Barriers to exit must come down to raise airline returns, attract investors

CAPA ANALYST PERSPECTIVE - a series where CAPA - Centre for Aviation's analyst team provide their personal views on a hot topic facing aviation around the world.

The world airline industry has broadly recovered from COVID-19: in 2024 global passenger traffic is expected to exceed 2019 volumes, and IATA forecasts industry net profit at 97% of the 2019 result.

However, for decades, the industry's return on capital has failed to meet its cost of capital. Low returns suggest too much competition, despite modest increases in consolidation.

The Herfindahl-Hirschman measure of market concentration shows that five of the six global airline regions are highly competitive at the macro level. Only North America can be classified as "moderately concentrated".

Airline consolidation is hindered by low barriers to entry and high barriers to exit, although supply chain and labour constraints are modestly raising entry barriers currently.

However, perhaps more significantly, exit barriers remain high. These include government support, bankruptcy protection and obstacles to mergers and acquisitions from competition authorities and foreign ownership limits.

The transition to a sustainable future requires huge investment. In order to attract airline investors, barriers to exit - largely erected by governments and regulators - need to come down.

Jonathan Wober, Chief Financial Analyst at CAPA - Centre for Aviation shares his viewpoint.