Checking in on the aviation value chain’s recovery

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For nearly 20 years, we’ve run an annual aviation value chain analysis, and have recently completed a refresh with 2022 data. The results indicate that all subsectors continued their recovery in 2022, but overall, the aviation value chain still shows significant losses. As expected, the industry’s overall financial performance is recovering—aggregated economic performance for the full value chain resulted in a decrease in the sector’s net loss from $159 billion in 2021 to $69 billion in 2022.1 As in previous years, airlines remain the biggest drag on value chain performance. What is surprising is that this holds true for all regions. Even North America, where demand recovery is strongest, saw airlines generate a loss on par with the region’s airports.

This article provides an overview of global aviation’s performance in 2022, by subsector, to understand how the sector is recovering financially and where it currently stands. Every subsector either equaled or bettered its performance compared to 2021. While this is encouraging, improvement does not necessarily point to profitability or value creation.

Measuring value creation

Since 2005, McKinsey, in collaboration with the International Air Transport Association (IATA), has assessed the degree to which each aviation subsector earns a return that covers its cost of capital. Our measure of value creation is economic profit. This takes into account the difference between the return on invested capital (ROIC) and the alternative returns of equal-risk opportunities investors have access to, measured by the weighted average cost of capital (WACC). Absolute economic profit is the difference between ROIC and WACC multiplied by the invested capital.

We consider all participants in the value chain: original equipment manufacturers (OEMs) that produce aircraft and engines; lessors; air navigation service providers (ANSP); airports; catering suppliers; ground services companies; maintenance, repair, and overhaul (MRO) suppliers; airlines; freight forwarders; and global distribution system (GDS)/travel technology providers. This year, we have included the jet fuel production subsector in the value chain.

All subsectors besides freight forwarders and fuel production showed large losses in 2022 (Exhibit 1). Airlines showed the largest absolute economic loss at just over $45 billion.

In 2022, nearly all subsectors noted sizable economic losses—freight forwarding and fuel were the only value-creating segments.

Despite these sizable economic losses, results are on an upward trajectory. All subsectors improved performance compared to 2021, except ANSPs which remained static. But, the sector has not fully recovered to pre-pandemic levels as seven out of 11 subsectors showed ROIC below that of 2019. The degree of recovery differs materially by subsector (Exhibit 2).

Aviation subsectors show improved ROIC performance, but most show ROIC below that of 2019.

Airline losses have slowed, and more carriers are showing profits

Airlines were underperforming, long before the damage of COVID-19. In fact, the subsector’s ROIC has been below WACC since at least 1996. Airlines stand out from other participants in the aviation value chain for having lower and more volatile returns (Exhibit 3). The causes are manifold but lie chiefly in airlines’ high exposure to external shocks due to a large, fixed cost base and variable revenues; highly price-sensitive passengers providing an incentive for marginal pricing; low entry barriers; high exit barriers; and increasingly consolidated supplier markets. To add to this, airlines’ costs are rising, for example for fuel, parts, and labor. Many have seen a structural increase in labor costs. To illustrate, in the United States, one airline’s recent salary negotiations concluded in an agreement to raise pilot pay by up to 40 percent over a four-year period. This may not be a sector-wide occurrence, or representative of total labor costs, but it is indicative of rising costs in a tight labor market coupled with high inflation.

Airlines stand out in the value chain for lower and more volatile returns; service providers differ.

Airlines’ 2022 economic losses of $45 billion are significant, but a marked improvement on the $180 billion and $111 billion lost in 2020 and 2021, respectively. The subsector is recovering—industry revenue in 2022 was at roughly 87 percent of 2019 levels and traffic (measured through revenue-passenger kilometers) stood at 69 percent of 2019 figures, pointing to higher yields. Indeed, strong post-COVID-19 passenger demand combined with a shortage of almost everything else (including aircraft, flight crew, and ground staff) grew passenger yields by around 10 percent from 2021 to 2022 in nominal terms.2 Improved yields played a part in helping airlines recover.

