In his 2007 letter to Berkshire Hathaway shareholders, the famed investor Warren Buffett wrote, “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a great service by shooting down Orville’s plane.” Buffett’s remark highlights an unfortunate truth plaguing the airline industry: for decades airline carriers have consistently destroyed shareholder value. Over the last five years, on average, shares in airline stocks like American Airlines, United Airlines, Southwest Airlines, Alaska Air, and JetBlue have underperformed the S&P 500 by close to 10 percentage points each year. Though the global airline industry serves over 5 billion passengers every year and generates around $1 trillion in annual revenue, the industry’s Return on Invested Capital (ROIC) has historically not covered its Weighted Average Cost of Capital (WACC). In 2025, the global airline industry generated a return on invested capital of 6.8% against a weighted average cost of capital (WACC) of 8.2%; continuing a gap that has persisted for decades. Consolidation in the airline industry, monetization of loyalty-programs, and other ancillary revenues have helped to narrow the gap. But structural forces persist that make most airline carriers unprofitable.
Main Players in the Aviation Ecosystem
The airline industry encompasses all the business and services related to the transportation of passengers and cargo through the air. The airline industry is a subsector of the aviation industry which includes everything associated with the design, manufacturing, operation, and maintenance of aircraft. The aviation industry is comprised of airlines, manufacturers, airports, air traffic control systems, and regulatory agencies. The airline sector operates under a paradox within the aviation industry: though airlines are the most visible players in the aviation industry, they capture the least amount of profit in the value chain. From 2012 to 2019, global airline companies destroyed an average of $17.9 billion in investor capital each year; while every other segment of the aviation value chain including engine manufacturers, lessors, airports, and technology intermediaries, earned returns above their cost of capital.
The aviation industry has established a clear profit bias in favor of aircraft original equipment manufacturers (OEMs); the companies that design, engineer, manufacture, test, and certify aircraft, engines, and critical components. Two of the top aircraft engine OEMs, GE Aerospace's Commercial Engines & Services segment and Rolls-Royce Civil Aerospace division reported record profits in 2025. Both GE Aerospace & Rolls-Royce follow a similar OEM model selling aircraft engines at thin profit margins to secure decades of after-market service maintenance, repair, and overhaul (MRO) contracts that provide profit margins around 40 – 50%. For fiscal year 2025, Rolls-Royce reported £7.2 billion in MRO service revenue; 2.2 times that of its aircraft OEM revenue.
The aircraft OEM segment is further strengthened by the duopoly that exists between Airbus and Boeing, the world’s two leading aircraft manufacturers who together account for over 99% of the large commercial aircraft produced each year. Airbus and Boeing share a combined backlog of 16,000-plus commercial aircraft on orders that span more than 12 years of production. The limited supply of large commercial aircraft and persistent high demand give Airbus and Boeing significant pricing leverage over the airline carriers they sell their aircraft to.
Many other subsectors in the aviation industry are also highly profitable. Amadeus, the leading Global Distribution System provider (GDS) offers a travel booking system for websites and travel agents to search, evaluate, and book tickets for airlines worldwide. Amadeus consistently hovers between 38 – 47% EBITDA margins on airline bookings processed through its booking platform and reservation system. Airport operators can be even more profitable. Spanish airport operator Aena enjoys a virtual monopoly and consistently generates over 59% in EBITDA margins. The above examples highlight that aircraft OEMs and aircraft service providers have been able to gain a disproportionate share of the profitability in the value chain of the aviation industry. As the International Air Transport Association (IATA) Director General Willie Walsh noted in 2025: “Apple will make more selling an iPhone cover than the $7.90 airlines will earn moving the average passenger.”
