Running an airline isn’t for the timid. Weather events, infrastructure failures, and fickle passenger demand can make an already-tough business even more challenging. As this article goes to publication, economic uncertainty and geopolitical tension are both threatening to alter travel flows, piling yet more stress on airline executives.
These business challenges show up on ledger sheets. Since 2005, we’ve analyzed the financial performance of the aviation value chain. Our research demonstrates that, compared with other asset-intensive sectors, airlines in aggregate have a long record of mixing positive growth with negative economic profit.
But recent results suggest that this losing streak could at last be nearing an end. Many carriers and multiple regions performed well in 2023, and 2024 data indicate another decent year. Airlines that have reported detailed financial results as of the time of this writing recorded, as a whole, an economic loss of $5 billion (or –0.6 percent of industry revenue), but 41 percent of the airlines we track earned their cost of capital. Considering the state of the industry prior to the COVID-19 pandemic (airlines recorded a $30 billion collective economic loss in 2019), this is a remarkable feat.
What’s changed for the industry? Are these changes structural? What can individual airlines learn from the encouraging results? And what could derail the industry’s progress?
The airline sector in 2024
For the purposes of this analysis, we look at value creation from an investor’s perspective. Our measure is economic profit, which considers the alternative return from equal-risk opportunities available to investors. It’s calculated by subtracting weighted average cost of capital (WACC) from ROIC and then multiplying by invested capital. Positive economic profit—when ROIC is above WACC—signals that a company or sector is creating positive value.
Airline sector ROIC in aggregate has been below its cost of capital since at least 1996, which is the earliest data point in our research (Exhibit 1). Many of the structural factors underlying this poor result remain: Airline passengers are typically very price sensitive, the industry features strong competition paired with low barriers to entry and high barriers to exit, and the regulatory landscape can pose challenges to consolidation. But in 2023 and 2024, results improved. The annual differences between ROIC and WACC, at the sector level, were among the narrowest we’ve seen in the history of our research.
Regional performance varied. Latin America and the Middle East and Africa (for which only a limited set of airlines had reported data at the time of publication) were value creating. Europe and North America recorded marginal losses. Asia–Pacific accounted for the bulk of the sector’s negative results.
But sector averages don’t tell the whole story. The number of value creators was historically high in 2023 (when 46 percent of the airlines in our sample created positive value) and in 2024 (when 41 percent created positive value). These are the two best years for this metric since 1996, and they show notable improvement compared with 2019, the last full year of prepandemic results (when only 23 percent of airlines were value creators) (Exhibit 2).
Many airlines don’t earn their cost of capital, and the sector average is pulled down by some larger airlines that consistently don’t. (Some of these lagging performers are state owned—and perhaps valued more for the roles that they play in serving broader economic agendas than for their financial performance.) Still, there have been several consistent value creators among the airlines that we track. Omitting the pandemic-influenced results of 2020–22, seven airlines in our sample earned their cost of capital every year during the 2015–24 period. Another six were value creating for all but one of the years in that period. Twelve airlines were value creating for all but two of those years.
Jet fuel is generally airlines’ largest operating cost, accounting for roughly 20 to 40 percent of an airline’s cost base, depending on the business model. Airline sector performance is often thought to be linked directly to jet-fuel-price developments, which lie outside airlines’ control. This link, however, isn’t as strong as some might imagine: Our research indicates that it’s possible for the sector to do well during periods of both higher and lower jet fuel prices. Both 2023 and, to a lesser extent, 2024 were years with higher nominal jet fuel prices, but the sector still performed relatively well in terms of ROIC. Jet fuel prices in 2025 have, thus far, been lower than they were in 2024, though geopolitical tensions could still cause them to fluctuate in the near term.
How do airlines create value?
Value-creating airlines operate in a mix of regions and employ a mix of business models. There is no single path to success. That said, we’ve written before about six “secrets” that, based on our research, can be key components of superior airline ROIC performance:
- balancing capacity and demand
- generating ancillary revenue (for instance, from selling premium seats and extra-baggage allowances)
- earning a great reputation through reliable, on-time performance
- providing origin and destination (O&D) routes that other airlines don’t
- ensuring high capital productivity (for instance, by making efficient use of aircraft)
- building strong organizational health, featuring a clear strategic vision, well-communicated values, and motivated employees
Recent performance improvement in the airline sector can be traced, in large part, to better execution in some of these six areas. Developments relating to these dynamics could heavily influence future results.
