Airlines in SOAR have almost double the average airline profit margins
At the official launch party of SOAR in London last month, about a hundred aviation industry executives and journalists received special preview copies of my new book. One of the people who received it was Dr. James Pearson, a Senior Lecturer and Course Director of Aviation Management at Coventry University in the UK. While I had not met him previously, I was keen to receive some critical feedback from a professor. And I did.
A couple of days ago, he posted on LinkedIn:
“I’m always wary of such books as I like numbers. Who cares if an airline has a brilliant brand with exceptional buy-in if it makes a loss or underperforms financially?”
When I was shortlisting the airlines to be featured in SOAR, I wanted a global spread of airlines that have built endearing brands over a long period – from Southwest and Finnair to Air New Zealand and Kulula. I also ensured that out of the eight featured in SOAR, half were LCCs and half were legacy airlines. I had personally not evaluated the financial performance of the shortlisted airlines. Hence, Dr. Pearson’s comment immediately caught my attention.
Being a quantitative person, Dr. Pearson went on to analyze the financial performance of all of the eight airlines featured in SOAR. His cfindings were revealing.
Airline profit margins tend to double when they focus on brand
Analyzing the financial results of airlines in SOAR between 2006 and 2015, Dr. Pearson found that their average operating margin was 5.9%. This, as compared to the global average airline profit margins of 3.4% in that period, which included record fuel prices and a major global financial crisis.
Airlines featured in SOAR had an operating margin that was 73.5% higher than the global average over the last ten years.
This is reassuring. Dr. Pearson’s analysis shows that airlines that give importance to building their brand equity do not necessarily trade off financial performance. This is clearly evident with the likes of AirAsia and Southwest, both of whom outperform competition financially and have built formidable brands.
Among these numbers, it should be noted that Vueling’s major losses occurred within the first couple of years after its merger with ClickAir in 2008. Over the last three years, for example, the airline has averaged 8.5% in operating margins, much higher than the global average.
Even higher airline profit margins in good times
In fact, if we focused on financial results of airlines only for last three years, the global airline profit margins averaged 4.5%. In this same period, airlines featured in SOAR had an operating margin of 8.4%, which is 87% higher than the global average. This means that airlines that focus on the brand outperform competitors by a greater margin when the times are good.
As an example, let’s evaluate Air New Zealand. Their average operating margin for the past 10 years is 4.4%. But since 2012, the operating margin has more than doubled to 9.3%. This comes after significant investments in the brand and product over the last decade. Air New Zealand introduced the Skycouch in 2010 and started getting deliveries of brand new 787s from 2014. Meanwhile, the airline invested significantly in the brand, starting with the “Nothing to hide” campaign in 2009 that kicked off its slew of safety videos. Many of those went viral around the world, building the brand further. Ultimately, these sustained efforts are reflected on the balance sheet.
The analysis done by Dr. Pearson shows a direct correlation between investment in the brand and operating margins.
Each airline featured in SOAR follows a different path to building an endearing brand. Southwest has a culture that fosters individuality. AirAsia seeks inspiration from its CEO, Tony Fernandes. Finnair trusts its well-educated staff to take care of passengers. Vueling continues to maintain a startup culture even after a decade. There are many more inspiring stories of individuals, of teams and the mistakes they learned from in building a great airline brand. You can buy your copy of SOAR on www.simplisoar.comor on Amazon. I look forward to receiving more feedback.
*It is important to note that Kulula is part of the Comair group in South Africa, which also operates the British Airways brand domestically. Hence, their financial results are combined for this analysis.