An economic puzzle for airline management — how to cover mandatory investments

Abstract

A major structural problem in the air transport industry is the very small profit margin i.e. 2-3% over a long period, e.g. 1970-1990. But the industry has to make heavy investment (12-15% of yearly turnover) on a regular basis in market growth and fleet renewal.

As airline cash flow is often insufficient they have to raise equity (limited returns in view of the low profit margins) and inevitably suffer from chronic debt. This is all the more expensive as an airline is often short of capital and made worse when interest rates are high (as is currently the case in France).

The current financial situation was caused by an unprecedented overcapacity crisis, in a time of economic stagnation. This has shown no sign of improvement since the Gulf conflict, and is all the more crucial today because it comes at a time when the air transport industry in general, and Air France in particular, are taking delivery of a large number of new aircraft.

This paper examines a specific case, Air France. This will enable some overall conclusions to be drawn, thereby making an effective contribution to restoring this sector to a sound economic balance in the medium term.

The problem does not just concern airlines. The aircraft financing sector is beginning to feel the effects of the crisis. They might do well to draw the necessary conclusions from this study. Also, one must not forget the aircraft manufacturers, who without doubt still have to face the bulk of the crisis ahead.