Travel, Logistics & Infrastructure Practice

The six secrets of

profitable airlines
What airlines can learn from the small group of carriers that
yield consistently strong results.

by Jaap Bouwer, Alex Dichter, Vik Krishnan, and Steve Saxon

© AndreyPopov/Getty Images

June 2022
 The airline industry has failed to earn its cost of
capital in every year of its existence. But in the
few years preceding the COVID-19 pandemic,
something began to change. Despite the industry’s
overall weak performance, a small group of airlines
managed to create shareholder value.
Five power curves—which plot out the economic
performance of individual airlines relative to one
another—show that from 2012 to 2019, a small
group of airlines managed to generate shareholder
value (Exhibit 1). This group includes airlines from
multiple regions and with a range of sizes and
business models. What do these airlines have
in common?
To find answers, we analyzed a large number of
variables to seek patterns in top performers. We
also interviewed industry leaders.
Secret one: High-performing airlines
effectively manage their capital base,
especially aircraft
ROIC is the best metric of value creation. Most
airlines focus on increasing the numerator, which
is profit. However, an often overlooked way is by
managing the denominator, or capital base, wisely.
In our analysis, capital turnover, or the revenue
earned per dollar invested in capital, is correlated
with better ROIC performance (Exhibit 2).
A narrow-body aircraft generates a higher capital
turnover than a wide-body plane because of cost
and usage. A narrow-body Boeing 737-800 is three
to four times cheaper than a wide-body aircraft such
as the 777-300ER. Because a narrow-body aircraft
is deployed on shorter flights, it can complete five or
six flights per day compared with one or two trips for
wide-body aircraft.

Six secrets emerged. As carriers set out to
reenvision themselves and plan for a comeback
from the pandemic, taking these lessons on board
could set them up for future economic success.
Regardless of aircraft type, airlines that buy newer,
more expensive aircraft will have to manage the
large weight on their balance sheets by maximizing
utilization. Ideally, new planes should be in the air
for ten to 12 hours a day for narrow bodies and 14 to
15 hours a day for wide bodies.

Web 2022
SixSecretsProfitableAirlines
Exhibit 1 of 6
Exhibit 1
A small group of airlines managed to generate profits while the rest of the
A small group of airlines managed to generate profits while the rest of the
industry lost value.
industry lost value.
Airline industry economic profit power curve,¹ $ billion Not profitable Profitable

2001 (n = 64) 2008 (n = 102) 2015 (n = 115) 2019 (n = 98) 2020 (n = 90)
3

0
–3
–6 Each dot represents
an airline
–9
–12

¹Power curve shows the distribution of profits of sampled airline carriers from lowest to highest profits. Number of carriers sampled differs each year.
Source: McKinsey analysis

2 The six secrets of profitable airlines

Web 2022
SixSecretsProfitableAirlines
Exhibit 2 of 6
Exhibit 2
Higher airline capital turnover is correlated with higher ROIC performance.
Higher airline capital turnover is correlated with higher ROIC performance.
Airline capital turnover vs ROIC in 2019

30

20

ROIC, excluding 10
goodwill, after
taxes, %
0

–10

–20
0 1 2 3 4
Capital turnover (revenue/invested capital), $

Source: McKinsey analysis

If airport regulations permit, airlines could
complement such flight activity with the potential
deployment of depreciated aircraft, especially on
popular routes. Airlines that do this may capture
revenue peaks while lowering asset costs. As
capital assets, airplanes are subject to depreciation.
However, if an aircraft is properly serviced and
maintained, there’s no correlation shown between
its age and safety. One low-cost carrier, for example,
separates its aircraft internally into two subfleets.
The new, efficient modern fleet flies more than
12 hours, on average, every day. The older fleet,
with significantly lower ownership costs, flies when
there’s sufficient demand at the right yields.
Secret two: High-performing airlines
know that conduct matters more than
market structure
Our analysis has shown that airlines based in slow-
growing home markets outperform their peers in
high-growth markets (Exhibit 3). Fast-growing
markets attract many new entrants. As new
planes are rapidly added in anticipation of demand
growth, ticket prices fall. The Asian market, which
is the lowest-performing region, is a case in point.
Before the pandemic, the Asian market became
less consolidated, and stiff competition has badly
bruised many of the airlines there.
On the flip side, US airlines have fared better, due
in part to mergers leading to a more consolidated
market. However, market structure isn’t the only
factor. Latin America, too, saw a similar consolidation,
but airlines there failed to return their cost of capital.
This shows that airline conduct is the more critical
factor (Exhibit 4). US carriers were careful to add
capacity at a slower rate than GDP growth and
only on routes where they already had enjoyed a
competitive advantage.
This should be good news for airlines. After all,
whether a carrier is in a fast- or slow-growing
market is beyond its control. Even airlines in
rapidly expanding markets can improve returns
by reassessing capacity addition. While explicit
capacity control with other industry players is
forbidden by antitrust regulation in most markets,