Capacity moving largely in line with demand
In 2023, there were 24 percent fewer aircraft deliveries from manufacturers than in 2018 (which was a strong year for aircraft production). In 2024, there were 30 percent fewer deliveries than in 2018. OEM and supply chain challenges resulted in fewer available aircraft, and airlines had less capacity (meaning fewer available seats on flights) than they perhaps would have liked. This undercapacity was exacerbated by rampant engine problems that required additional maintenance checks, which grounded a substantial number of aircraft.
Airlines have responded to supply constraints by extending aircraft leases (there were 11 percent more lease extensions in 2024 than in 2018) and by keeping older aircraft in service longer (the average age of the narrow- and wide-body passenger fleet in 2024 was 11.3 years, versus 9.7 years in 2018). Still, supply levels have been lower than airlines would prefer. This has led to a change in the supply–demand balance, moving from oversupply to undersupply, and yields have adjusted accordingly. Fewer seats available to passengers means higher ticket prices. The result, in pure economic terms, is better financial performance.
However, supply could soon increase. As of March 2025, airline manufacturers’ order books are near all-time highs. This is partly a result of slower deliveries, but it’s also an indicator that a considerable number of aircraft are set to join airline fleets in the next few years, creating more available seats.
Meanwhile, a few factors suggest potential decreases in demand. For some mature aviation markets, such as Europe, real-GDP growth over the next few years is expected to be lower than it was from 2000 to 2019. While air travel tends to grow faster than GDP does, growth in GDP is still a core underlying factor for demand.
Airlines are also expected to increase their use of sustainable aviation fuels, which can be two to four times more expensive than regular jet fuel. This cost could be passed on through ticket pricing, and pricier tickets could drive some passengers away.
Recent economic uncertainty posed by global trade developments has caused consumer and business confidence to trend downward, especially in North America. This could lead to lower demand for both business and leisure travel. Rising geopolitical tensions could also reduce travel flows between certain countries. Notably, these tensions could alter supply chains and impede deliveries to certain parts of the world, thereby reducing capacity and counteracting yield drops.
Improved returns from ancillaries
Airlines continue to grow revenue from sources beyond ticket sales, such as baggage fees, in-flight purchases, travel retail commissions, and seat selection and upgrade fees. These ancillaries are generally associated with higher margins and lower price elasticity than base ticket sales are. By some estimates, ancillary revenue share has grown from approximately 5 percent of sector revenue in 2010 to approximately 15 percent in 2024.
Airlines have been expanding the number of ancillaries that they offer. But our analysis suggests that rather than simply increasing the breadth of ancillaries available, airlines could benefit more from a better retailing approach featuring an intensified focus on personalizing offerings, carefully pricing them, and optimizing when and how ancillaries are offered.
Loyalty programs have become considerable sources of value for many airlines. Some airlines, such as the large US network carriers, generate sizable amounts of revenue from cobranded credit cards. This is likely linked in part to the high credit card penetration and interchange rates in the United States. To illustrate, interchange fees in the United States are approximately 1.7 percent, whereas in Europe they’re mostly capped at around 0.3 percent. Greater revenue from these transaction fees can help to fund US credit card rewards and benefits.
In markets with lower credit card penetration and interchange rates, loyalty programs can still be an effective device for swinging customer demand. Customers might choose an airline because of a strong preference for its loyalty program, even when the airline doesn’t offer the lowest price or the best schedule option.
Reliability’s relationship to performance
We find evidence that better on-time performance correlates with better airline financial performance (Exhibit 3). In our survey on airline customer preferences, 34 percent of passengers indicate that reliable, on-time operation makes them more loyal to an airline, making this factor the third-most important after competitive pricing (48 percent) and flight comfort (36 percent). Today’s passengers are much more aware of an airline’s on-time performance rating, given easy public access to statistics through metasearch engines and tracking websites.
On-time performance in the industry, however, hasn’t been on an upward trend. In the United States in 2024, for example, 78 percent of flights were on time. This figure is up from 73 percent in 2000 but down from 81 percent in 2016. Staffing shortages across the value chain may have contributed to this result. Some factors causing delays lie outside an airline’s sphere of control, but data-driven operational decision-making, powered by better analytics, can help airlines take proactive steps both to mitigate delays and to keep passengers informed about impending disruptions.
