The external factors impacting airline profits

Airlines globally are facing profit and revenue woes as external factors from oil prices to labor union strikes threaten a delicate balance

Key Takeaway

The airline industry is infamous for difficulties in maintaining profit margins amid a number of internal and external factors that consistently threaten to throw them off balance. From rising competition and consumer demands, to labor deficits and union strikes, to fluctuations in fuel prices, airline decision-makers need to constantly adjust their strategies and find new ways to cut costs and increase revenue in order to remain above ground.

Large carriers and low-budget airlines alike are facing mounting struggles globally to maintain profit margins while facing a number of external factors that are causing disruption.

According to the US Bureau of Transportation Statistics, airline travel in the US has increased 15% from 2007 to 2017, while flight prices are seeing all-time lows. Worldwide, air traffic has nearly doubled since 2007.

While demand has increased, so have profits for major airlines, predicted to sit around $33.8B in 2018. However, this hasn’t come easy and has led to some significant changes in customer experience.

Looking out at some of the external factors impacting airlines emphasizes the need for leaders at the top to remain acutely aware of any changes that might impact their business, in real time.

Wage inflation + union strikes

As the demand for labor in the airline industry continues to rise, workers are in turn demanding higher salaries and more benefits. From budget carriers like RyanAir to Air France and United, firms are facing labor union strikes, increasing wage pressure across the board.

According to Reuters, labor costs surpassed fuel as global airlines’ biggest single expense in 2016, at 22 percent of costs against just under 21 percent for fuel. “That is expected to jump this year to 30.9 percent versus 20.5 percent for fuel.”

“As airlines have been making profit, the workforce has got market power, so that is pushing up the cost of labor,” IATA Chief Economist Brian Pearce said in an interview. IATA forecasts that unit cost, or the measure of how much it costs an airline to operate each kilometer and seat flown, will rise 4.3 percent this year versus 1.7 percent in 2017.

Airports are currently facing demonstrations from workers globally – affecting those that operate an estimated 36% of world travel, from Sydney, to France, Germany, Brazil and the US. According to a press release from SEIU, airline industries continue to gain profits off of low worker wages as they subcontract out to ‘low-bid, irresponsible contractors” amid aggressive cost-cutting.

“The global airline industry is leading a race to the bottom that’s hurting communities across the globe,” says Stephen Cotton, General Secretary of the International Transport Workers’ Federation. “Airline companies keep coming up with new ways to drive down wages, cut benefits, and increase workloads. But the world’s airport workers will be at every corner to fight these injustices. Our movement to win fair pay and union rights is catching on and spreading all over the world.”

Labor shortage

While the existing labor force continues to demand a higher salary, many airlines are struggling to find talent at all, particularly when it comes to commercial pilots. The ‘desperate’ shortage has caused a significant disruption in the form of route cancellations, including the all-out pilot boycott Ryanair experienced earlier this year, causing the carrier to cancel 1 in 6 flights globally during peak holiday season.

This is due in part to changing requirements that have deterred young people from undergoing necessary training to become a pilot, and a general decline in interest for the career path. Due to the shortage, pilots also face demanding schedules and less flexibility.

As a result, salaries are spiking, and benefits offered to new pilots have increased dramatically. Business Insider cites an increase at budget airline GoJet from an entry salary of $20,504 in 2014 to $61,512 in 2018, inclusive of a sign-on bonus.

Further impact: More cancellations means less available flights particularly in smaller communities and regional airports, as smaller airlines tend to be disproportionately affected by understaffing. As a result, passengers need to either cancel travel plans entirely or find farther, less convenient options.


Fluctuating oil prices

Wages aren’t the only factor cutting into airline profits. We’re facing a slump in crude oil prices globally, hovering at around $50/barrel. While the US puts pressure on Saudi Arabia to bring prices down, the producer is pumping out record volumes of crude.

Low oil prices of course mean lower costs for airlines. But at any minute this can change. Those that hedge on jet fuel – like European carriers – will find the impact of higher fuel prices coming through later than those who haven’t.

Competition + consolidation

Robust global economies, along with a dip in oil prices, have contributed to greater demand for consumer travel, and with it, more airlines offering more routes and more options for the discerning traveler. However, as competition increases, airlines are forced to consider tradeoffs between sacrifices in customer experience, flight prices and other cost-saving efforts vs the potential of losing customers to other carriers.

As well, more flights that take off and airlines that operate out of global hubs means greater competition over space at these airports. Airports are already facing crowding, and greater demand means they can charge higher prices for a spot at one of their gates. However, more flights and passengers can also mean more delays if operational efficiencies aren’t increased accordingly, which cut into airline profits.

Competition comes also in the form of data-driven technology that is threatening to undermine the age-old infrastructure airlines continue to operate on. Google can more quickly offer real-time information and is working to use AI to predict flight delays before they’re announced. As well, Uber’s deep understanding of the connection between consumer and transport positions the brand perfectly to step in with a better customer experience and take over traditional airline sales channels.

What makes tech companies an even more significant threat is that they’re not tied to a single airline, potentially forcing more fair and streamlined pricing and expectations for consumers across the board if a brand hopes to remain in the competition.

What’s the solution?

Beyond these factors, elements like climate disasters fueled by rising climate change, political unrest and disputes among nations, and mechanical maintenance or update costs all contribute as forces that impact an airline’s ability to increase profits. Further internal issues like organizational silos and lack of collaboration or feedback loops also inhibit these massive organizations from reaching their goals.

According to a study by BCG, the PMOP – or, profit-maximizing operational performance – approach can help airlines improve profitability by taking an integrated and analytical perspective and evaluating all potential tradeoffs.

This comprehensive analysis combines internal and external sources of data and perspective for an Outside Insight approach. “Internal sources are usually very detailed and accurate. But by themselves, they often do not provide a comprehensive perspective on how the company is doing, compared with others operating under similar circumstances. PMOP starts from a relative perspective, looking at an airline’s performance, compared with that of several peers.”

For each airline, the answer will be different but the key will be to find the right balance and the right tradeoffs that offer increased profitability that doesn’t come at a great cost to customer satisfaction or employee happiness.

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