The six secrets of profitable airlines 3

 Web 2022
SixSecretsProfitableAirlines
Exhibit 3 of 6
Exhibit 3
Airlines operating in slower-growing markets tend to do better.
Airlines operating in slower-growing markets tend to do better.
Average ROIC of airlines,¹ by home market passenger growth CAGR,² %

7.9

4.6
3.5
5.1
4.1

2–4% 4–6% 6+%

CAGR
¹Simple average of carriers in sample.
²Passenger growth seen as true origin-and-destination (O&D) passenger growth to/from home market. For multicountry carriers, such as European low-cost
carriers, the largest country in passenger terms is viewed as the home market. Pure cargo carriers were exempted from this analysis; <2% growth categories
not included, as none of the home markets showed this growth.
Source: International Air Transport Association Market Intelligence Services; McKinsey analysis

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SixSecretsProfitableAirlines
Exhibit 4 of 6
Exhibit 4
Airline conduct
Airline conduct matters more than
matters more than industry
industry structure
structure when
when itit comes
comes
to performance.
to performance.
Structure Conduct Performance
Share of seats of top 5 carriers in Capacity growth vs Average operating
2019, % GDP growth¹ margin 2017–19,² %

US 85.4 0.4 7.0

South America 81.6 2.7 3.2

Europe 63.8 2.1 3.2

¹Intraregional seat CAGR as ratio to real GDP CAGR, 2007–19.

²Simple average of achieved operating margins by year. Latin America as proxy for South America, and North America as proxy for US.
Source: Cirium Diio Mi; International Air Transport Association; International Civil Aviation Organization; Oxford Economics

airlines should be able to model how their capacity
additions would likely affect returns.
Secret three: High-performing
airlines give customers choice
through ancillaries
Ancillaries are an undertapped channel of value for
many airlines. Our analysis reveals a mildly positive
relationship between ancillary sales performance
and ROIC. Carriers whose passengers each spend
at least $20 on ancillaries generate 8.2 percent
ROIC on average, which is more than five
percentage points higher than it is for airlines whose
passengers spend less than $5 on ancillaries.
Before the pandemic, airlines generated around
$110 billion in revenues from the sales of ancillary
products, which is about $67 billion more than the
industry’s absolute operating profits of around