Structural Constraints on Airline Profitability
There are two main factors that constrain profits in the airline industry: capital intensity and fuel exposure. As of 2025, a new Boeing 737 MAX retailed for around $122 million while a widebody Boeing 787 retailed for nearly $293 million. Major airline carriers typically spend 6 – 12% of corporate revenues on capital expenditures (CapEx) tied to upgrading, maintaining, and acquire their fleet of planes. Aircraft continually lose value over the 20 – 30 years of their expected lifespans, so CapEx investments by airlines are necessary to maintain a healthy fleet. In 2024 alone, Delta invested $4.8 billion in CapEx to maintain its fleet. On top of fleet CapEx, jet fuel is another major expense typically taking up 26 – 32% of an airline’s operating costs. For 2025, the airline industry's total jet fuel bill reached $236 billion. The ongoing war in Iran and resulting elevated increase in jet fuel prices threaten to drive airline operating costs significantly higher through the end of 2026 and into 2027.
In recent years, growing labor costs have become one of the airline industry’s biggest expenses. As global air travel has recovered from the Covid-19 pandemic and grown to exceed pre-pandemic levels, airlines have suffered from a shortage of pilots. As a result of the shortage, airlines have been forced to raise pilot salaries and benefits. In 2023, pilots from the three major U.S. air carriers, Delta, United, and American, negotiated pay increases of 34% or greater. The shortage shows no signs of abating with Boeing estimating that the airline sector will require 660,000 new commercial airline pilots over the next two decades and Oliver Wyman predicting a shortage of 24,000 pilots by the end of 2026. The shortage in airline pilots is expected to continue exerting upward pressure on pilot wages and to cause further erosion of profit margins in the airline industry. Total airline labor costs were projected to be $253 billion in 2025, up 7.6% year-on-year from 2024.
Environmental regulations, particularly in Europe, have added another layer of operating costs to air carriers. Starting in 2026, the European Union (EU) Emissions Trading System is moving to auctioning off 100% of carbon allowances meaning that heavy polluters like airlines will need to account for every ton of carbon they emit by purchasing allowances at EU auctions. The EU Emissions Trading System initiative is projected to increase passenger ticket prices by €21 - €45 per flight by 2030. Another European climate initiative, the ReFuelEU Aviation Regulation requires the airlines industry adopt sustainable aviation fuel (SAF) to reduce emissions. Under the regulation, aviation jet fuel supplies must steadily increase the amount of SAF at EU Airports from 2% in 2025 to 70% in 2050. The ReFuelEU Aviation Regulation stands to significantly raise the operating costs of airlines flying in the Europe Union as SAF is 2 – 4 times more expensive than conventional jet fuel.
Industry Structure
As of result of consolidation within the industry, the U.S. airline market offers the most promising picture for ROIC. Between 2008 – 2016, the twelve top U.S. airline carriers were consolidated through a series of mega-mergers. As of the September 2025, the Big Four American airlines (American, Delta, United and Southwest) accounted for roughly 74% of the domestic capacity for airline travel in the United States. Industry consolidation along with capacity discipline helped deliver the airline industry’s first sustained period of above-cost-of-capital returns in North America from 2015 – 2019.
Whereas the Big Four airlines dominate the American market, fragmentation in the European airline industry has allowed low-cost carriers (LCCs) to thrive. In Europe, the five largest airline carriers (Ryanair, easyJet, Lufthansa Group, Air France-KLM, and IAG) account for just 45% of the total market share. LCCs have had strong market penetration in the European market and exerted downward pressure on ticket prices which has driven fairs lower. In 2024, Ryanair achieved a cost-per-available-seat kilometer (CASK) almost 47% below the European industry average, carrying 197 million passengers and recording operating margins above 20%. Though price compression has affected the European airline industry more so than the U.S., industry data points to structural difficulties facing the airline industry as a whole. As noted by IATA, the global airline industry overall is earning much less per passenger with the real passenger yields, or the average revenue an airline earns per passenger per each kilometer flown, having dropped six folds in the last 50 years.
