Aviation value chain: Strong recovery brings profitability into view

The aviation value chain recorded a modest economic loss of roughly $3.6 billion in 2023. Jet fuel producers, which benefited from elevated fuel prices, and freight forwarders, which continued to see strong air cargo demand, achieved the largest profits. Airports, airlines, and OEMs suffered the largest losses in absolute terms. The overall results, buoyed by the ongoing recovery in air travel, represent a significant improvement compared with 2022, when economic losses across the value chain totaled roughly $67 billion. Nine out of the 11 subsectors we track improved performance in 2023 versus 2022, and six out of 11 performed better compared with 2019.

Drilling down within these subsectors reveals a few narratives. For instance, disruptions to aircraft production supply chains have created both challenges and opportunities. OEM production levels remain materially reduced, and aircraft and engine OEMs as a group generated economic losses of about $2 billion in 2023. But fewer new aircraft being delivered amid strong demand means that airlines are extending the service lives of their existing aircraft: the share of commercial fleet aircraft that are 25 or more years old increased to 9.6 percent, from 8.1 percent. Older aircraft require more maintenance, so the MRO sector rebounded to modest economic profitability of about $42 million (equaling roughly 0.1 percent of revenue).

Meanwhile, in cargo—one of the few bright spots for aviation during the pandemic—demand remained strong, propelled by e-commerce orders. Capacity also rebounded, aided by increased availability of wide-body aircraft, which led to cargo yields dropping by approximately 32 percent. Freight forwarders continued to generate the largest economic profit of any subsector in absolute terms (about $5.1 billion in 2023), but results were still down from the previous year’s profit (about $7.2 billion in 2022). In 2020, the only value-creating airlines were all-cargo airlines, but by 2023, all-cargo airlines constituted only 2 percent of value-creating airlines.

Our analysis shows that airline sector ROIC has remained below the weighted average cost of capital (WACC) since at least 1996. Airlines are a perennially pressured sector. Among the headwinds airlines face are price-sensitive passengers, consolidated supplier markets, and volatile costs for fuel, parts, and labor. In 2023, despite these ongoing challenges, airlines closed the gap between ROIC and WACC to the second-smallest deficit observed since the start of this analysis two decades ago.

Additionally, the share of value-creating airlines in our sample—that is, airlines that achieved ROIC higher than WACC—rose to 49 percent, which is the highest proportion we’ve seen over the history of this analysis. (For comparison, only 23 percent of our airline sample was value-creating in 2019. The best previous recorded result was in 2015, when 32 percent of our sample achieved ROIC above WACC.)

Postpandemic demand has been resilient: revenue-passenger-kilometers—a demand metric for the airline sector—grew by approximately 37 percent year-on-year in 2023, reaching about 94 percent of 2019 levels.¹Revenue-passenger-kilometers are calculated by multiplying the number of paying passengers by the total distance traveled. Meanwhile, supply growth has slowed due to factors such as supply chain challenges and labor shortages. Given that demand for airline seats grew faster than supply, yields rose. Revenues for the airline sector were at about 108 percent of 2019 levels in nominal terms, while passengers carried were at about 99 percent of 2019 levels.²Accounting changes regarding the treatment of aircraft leases may have had additional positive effects on airlines’ ROIC in 2023.

The regional picture shows notably different patterns of postpandemic recovery. From 2014 to 2019, only North American air carriers consistently created value, due in part to slower capacity growth in a consolidated market. Postpandemic, however, North America continues to produce economic losses, while Europe, Latin America, and Africa and the Middle East have emerged as value-creating regions. The Asian airline sector remains unprofitable, in large part due to significant economic losses from Chinese airlines, which have had slower recovery of international demand after the pandemic.

Over the past decade, North American airlines have been a bright spot. They were profitable every year between 2014 and 2019—years when most other regions’ airlines posted losses. In 2023, however, North American carriers recorded an overall economic loss of about $0.7 billion.

The underlying data suggests this was largely driven by the sluggish performance of low-cost carriers. In 2019, North American low-cost airlines produced an economic profit of roughly $1.3 billion, but in 2023 this group recorded an economic loss of about $3 billion. Among the challenges that could have contributed to low-cost carriers’ declining performance are oversupply and strong competition in the North American short-haul market, as well as business models that have caused low-cost carriers to miss out on servicing a shift in consumer demand toward long-haul and premium seats.

In 2023, due in part to company-specific factors, the contrast between top and bottom performers increased within several subsectors. For example, in the aircraft and engine OEM subsector, the difference between the third quartile and bottom quartile of ROIC performance was 23 percentage points in 2019, but in 2023 it increased to 55 percentage points. Increasing polarization was also visible in other subsectors, including airlines, airports, freight forwarders, MROs, and ground handlers.

Although airports greatly improved on their 2022 results, their $9 billion economic loss was the largest of any subsector. Airport traffic in 2023 did not recover to its prepandemic levels, affecting both aeronautical (for instance, landing charges) and non-aeronautical (for example, retail spending by passengers in terminals) revenues.

While airlines were able to benefit from the slower recovery of capacity by raising prices, costs for airports are largely fixed (and, in most cases, regulated). Airports therefore saw lower revenues coupled with continued high fixed costs. Given that the airports subsector generally delivered strong economic profit in the years immediately prior to the pandemic, continued postpandemic traffic recovery could lead to improved results.

North American airports continue to post negative economic profit, but this is largely a result of their ownership structure. Most North American airports are publicly owned and are treated as utilities for their communities. They are not subject to the same profit incentives as, for example, typical Asian or European airports, many of which are privatized.

Asia–Pacific airports posted a large economic loss in 2023. Although passenger traffic in Asia–Pacific continued to recover in 2023, it remained at approximately 93 percent of 2019 levels (compared with, for example, 105 percent at airports in the Middle East). Some Asia–Pacific airports also faced slowed retail revenue recovery amid inflationary pressures and economic uncertainty.