The airline industry is facing some of the most profound challenges in its history. Hub networks are becoming critically congested. Opportunities for further growth are shrinking, operational disruptions are becoming more frequent, and service quality has reached unprecedented lows. Both legacy and low-fare carriers are grappling with identity shifts, blending elements of low-cost and full-service models in search of viability.
Yet, in the midst of mounting operational strain, European airlines in 2015 achieved average operating margins three times higher than any point in the previous decade. Industry-wide, returns exceeded the cost of capital (an uncommon occurrence). However, much of this profitability stemmed from a temporary drop in jet fuel prices, raising critical questions about the sustainability of these gains. Despite these uncertainties, major airlines pressed ahead with ambitious fleet expansions, increasing the risk of overcapacity, heightened disruption, and downward pressure on fares.
In search of answers, I came across a series of thought-provoking articles by Alex Dichter that offered valuable insights into some of the airline industry’s most pressing and often overlooked issues. At the time, Alex was a Senior Partner in McKinsey’s London office, leading the firm’s global Airline, Travel, and Aviation practice. A former pilot and instructor, Alex brings a rare blend of hands-on operational insight and strategic, financial, and organisational expertise. He kindly accepted my invitation for an interview to share his perspectives and to help reveal the less visible forces shaping the future of the airline business.
Here are the brief excerpts from our conversation.
JR: Corporate performance reports are a compilation of disjointed financial and operational inputs translated into KPIs, and as such, don’t seem reliable enough for making sound systemic decisions. On the financial side, ROIC (Return on Invested Capital) is used as the industry benchmark for airline performance. Is this the right measure of capital, and how much does it distract from deteriorating business fundamentals like the sustainability of current business models, the stability of operations, and service quality?
AD: Whether or not ROIC is distracting, very few people lower down in an airline think about it. For the most part, they’re focused on operational performance metrics - and hopefully on driver-based metrics. If you run an airline, you want your head of airports to focus on things like the number of gate agents per departure or the percentage of self-check-ins. These are local levers that impact both cost and quality.
But at the senior management level, there are issues with ROIC that can distort decision-making. It’s one of the fundamental traps in the industry. A big one is how airlines account for costs. Accounting standards allow them to record maintenance expenses on a cash basis. For example, when you buy a new aircraft, for the first five years you basically show no maintenance costs. You end up with high cash flow, strong P&L results, and a high ROIC. But every hour that plane flies brings it closer to a C-check or D-check. That deferred cost doesn’t just disappear.
The same goes for labour. A first-year pilot earning $60,000 could be making $160,000 by year twelve. So you can manipulate the equation to produce a high ROIC for a while, especially if you’re a young, growing airline, but that doesn’t mean you’re making smart long-term decisions.
Another disconnect in the industry is that, technically, it doesn’t make money. It’s not a great business for shareholders. But the return on owners’ equity is often quite good. Entrepreneurs who start airlines tend to do well because they can borrow and leverage other people’s money. They build equity, make a few hundred million, and move on - leaving the longer-term problems to someone else. I’d like to see more metrics that tell us what it really takes to keep an airline healthy over time.
Also, we in the industry put far too much emphasis on aircraft - their competitive advantage is effectively zero. You buy the latest aircraft thinking you’ll gain an edge. But two years later, every competitor has the same model, and the price has dropped. Then those without the new aircraft feel they must have them, just to avoid being disadvantaged. Some airlines have managed to avoid this trap by investing in in-house maintenance and modification capabilities. They get more out of their older aircraft and are likely to stick with that strategy for a while.
JR: In the context of performance measures, why would a low-fare carrier with short turnaround times and minimal slack move operations, or even base themselves at congested airports risking costly disruptions? At the same time, legacy carriers are reducing their footprint at such constrained hubs and expanding elsewhere. Is the desire to grow so strong that it overrides long-term considerations like cost, quality, and reputation? And how much does the absence of system-level metrics contribute to this?
AD: First, low-cost carriers make money by serving places that stimulate demand. They offer low fares based on what people can afford and they have to stay competitive.
