The airline industry is an asset-intensive, heavily leveraged and of low profit margin. AVIATION DIGEST | JARED KALERA | The news from the aviation world has in the past two years been particularly depressing. Almost every player globally has been crying, supposedly due to the effects of the COVID-19 pandemic on the industry.
Do not be fooled however. Losses in the airline business did not start with the COVID-19 pandemic. There are lots of examples of airlines that have either closed shop or been making losses even prior to the pandemic.
European airlines especially have been in the news for making losses and going bankrupt. Air Berlin, Wow air and most shockingly Thomas Cook have closed shop. Many African airlines too have gone off the radar, and others really struggling.
Bloomberg in its 2021 October report, predicted a $200 billion loss world wide while Statista predicted a 51.86 billion loss for 2021 and a 137.76 billion loss for 2020 world wide.
Kenya Airways is on spot for making a $333 million in 2020 while Uganda Airlines made a $107 million loss.
The Africa Report in a post on 17th March 2021 quoted Rwandan Finance and Economic Planning Minister Uzziel Ndagijimana as saying, RwandaAir was not at the time profitable but a good catalyst for the Economy.
But why the losses all over the world?
First we should recognize that the airline industry is an asset-intensive, heavily leveraged and of low profit margin. It’s a business of high fixed and variable costs.
Fixed costs include insurance, rentals , salaries, taxes, fees and licences.
While the biggest variable costs according to Investopedia include fuel, labor and equipment.
Labor takes 35% of operating costs give or take. In stormy times, airlines will quickly reduce on the labor force. During the COVID pandemic, airlines all over the world retired and dismissed most of their employees. This labor force which among others includes pilots, engineers and expert technicians of various fields is highly skilled, expensive and competitive. These expenditures clip off targeted profits.Fuel is a big factor in curving out a profit margin. Pilots fuel what is called Block fuel (the total fuel in all the tanks). But this is divided into different segments.Taxi fuel which also runs the auxiliary power unit. Trip fuel which is fuel from take off to landing at the next airport. Contingency fuel which should at least last five minutes in case of an abrupt delay as […]