Business Model Evolution
The steep drop in real passenger yields has coincided with a large increase in ancillary revenues. Over the last 10 years, the biggest area of growth for airlines has not come from flying passengers but from secondary revenue sources such as add-ons and credit card & loyalty programs. Global ancillary revenue for the airline industry grew to $148.4 billion in 2024 from $27 billion in 2012. In 2024, Frontier Airlines made 62% of revenue from ancillary sources. Ancillary revenues for the global airline industry are expected to reach $157 billion in 2025 representing 15.7% of total airline revenue.
Credit card & loyalty programs are some of the most significant revenue drivers for the airline industry. Delta’s American Express partnership generated $8.2 billion in 2025, equal to around 1.4 times the airline’s adjusted operating income. In March 2026, On Point Loyalty, an international management consulting firm focused on airline loyalty programs, valued the top three airline loyalty programs with Delta SkyMiles coming in at number one at $31.7 billion, American AAdvantage coming in at number two at $26.7 billion, and United MileagePlus coming in at number three at $25.3 billion. The respective values of the loyalty programs for Delta SkyMiles and United Mileage Plus are close to the market capitalizations for each individual airline. As of May 2026, American AAdvantage is worth about three times the $9 billion market capitalization of its owner American Airlines. Without the revenue that loyalty programs and credit card partnerships are generating, both Delta and American Airlines would be operationally unprofitable.
The premium cabin revolution in the airline industry has provided another area of high-margined revenue growth. Spurred by increasing demand for premium choices among air travelers, airlines have begun redesigning their planes to showcase luxurious, private, customizable spaces. In Q4 2025, Delta reported $5.7 billion in revenues from premium cabin seating; the first quarter in the company’s century-long history where premium cabin revenue surpassed main cabin revenue. Other airlines have followed suit. In March 2026, United Airlines announced that it was doubling the number of “Relax Row” lie-flat economy seats to give more options to comfort conscious consumers.
Future Growth vs Sustainable Returns
Over the next 20 years, air traffic is expected to more than double. In that time span, the size of the world’s passenger and freighter fleet is predicted to nearly double from around 25,000 to in upwards of 49,000 planes. Between 2025 – 2044, Boeing forecasts annual revenue passenger kilometers (RPK) growth of 4.2% while Airbus expects annual RPK growth of 3.6%. Both Boeing and Airbus expect commercial demand in upwards of 43,000 aircraft over the next 20 years and believe that Asia (China, India, and Southeast Asia), driven by expanding middle class populations, will overtake North American and Europe to be become the dominant aviation market globally.
While growth in the airline industry remains robust, profitability continues to be an issue. From 2015 – 2019, the global airline industry generated $164 billion in cumulative net profit only to lose an estimated $181 billion from 2020 – 2022 during the COVID-19 pandemic. Similarly, the airline industry booked $12.9 billion in profit in 2007 only to lose $25.9 billion in profit from 2008 – 2009 during the Great Recession. Industry data indicates the airline industry’s median average ROIC from 1996 – 2004 was 4.9% compared to an estimated WACC of 7.5%, equivalent to an average annual loss in investor value of $11.7 billion during that time span. Most recently, in both 2024 and 2025, the ROIC for the global airline industry fell short of the industry’s WACC (2025: 6.8% ROIC / 8.2% WACC | 2024: 5.7% ROIC / over 9% WACC). Sustainable returns, rather than growth, remain the airline industry’s central structural challenge; a challenge that will be difficult to resolve.
The global airline industry illustrates a clear economic paradox where despite strong growth, the industry consistently fails to generate returns above its cost of capital. Various structural constraints – from high capital intensity to the cost of jet fuel to competition from LCCs – make it extremely difficult to generate sustainable profits in the airline industry. While new revenue streams from ancillary services such as add-ons and credit card and loyalty programs have improved margins, they have not resolved the structural weaknesses that exist at the industry’s core. Ultimately, until airlines can find a solution to these challenges, it will be difficult to achieve sustained financial profitability, and investors are likely better off investing in aviation companies that are not airline carriers.