Profitability and the air transport value chain

Abstract

This report analyzes the air transport value chain for the 2004 to 2011 business cycle. The report looks at the poor profitability of the airline industry, how profitability is measured, and attempts to diagnose why it is that return on investment continues to be inadequate. McKinsey & Company was commissioned to investigate returns on invested capital and value capture in the fuel supply chain and labor. They compare return on invested capital with a firm's weighted average cost of capital to measure the profits. The average return for capital invested in the airline industry during 2004-2011 was 4.1% while investments of similar risk outside the airline industry averaged approximately 7.5%. The report concludes with suggested actions to improve airline industry profitability.

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