All regions contributed to the overall losses in 2022—including North America. This is unexpected as the region has seen the greatest recovery in traffic. Its airlines also outperformed other parts of the world from 2012 to 2019, registering a cumulative $27 billion in economic profit. Historically, around five of the 10 most profitable airlines were North American carriers.

Even when the subsector generates an economic loss, there are always carriers that cover their cost of capital. There were only five carriers that created economic profit in 2020—all cargo focused. In 2022, that number rose to 19. With growing passenger demand and a rebound in supply helping to normalize air cargo, value creators in 2022 were a mix of passenger and cargo-focused carriers. The airlines that created value were outliers in a subsector characterized by significant variance in profitability and widespread losses (Exhibit 4).

Globally, 19 out of 86 airlines earned their cost of capital in 2022.

There are steps that airlines could take to emulate the small group of carriers that consistently show strong results. These actions, largely, have not changed over the past year or so. They include building resilience and working on the factors that drive value creation such as maximizing asset utilization, generating ancillary revenues, and, ensuring pockets of privilege in flight networks by providing passengers with a unique itinerary that others don’t.3The six secrets of profitable airlines,” McKinsey, June 28, 2022. Indeed, as supply gradually returns and puts pressure on yields, economic uncertainty impacts demand, and the cost base increases, taking action on these factors has become even more pressing.

Low traffic volumes affected airports and ANSPs

Airports are often thought of as being in a position to generate consistent profits, after all, most airlines have to use them. Counterintuitively, over the past decade, airports’ economic profit margin was not that different from airlines, averaging -6 and -6.6 percent respectively.

In 2022, airport losses were around $30 billion (-21.9 percent profit margin) compared to airline losses of $45 billion (-6.2 percent profit margin). While airlines saw yields rise due to the combination of stronger-than-expected demand and subdued supply, airports did not experience as direct an impact. The subdued results could be a function of airports’ significant fixed costs, relatively low traffic volumes, and changed mix with less of the long-haul traffic that typically generates more revenue for airports. By comparison, before the pandemic, airports earned a positive economic profit margin of 0.9 percent, while airlines were at -2.7 percent.

Airport economic losses were most pronounced in Asia–Pacific in 2022, and the subsector shows a wide spread in performance across regions. Airports in North America generally generate economic losses (this was the case even before COVID-19), while airports in other regions showed positive economic profit prepandemic. Some of this is by design, as most US airports are operated by a separate local government authority or an enterprise fund of the local government. Policy disallows these airports from generating surplus revenue. Meanwhile, European airports have a greater degree of corporatized and privatized airports.

Similarly, ANSPs (which manage the safe flow of air traffic) saw the second-lowest economic profit margin in the value chain (-10.4 percent). As with airports, low traffic volumes and high fixed costs contributed to this.

Fuel suppliers posted profits, helped by a rise in the price of jet fuel

The economic performance of the jet fuel production subsector is complex to untangle, given that refineries produce multiple products—typically, jet fuel makes up around 8 percent of production—and it is impossible for a refinery to produce only jet fuel. To include the subsector in our analysis, we applied downstream oil and gas sector performance to airline jet fuel spend. Accordingly, we estimate the economic profit of jet fuel production to be approximately $1.6 billion a year on average, with high sensitivity to the crude oil price.

In 2022, this subsector saw an economic profit margin of 3.3 percent, substantially higher than its average of 1 percent between 2012 and 2022. Along with freight forwarders, it was one of only two profitable subsectors in the value chain. Jet fuel prices spiked in 2022, likely explaining the jump in profitability of the subsector.

