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2 Jun 2023

Aviado comments on the Wirtschaftswoche article on the sustainability of current airline profits

Oh how things change. Airlines were experiencing a slow downturn from 2017 to 2019 with demand being propped up solely by low fares. The global pandemic hid these problems and a wave of government bailouts bought the industry time and saved tens of airlines from the inevitable insolvency, had the downturn continued.

Fast forward to 2023 and just about any airline is swimming in profits, save for a few which misread the market. But how long are these profits sustainable?

As airlines restart delivery of aircraft deferred during the pandemic, combined with 737 Max deliveries ramping up, the fleet renewals should kick out a large number of older aircraft, However, whereas these aircraft may normally be sent to the scrap heap, current demand levels will likely mean leases will be extended on many aircraft and others will move to the secondary market and be flying again. With cheap used aircraft, the risk is that the market will be flooded with new, poorly thought out start-ups, looking to cash in on the short term boom.

The wave of airline insolvencies prior to the pandemic, combined with the acceleration of capacity reductions means that, on the North Atlantic, for example, 90% of capacity is controlled by the three alliances. With less choice and fares having risen upto 40%, the competitive environment needs more scrutiny from competition regulators. However, it is likely that the regulators are asked to turn a blind eye while airlines recover as governments do not want to see their bail-outs go to waste. This is bad news for the mid and small-sized, as well as the large independent airlines as such policy favours the larger carriers and flag carriers. The flood of capacity will inevitably bring prices down, but the cost base will have risen significantly in the race to milk this profit cow.

It is Aviado's contention that there is a risk of high structural costs being introduced into airlines. If the airlines want to remain as strong as they are today in the long term, they should not only fundamentally change their costs, but also the way they work.

Image credit: Wirtschaftswoche

About Aviado Partners Advisory Services GmbH

Aviado Partners Advisory Services GmbH is a specialist management consulting firm providing objective, independent and evidence-based analysis, advice and implementation support to airlines, airports, rail operators, hotels and other transportation related companies around the world. The firm advises management, boards, investors, governments, leasing companies and other stakeholders across all the key commercial and strategy issues. Aviado Partners' team members and associates have worked with leading international full service and low cost airlines, global consulting firms, financial institutions and manufacturers both as members of senior management as well as an airline consultant. The Partners and Associates have led or had significant involvement in numerous merger, acquisition, restructuring, start-up, aircraft selection and performance improvement assignments in Asia, the United States, Canada, South America, Russia & the CIS, Africa and the Middle East.

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