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Aviation value chain: airline returns muted by ownership/control rules

According to analysis by McKinsey & Co for IATA, airlines nearly doubled their average return on capital (ROIC) in the period 2010-2018 compared with 1999-2009. However, airlines continued to generate the lowest ROIC in the aviation value chain in both periods.

Moreover, with the brief exception of 2015, global airline ROIC fell short of the weighted average cost of capital, which is the minimum return expected by investors. Only North American and European airline returns are ahead of this threshold.

The highest returns in the aviation value chain are generated by the global distribution systems and the manufacturers. Catering, forwarding, ground handling, MRO, ANSPs and airports also make higher returns than airlines.

Airline industry fragmentation is an important factor in its underperformance. By implication, the analysis adds fuel to the argument for removing ownership and control restrictions on airlines.

Could COVID-19 provide the jolt that is needed to prompt reconsideration of the archaic ownership rules?

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