Tailwinds 2016 – Surging airline profits: Now what?

June 16, 2016

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By: Jonathan Kletzel, US Transportation & Logistics Leader, PwC

Low fuel prices continue to boost the profits of the global airlines industry. Our recent look at airlines industry trends shows net and operating margins at record highs. So now airlines have the enviable challenge of what to do with their profits. Some airlines have already given a portion of their profits to shareholders or employees in the form of bonuses or wage increases. Others have lowered airfares on some routes, especially competitive ones. Many airlines are moving ahead with plans to upgrade or expand their fleets.

All of these choices are understandable and perfectly reasonable. After all, shareholders and employees experience the lean times, too. But solely returning profits to stakeholders does not prepare an airline for changes in economic conditions nor does it help to build sustainable or differentiating capabilities. And it is unlikely investors will continue to provide capital when they don’t see a long-term strategy that will provide bigger payouts in the future.

So what else should an airline consider to make the most of its  profits? With so many airlines buying the same planes, it could invest in differentiating its product. This involves analyzing all aspects of an airline’s business and prioritizing the customers it wants to appeal to. An example may include better coordination of an airline’s cross-functional competencies to become super-efficient and reliable, which could be especially attractive to business travelers. An airline could work on developing a customer experience that delivers a higher level of convenience and service than its competitors. These efforts, and others that aim to improve operations and minimize risk, will often  require  investments in technology. But they can give an airline more power to lower prices to compete on particular routes while creating differentiated offerings.

US airlines should also consider refocusing on their tax strategy. Most of them haven’t had to pay corporate income taxes in a long time, but that’s changed now. Airlines have to think about how to enhance their tax function so it can better align with the rest of the business and identify tax efficiencies that can further enhance profitability.

While investing for the future may not seem urgent in today’s environment, downturns are inevitable. Even now, we see that while profits are up, global revenues are down from 2013 levels. Lower fuel prices have allowed airlines to increase capacity, but the international economy is still sluggish. To fill seats, airlines have resorted to discounting their prices. In the US, the yield decline was most dramatic for the ultra low-cost carriers (ULCCs), which also had to contend with more competition from the mainline carriers.

No matter which investments an airline chooses as part of its strategy, the key to sustainability is flexibility. An airline has to have a flexible cost structure to help it through tough times. This includes a hedging strategy under various fuel price scenarios, labor contracts that incent workers but don’t lock in onerous fixed costs, and rational fleet planning that considers fuel prices, capacity and projected demand.

For further insights, read our latest edition of Tailwinds.

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