Second, for most airlines, the majority of their profits come from cities where they are dominant. In attractive markets, this creates an arms race. You want to be number one as fast as possible because that dominance translates into pricing power, even if operational performance is poor.
But here is the key question: do airlines make those decisions with a full understanding of operational risk? Almost certainly not. They make decisions based on long-term averages and, to some extent, hope. It’s rule-of-thumb thinking not driven by data or a real grasp of operational constraints.
As we know well, the data is all there. It’s incredibly rich and available. I can tell you, for instance, how likely a particular aircraft will be delayed at Gatwick on a given day of the week. With that level of insight, schedule design would look very different. We will eventually see airlines at congested airports shift their thinking, but it will take time.
JR: Many aspects of quality result from complex interactions between people and processes and cannot be captured through conventional measurement. This has become even more difficult now that service quality and passenger experience are largely in the hands of outsourced providers. As you wrote in your article Buying and Flying, over 60% of an airline’s cost base often goes to suppliers. How can airlines ensure quality in outsourced services?
AD: There’s no technical reason why an outsourced provider can’t deliver service that’s as good - or even better - than what the airline could provide internally. The core issue is how the outsourcing is done.
There are two models: outcome-based and input-based. In industries with sophisticated operators, outcome-based outsourcing is far better. It links supplier compensation to the achievement of specific business outcomes for the customer, rather than just inputs (like labour hours) or outputs (like number of transactions).
In airlines, many outsourced service providers - especially for ground handling - are not particularly sophisticated. The issue isn’t outsourcing itself. It’s about taking full operational ownership and recognizing that quality matters. And quality isn’t just champagne corks. It’s knowing whether the door opened on time, whether passengers got accurate information, and so on.
Quality is not a tech, but organisational and cultural issue. But again, the data is all there. The challenge is acting on it.
JR: As the gap between air travel demand and airport capacity tightens, passenger experience deteriorates, affecting both low-fare and premium passengers alike. Have airlines stopped caring about passengers once the sale is made?
AD: A few things need to change. First, passengers should be better informed about the risk of missed connections. Second, technology needs to make those risks more transparent when customers are booking.
It’s not just about legroom anymore - it’s about the likelihood of a successful journey. Once customers start understanding that, management teams will start caring more about experience. Technology can help educate passengers - either to make better choices or to prepare for an undesired experience.
Take connectivity, for example. Operationally, every management team would love to have 90-minute connection windows. That gives enough buffer to absorb minor delays. But lengthening connections costs market share. Passengers will pick a 11.5-hour itinerary over one that takes 14.5 hours, even if the latter is more reliable. So airlines are forced to offer tighter connections to remain competitive. And that’s what passengers choose.
JR: Cheaper fares, more costly and uncomfortable journeys, more idle time at choked airports - who needs to change first: the airlines or the passengers?
AD: The next step is to give passengers more transparency - clear options on flight connections with information about delay risks and the chance of missed connections. In the end, it will come down to customers understanding that this is mostly about their choices.
Let’s close this insightful conversation with a few quotes from Alex’s articles:
Between ROIC and a hard place: The puzzle of airline economics:
“If we look at the airline industry flow of funds over the past 50 years, we see a cycle in which new aircraft-backed debt replaces old debt. The operating efficiencies of the new aircraft helped to create additional cash flow that made it easier to pay off the debt. The result was, yes, positive cash returns but also mounting debt, with no sign of a cyclical return. Could it be that the airlines in their WACC (Weighted Average Cost of Capital) calculations and measurements of ROIC are overstating the risk and opportunity cost of buying aircraft, but that the banks and lessors are understating the risk and opportunity cost of lending against them?”
Winter is coming: The future of European aviation and how to survive it:
For most airlines, a primary factor in recent results has been a windfall from lower fuel prices. Our analysis of IATA data shows that the 2015 global industry operating profit of $59 billion (8.3 percent margin) would have swung to a loss of $6 billion (–0.9 percent margin) if fuel prices had remained at 2014 levels.”
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May Alex’s insights ignite the leadership shift and practical actions needed to make air travel a better experience.