Freight forwarders maintained standout profitability

Freight forwarders (intermediaries on the vast majority of air cargo shipments) have maintained consistent economic profitability since 2012. And, since the onset of the COVID-19 pandemic, profitability has been increasing sharply. In 2022, this trend continued with freight forwarders delivering an economic profit margin of 5.4 percent—the highest of all subsectors included in our analysis. The subsector also benefited from the spike in freight rates, and, is probably one of the most asset-light industries in the value chain—factors which likely boosted profitability.

Currently, the air freight sector faces uncertain market demand while inventory-to-sales ratios continue to increase. As flight schedules fill up and belly freight capacity continues to recover, air cargo yields are expected to come down slightly from their peak, but stay elevated above 2019 levels. With a return on invested capital of around 12 percent in 2022, air cargo carriers continued to show strong performance, albeit slightly behind 2021 (when ROIC was approximately 15 percent).

Manufacturers and lessors show smaller losses with some firms achieving positive margins

In 2022, manufacturers posted an economic loss of $1.7 billion (1.9 percent of revenue). This has come down from the $4.4 billion (6.9 percent of revenue) lost in 2021. The recovery of traffic saw the number of narrow- and wide-body aircraft orders placed increase from roughly 470 in 2020 to 2,250 in 2022. However, OEM production rates are significantly lower than before the pandemic due to supply-chain challenges and issues with new technologies. Rates are now recovering, but for the most part, the industry is still experiencing a supply shortage with fewer aircraft being produced than the numbers demanded by airlines.

Similarly, lessors posted economic losses amounting to 7 percent of revenue. Lease rates continued to recover given demand changes and an overall shortage of supply. To illustrate, lease rates for an Airbus A320neo were about $250,000 a month in 2020. In 2023, this would cost roughly $360,000 a month—in nominal terms not far from the rates observed in 2019.4 Some lessors experienced war-related exceptional losses that have not been included in the analysis.

GDS providers show continued losses impacted by a high rate of acquisitions

GDS/travel technology providers lost $0.5 billion in economic profit in 2022, representing 8.8 percent of revenue in the subsector. This is an improvement on the $0.8 billion (22.4 percent of revenue) lost in 2021. GDSs are one of the subsectors most clearly impacted by the pandemic: most had posted consistent profits until 2020. Indirect bookings, powered by GDSs, were still relatively more depressed than overall traffic, partly due to a slower corporate travel recovery. In 2022, the value of direct airline bookings (primarily through airlines’ own websites) was approximately 12 percent lower than in 2019. In contrast, the value of indirect bookings (chiefly powered by GDSs) was around 38 percent lower than in 2019. As corporate travel gradually recovers, it is likely that GDS’s margins will recover too, given that the underlying fundamentals, such as the high entry barriers to building such systems, haven’t changed.

Catering, ground services, and MRO providers

The catering subsector lost $0.1 billion in economic profit in 2022, constituting 0.5 percent of its overall revenue. Ground services, meanwhile, reported a loss of $1.1 billion at 2.9 percent of revenue. This represents a 1.3 percent improvement in ROIC between 2021 and 2022. These subsectors are both heavily reliant on passenger traffic, so both will follow a similar recovery trajectory. During the pandemic, catering and ground services’ economic margins were not as low as those in aviation subsectors with a greater degree of fixed costs.

The MRO subsector generated economic profits of $0.2 billion (0.7 percent of overall revenue) in 2022. Although industry revenue was still lower than 2019, ROIC for the subsector was 1 percentage point above 2019, making MRO one of just three aviation subsectors to overtake pre-pandemic levels.

All subsectors across the aviation value chain have improved economic performance when compared to 2021, but the value chain overall continues to experience losses in the wake of the COVID-19 pandemic. As in previous years, airlines are generating the largest economic loss, driven by structural challenges in the industry. Airports have the most negative margins in 2022, hit by their higher fixed cost base and lower traffic. Players across the value chain could continue to work together to improve the economic sustainability of the industry, for everyone. In every subsector, there are value-creating companies: there are opportunities for those with the right market position, strategy, and operations to outperform.

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