3/13/2024

4 disadvantages of the aviation industry

Scroll down

WANTS TO KNOW HOW TO MAKE EARNING FROM NEWS?

Register for free and get expert advice, access to a training course and webinars.

Everyone has heard about the success of technology companies and the hype around artificial intelligence. But there are also sectors in the stock markets that, on the contrary, are experiencing significant difficulties in our time. For example, Boeing is once again delaying aircraft deliveries, causing the aviation industry to suffer another crisis.

Despite its vital role in the global economy and its invaluable contribution to reducing distances between people, the airline industry has historically been subject to financial difficulties. Bankruptcies are not uncommon for airlines, even giants like American Airlines, United and Delta, which have undergone restructuring through mergers.

Here are 4 reasons why you should reconsider investing in companies in the airline industry.

Operation of unprofitable companies

While in other industries it is common for unprofitable companies to consolidate or close, the airline industry presents a paradox. Despite years of significant losses, many airlines continue to operate due to the influence of various stakeholders.

The closure of a major carrier entails a number of negative consequences:

  • Loss of thousands of jobs.
  • Inconvenience for hundreds of thousands of passengers.
  • Millions of losses for creditors.
  • Damage to national pride when it comes to a national carrier.

Due to these factors, it is generally not profitable for governments to close down unprofitable airlines and prefer to provide them with financial support.

However, such support comes at a price. Struggling airlines are forced to dump prices to fill capacity. This results in a lack of pricing power and negatively impacts the entire industry, including stronger players.

High costs

The industry’s high and persistent costs make airlines vulnerable to market fluctuations and other factors.

1. High asset value. Airplanes are extremely expensive equipment. Airlines typically do not own them, but lease them or purchase them on credit. This means they must incur significant debt service costs or lease payments regardless of current economic conditions. Large commercial aircraft can have a service life of up to 25-30 years, making these commitments long-term.

2. Labor costs. Airlines require a large and skilled workforce to ensure smooth operations. This includes pilots, flight attendants, engineers, air traffic controllers, ground service personnel and many other professionals. Salaries and social costs for personnel constitute a significant portion of airlines’ operating costs.

3. Volatility of fuel prices. Fuel is one of the key consumables. Oil prices are subject to fluctuations, which can lead to sharp increases or decreases in costs. Airlines cannot always fully hedge risks associated with fuel price volatility, which negatively impacts their profitability.

4. Security costs. They include screening of passengers and baggage, staff training, and the introduction of new security technologies.

Influence of external events

The airline industry is highly sensitive to external events that can have far-reaching consequences on its operations and passenger demand. For example, these include natural disasters or the COVID-19 pandemic.

Deterioration in quality of service

Negative passenger experiences at various stages of the air travel – from check-in to on-board service – pose a serious problem for airlines. This discourages them from raising prices, which is necessary to achieve profitability.

For example, security and check-in procedures often result in long queues, which are frustrating and time-consuming for passengers, and flight schedules do not always meet passenger needs, leading to inconvenient transfers and long waits. Poor on-board service, incompetent staff, late provision of information – all this negatively affects the passenger experience.

WANTS TO KNOW HOW TO MAKE EARNING FROM NEWS?

Register for free and get expert advice, access to a training course and webinars.

Fill out the form and get a free consultation!

Add review

Name *

Review *

Recommend to read

  • 4/19/2024
    How to read a company’s quarterly report

    The market is once again entering the period of quarterly reports: streaming service Netflix has just reported profits, and next week traders are waiting for reports from companies such as Visa and Tesla. So let's look at the importance of quarterly reports for financial analy...

    Read more
  • 4/18/2024
    How is the price of Bitcoin determined

    Very soon the Bitcoin halving is due to take place, which is carried out every 4 years. Analysts are divided on how significantly this event could affect the price of the asset. On the eve of the Bitcoin halving 2024, we consider the main factors determining price dynamics....

    Read more