The power of privilege
An airline enjoys network privilege if it can offer O&D journeys for which it is the clear best choice for passengers. An airline that has a larger share of its passengers flying on trips for which it’s privileged will tend to generate better ROIC. Passengers flying on privileged O&D routes tend to provide higher yields, since they’re willing to pay for the airline’s distinctive offering.
Privileged O&Ds often occur in secondary markets in which fewer passengers travel the route. For one large network carrier, the average market size for privileged O&D routes was 24 times smaller than that of the most competitively exposed markets (meaning those in which the airline has less than 20 percent expected market share).
Hubs—when an airline has a concentrated presence at an airport with many routes and a high share of connecting passengers—are one way to create privileged O&D offerings and, in particular, to tap into thinner secondary markets. Hubs allow an airline to group together multiple passenger flows going to a certain secondary city, making service to that smaller city more viable. Some industry observers have suggested that the rise of longer-range aircraft with smaller cabin sizes could lead to the demise of hubs. Although hub market share has slightly decreased, we find that connecting traffic remains a sizable portion of multiple end-to-end passenger flows.
Airlines can further build out network privilege by serving secondary markets in a cost-effective manner and connecting them to at-scale hubs. New aircraft technology in the form of either cost-efficient regional aircraft or longer-range, smaller-gauge aircraft (which can fly long distances but hold fewer passengers) can help strengthen hub operations.
A rise in capital productivity
Capital productivity, or how much revenue is generated per dollar of invested capital, is of vital importance to airline performance. Airlines can maximize capital productivity in a number of ways, such as the following:
- ensuring that new aircraft fly as many hours per day as they can (ten to 12 hours per day for narrow-body aircraft and 15 to 16 hours per day for wide-bodies)
- ordering aircraft at the right moment—when aircraft prices are down or when aircraft deliveries will be timed to arrive amid high passenger demand—which can lock in savings across the aircraft’s lifespan
- effectively dealing with demand seasonality by playing with an aircraft fleet’s age profile (for instance, by keeping a mix of newer and older aircraft in the fleet and putting older aircraft into service only when demand is high)
Capital productivity has increased over time, in nominal terms. In 2000, airlines at a sector level generated $0.90 for every $1.00 invested. That increased to $1.20 per $1.00 invested by 2023 and to $1.23 by 2024. This increase is in part caused by inflation stemming from supply–demand imbalance, but airlines have also become more capital productive over time.
The value of healthy organizations
Healthy airline organizations are better able than others to bring disparate functions together to make cross-functional trade-offs, quickly coming to decisions that are best for the airline as a whole (for instance, through integrated planning). They employ motivated workforces that know what’s expected and feel trusted to deliver on their objectives. They’re typically quite lean.
We measure organizational health using McKinsey’s Organizational Health Index, a diagnostic tool that measures the critical elements of a high-performing culture within an organization. Organizational health continues to correlate with better airline performance (Exhibit 4). But many airlines could be healthier. In our sample, 67 percent of airlines exhibit health levels that are in the bottom quartile across sectors.
Airlines could improve their health levels by focusing on areas such as direction (communicating a clear and compelling vision of where the airline is headed, how it will get there, and what this means for everyone), motivation (nurturing employee loyalty and enthusiasm), and external orientation (engaging with customers, suppliers, partners, and other external stakeholders to create and deliver value).
What could halt airlines’ progress in 2025?
Despite positive trends in 2023 and 2024, several developments could stop the airline sector from maintaining or improving its results in 2025. Demand uncertainty linked to changes in business and consumer sentiment could lead to lower demand for certain travel lanes, thereby affecting airlines’ financials. Should a recession hit, demand could be further dampened due to the link between GDP growth and air travel growth. Tariffs may put upward pressure on airline input costs.
Knock-on effects are often unpredictable. Lower demand growth might be offset by decreased OEM supply resulting from trade flow tensions. Shifting passenger demand could open up new opportunities for network privilege. Healthier organizations will meet challenges with the cross-functional nimbleness that’s required to rapidly respond to changing external conditions.
Airline performance has been climbing, but there are potential storm clouds in the distance. Airlines that can navigate this turbulence could see their financial performance take flight.
