Few Big Names Among Airline Top Performers

By George W. Hamlin
Source: Aviation Week & Space Technology
July 01, 2013

Looking at the Top 25 carriers overall in the latest Top-Performing Airlines rankings, readers might be tempted to ask about the absence of the industry's “big names,” including airlines that seemingly have been around forever. And where, in particular, are the large U.S. and European legacy carriers, which are typically prominent players in the industry?

The smaller airlines (with revenues under $2 billion) constitute four of the Top Six airlines overall, and eight of the Top 15 (see overall rankings at AviationWeek.com/tparanking). Only three carriers from the large category (revenues greater than $6 billion) are in the Top 15, and one of those, Ryanair, with revenues of $6.36 billion, barely meets the category cut-off point. Interestingly, the other two large-category airlines are both based in Asia: ANA and Singapore.

Another surprising fact is that many of the top-rated carriers didn't exist as of 1970. Only two of this year's Top 10 airlines were extant in 1970, and only nine of the Top 25. Why 1970? The advent of the Boeing 747 marked the start of the widebody aircraft era. Subsequently, the first modern low-cost carrier (LCC) appeared on the scene in the form of Southwest Airlines, in 1971; and Singapore Airlines assumed its present identity (having previously been a part of Malaysia-Singapore Airlines) in 1972.

In addition, it is also noteworthy that none of the Top 10 airlines operate using a classic large hub-and-spoke system. Only Singapore, Turkish Airlines and Air China fit this description among the Top 20 overall, and the Turkish and Air China hubs are relatively recent developments in terms of airline history. Indeed, it is necessary to go down to the 22nd-ranked carrier, Lufthansa, before a true large legacy hub operator is encountered. And the highest-ranked U.S. legacy carrier? US Airways in the 29th spot. The best of the U.S. “Big Three”? Delta Air Lines, at No. 47. (In fairness, Southwest, ranked 28th, is not in the Top 25 either.)

It should be obvious from the results that longevity, large size and hub-and-spoke traffic flows are not necessarily guarantees of financial success in today's airline business. This is not to say that the three characteristics just cited necessarily cause failure; they do not. However, the newer/smaller/more nimble airlines generate better overall results than their older/larger/possibly less-nimble competitors.

This has relevance from both policy and investment perspectives. In the U.S. and Europe, “mega-mergers” have been approved in recent years creating giant airlines, or groupings of them, but as we see in reviewing the TPA results, this has not produced entities that outperform their smaller competitors. They may have become “too big to fail,” or, from a political perspective, too big to let fail, but to date, they have not demonstrated their inherent superiority as businesses, even with advantages such as restricted-entry international routes and, in much of the world, control of airport slots at important locations.

From a financial perspective, it is worth pointing out that in the U.S. market, the new mega-legacies all stem from recent application of the bankruptcy-protection process. Should investors, particularly in the equity sector, be concerned? Who can say this cannot happen again, or spread to other areas and markets?

There has been considerable discussion of the need for fewer, if any, restrictions on cross-border ownership (and control) of airlines. A related question should be whether it is better to continue with the existing cast of carriers, or to evaluate if key industry assets such as slots and route rights might be deployed in different, and possibly more economically effective, ways. This would mean that carriers would not necessarily continue to exist either as standalones or as part of mergers that simply combine both networks. While this would be painful for the stakeholders (shareholders, employees, debtholders) of those existing airlines that didn't make the cut, a better global airline system might result.

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