4 The six secrets of profitable airlines

$43 billion. Margins for ancillaries are generally high
and without them, many airlines would fail to return
their cost of capital.
Both passengers and airlines benefit when airlines
unbundle priority services and expand their range
of ancillaries. With more options, customers enjoy
greater control of their travel experience. They
are less price sensitive for the add-ons they want
compared with base fares. Thus, ancillaries are a
way to delight passengers by offering additional or
unexpected value, for instance, by auctioning off
otherwise empty business class seats before
a flight.
Airlines may offer price-sensitive passengers a
low base fare to give them a great sense of value,
and then entice them with a range of add-ons. In
economy class, for example, many high-performing
airlines are actively innovating new ancillaries and
selling them at the right moment in the customer’s
journey. Aisle seats, premium meals, reserving
overhead space, and private-car transfers at
the point of destination are just a few examples.
Think broadly.
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SixSecretsProfitableAirlines
Exhibit 5 of 6
Exhibit 5
Airlines with greater network privilege tend to perform better.
Airlines with greater network privilege tend to perform better.
Average ROIC of airlines,¹ by degree of network privilege² in 2019, %
5.5
3.4
0 25
¹Simple average of carriers in sample.
²Routes where carrier has more than 50% of achieved passenger share.
Source: McKinsey analysis
The six secrets of profitable airlines
Secret four: High-performing airlines
create pockets of privilege in their
flight network
When it comes to origin-and-destination (O&D)
pairs, an airline enjoys privilege when it’s able to
provide passengers with a unique itinerary that
others don’t. Every carrier’s network of flights
has some privilege. Successful airlines are able to
identify, create, and monetize niches in their flight
network (Exhibit 5).
Panama’s Copa Airlines, a consistent value
creator, provides an excellent example. Its
fleet of narrow-body aircraft serves more than
80 destinations across North and Latin America,
offering thousands of O&D pairs. For example,
if a traveler is going from Chicago to Rosario,
Argentina, Copa has the only reasonable one-stop
connection. The percentage of Copa’s passengers
who travel on its privileged O&Ds is three times
the industry average.
As airlines bring back flights, decision makers could
analyze their network privilege to capture more
value. Usually, this can be achieved by serving
smaller, secondary and tertiary cities and connecting
7.3
50 75 100
5
 The best airlines effectively wield the
tools they have at their disposal to
engage with customers directly and
establish themselves as trusted brands:
loyalty schemes, online sales, and
mobile apps.
the flights through large-scale hubs. There may
be potential to deploy longer-range, fuel-efficient
aircraft such as Airbus A321neos or Boeing B787s
to experiment with new destinations. They should be
careful of adding too much capacity too quickly.
Secret five: High-performing
airlines differentiate themselves by
their reputations
Customers no longer buy tickets solely based on
price and schedule. They fly more frequently and
are more knowledgeable about the differences
between airlines, including their product offerings
and operational performance. More are booking
directly on the airline’s own website based on
reviews they’ve read.
Even when customers engage intermediaries,
such as online travel agencies (OTA), they’re
exposed to much richer information. Five years
ago, most OTAs showed only flight prices and
schedules. Today, it’s common to find seat
details, on-time performance for the flight, Wi-Fi
availability, seat maps, customer review scores,
and even environmental impact on OTAs.
Thus, it’s crucial for airlines to build a positive
reputation by keeping standards up. Our analysis
6 The six secrets of profitable airlines
shows that carriers that are reliably on time
and have good operational performance enjoy
higher returns. Investments in reliability—as
well as innovation in the onboard product—can
have revenue upsides. Delta, for example, has a
yield advantage among its peers and enjoys high
customer satisfaction partly because the carrier
leads in on-time performance and has the lowest
cancellation rates.
Having developed a quality product, the next step
is to get passengers excited about the journey. The
best airlines effectively wield the tools they have
at their disposal to engage with customers directly
and establish themselves as trusted brands: loyalty
schemes, online sales, and mobile apps.
Secret six: High-performing airlines
are great organizations, too
We can, to an extent, quantify an airline’s
performance when it embodies the five secrets
above. What explains the rest? From our
experience, the last ingredient is organizational
health. Healthy companies have a highly skilled
and motivated workforce. Employees have clear
objectives and feel recognized for their work.
Decision making is swift and fact based, and
departments work seamlessly with one another.
 Web 2022
SixSecretsProfitableAirlines
Exhibit 6 of 6
Exhibit 6
Airlines with better organizational health tend to enjoy better returns on
Airlines with better organizational health tend to enjoy better returns on
invested capital.
invested capital.
Organizational Health Index score¹ vs ROIC in 2019

20

15

10
ROIC, excluding
goodwill, after
taxes, % 5

–5

–10
0 20 40 60 80 100
McKinsey Organizational Health Index score¹
¹Average across 9 dimensions of health; years vary.
Source: McKinsey analysis

We ran McKinsey’s proprietary Organizational organization. Employees across ranks in healthy

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Health Index at a dozen carriers globally. On
average, airlines are unhealthy organizations
compared with other sectors, with 75 percent of
carriers falling below the global median score.
There’s a clear correlation between value creators
and companies with strong organizational health
(Exhibit 6). Improving the status quo could lead to
better ROIC.
All companies could work on improving their
organizational health. Our research has found that
most airlines have the potential to greatly enhance
the quality of their leadership with a strong strategic
vision that is communicated to all levels of the
organizations internalize their company’s values
and purpose, which drives decision making across
all functions, including external engagements with
other partners, communities, and authorities.
Demand for air travel is coming back, and
projections see a return to prepandemic levels of
traffic by 2023 or 2024. As airlines restructure and
reenvision themselves for the future, they can learn
from the past. These six secrets of value creation
could empower them to generate value for both
passengers and investors in the postpandemic world.

Jaap Bouwer is a senior knowledge expert in McKinsey’s Amsterdam office, Alex Dichter is a senior partner in the Boston
office, Vik Krishnan is a partner in the Bay Area office, and Steve Saxon is a partner in the Shenzhen office.

The authors wish to thank Alex Deshowitz for his contributions to the article.

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