010. That would make 2010 the third profitable year for the industry during the last 10.
In the first quarter of 2010 cargo volumes climbed 26% from the first quarter of 2009 and what’s called premium travel volumes (the seats that aren’t coach) rose 20%.
On a global basis airlines will make $2.5 billion in profits this year, the IATA projects.
But the recovery isn’t spread evenly across the world. Airlines in emerging economies are, by and large, doing better than fine. U.S. airlines are projected to make $2 billion in 2010. But European airlines are forecast to show a $3 billion loss for the year.
But to understand exactly how bad this business is, in aggregate, you need to take a look at the miniscule margins that $2.5 billion in global profits represents.
According to the Financial Times, the industry’s profit margin comes to just 0.5%. And this is in a recovery year.
The industry’s return on invested capital will be just 3% in 2010. That’s way less than all but state-owned or controlled airlines pay for the capital they borrow.
Hard to figure how the industry will afford to add a net 800 new airplanes in 2010.