IATA outlines air transport sector’s predicament

The short-term prospects for air freight remain subdued as the International Air Transport Association (IATA) reported that airfreight volumes have increased just 0.8% so far in 2013 (ending May 31), whilst load-factors have fallen to 44.9%; the lowest level for more than three years. Tony Tyler, IATA’s Director General described the air cargo market as being “in suspended animation at the moment.”

However, IATA views the problems of the sector as not merely short-term, but as structural. In a report published on Monday called ‘Profitability and the Air Transport Value Chain’, the organisation argued that the returns on invested capital in the airline sector are so low that they are insufficient to support the “US$4-5trillion that will be needed over the next 20 years to meet the growing demand for aviation-enabled connectivity”.

Certainly, the numbers cited by IATA suggest significant problems attracting investment within the sector. Over the period 2004-2011, on average an investment in an airline would have returned 4.1%. Although this represents an improvement on the previous business cycle 1996-2004, which saw an average return of 3.8%, even the higher number was below the risk adjusted cost of capital at 7.5%. IATA commented that “on average industry returns were just sufficient for the industry to service its debt, with nothing left to reward equity investors for risking their capital.”

Indeed, it is noticeable that the report calculates that airlines gave a poorer return than the trucking businesses over the same period. However, there are businesses that can make money out of air transport. For example, the report cites freight forwarders as being capable of profiting from the sector, suggesting that they make on average a 15% return on invested capital.

The report perhaps, in part, overstates the sector’s woes in an attempt by the organisation to lobby the airline industry. However, it is reasonable to suggest a structural problem does exist within the air transport sector. This is partly the result of political interference on market structures, the comparative ease of entry into the sector and the increasing power of consumers. But these factors should not be exaggerated. The sector is its own worst enemy with so many investors and governments willing to throw money at the airline business with agendas other than economics. As a result, the cost of air freight transport will continue to be lower than it should otherwise be.