The overall outlook appears to be brightening for the airline industry, raising hopes that a new upward cycle is beginning. But look below the surface, and a much more complex—and in some cases troubling—picture emerges.

Aviation Week's latest Top-Performing Airlines (TPA) study shows that an increasing number of carriers are in a healthier financial position as the latest downturn releases its grip. This change in momentum means many contrasting dynamics are at work, however. Some airlines that sank lowest are among the biggest improvers, while carriers from much-touted developing regions are generally struggling to exit the malaise. Small, niche carriers still have an advantage, but large airlines are starting to perform better. And fortunes are certainly mixed for the newly merged mega-carriers.

The annual TPA study is based primarily on financial results from the last full calendar year. Carriers are scored in six categories, and ranked by total score. In this year's analysis, the complex set of formulas used to calculate airline scores has been revamped to offer an even more nuanced assessment of airline performance. Prior-year scores have also been recalculated to reflect the new formulas.

This year's overall top performer is Allegiant Air, which also won in the small carrier division. Ryanair was the best of the large carriers, and Copa Airlines was the top mid-size company. The rankings only include publicly traded airlines. This means the large Middle Eastern carriers, for example, are omitted.

Of the 71 airlines tracked in the TPA study, 35 improved their total score through the end of 2012. This also means that half were down, and the median score for most regions declined too. However, this is still much better than the previous TPA study, when only 15 carriers saw their scores improve. Enough evidence is emerging that the trend is upward, and this aligns with other industry economic assessments, which show 2012 as the bottom of the latest cycle.

All signs point to continuing improvement this year, according to the TPA Council of Advisers—a group of five leading airline analysts consulted by Aviation Week. They believe there is generally more upside for the industry at the moment. Improvements in financial health have so far been mainly based on structural reforms within the industry, so when global economic growth kicks in, the airlines should see further gains.

“On a macro basis things are definitely improving, although there are pockets that are slower to come to that point,” says Bryan Terry of PwC.

Michael Dyment of Nexa Capital Partners believes the top of the current cycle is still in the future, so there is still upward movement to come. It is “just recently that U.S. carriers have been able to gain access again to Wall Street” investment, Dyment says. Carriers are obtaining unsecured financing at rates lower than they have seen for 20 years—partly due to improved cash flows, he notes.

Generally, executives are managing airlines “more like a business” than they have in the past, says Terry. This is reflected in sustained capacity discipline—particularly in the U.S. and Europe—and the ability of airlines to pass on oil price increases.

Although there is still some “irrational behavior” such as government ownership and failing carriers being propped up artificially, “the extent of financial responsibility is generally increasing in the airline industry,” says Craig Jenks of New York-based Airline/Aircraft Projects.

Because of the restructuring of the airline industry in recent years, carriers can still be profitable if oil rises to $200 a barrel, says Nexa Capital's Raymond Neidl. However, the industry will obviously still be at the mercy of the broader economy. Down-cycles “won't be as disastrous as in the past, but this industry is still going to be cyclical,” Neidl says.

The industry's profit cycle is closely aligned to the aircraft ordering cycle, says Jenks. Airlines veer from over-ordering aircraft to under-ordering during the course of what seems to be a capital equipment cycle. Prompted by the current low interest rates and high oil prices, airlines are “beginning to order quite a lot of equipment as [the industry] comes out of a trough.”

Jenks notes that this is particularly evident in the Middle East, China and Southeast Asia. He says the industry is seeing “an early upturn in that capital growth cycle, although we're not yet at that danger point” of having excess orders.

While the overall trend is positive for the airline industry, one of the more notable subtexts is the continued weakness of carriers from some developing regions. The so-called BRIC nations—Brazil, Russia, India and China—are typically described as having huge economic growth potential, but the TPA results show their airlines are lagging.

Of the 10 airlines from these four countries that are in the TPA study, only two show slight positive growth in their scores. The remainder declined, some significantly.

Jenks says the issues for China, India and Brazil are similar. Economic growth has been slower than expected—although China's is still robust—and there has been a high rate of airline capacity growth in all three.

The BRIC airlines are particularly focused on their very large domestic markets, says Jenks. This makes it more difficult to transfer capacity to international routes when their domestic economies slow. India, China and Brazil do not have strong global long-haul airline brands, or strong long-haul hubs, he says. For airlines in these countries, their “international route capacity is inferior to the inbound routes and branding of foreign competitors.”

Another feature of the TPA results is that some of the most troubled carriers in previous years are now among the most improved, says Jenks. For example, Thai Airways, American Airlines, Malaysia Airlines, Finnair and Air Berlin are among the top improvers in their categories.

In some ways, “this is what you'd expect in an early upturn environment,” Jenks says. But it also demonstrates that “nothing focuses the mind like a near-death experience.” TPA Project Manager and aviation analyst Michael Lowry emphasizes that all these carriers had a lot of scope to make gains since they had such low scores. But they have also “executed significant restructuring programs and succeeded.”

A trend that is no surprise in a strengthening industry environment is improved performance of the larger carriers—particularly the U.S. legacy airlines. This is in contrast to last year's TPA analysis, where the woeful performance of the large-carrier category was a notable feature. Although the scoring formula has been revised since then, only one of the airlines in this category saw its score increase in last year's study.

But despite this relative improvement of the majors, it is still the smaller niche carriers that are the star performers of the TPA rankings. Four of the Top Six airlines overall are from the small category, and eight of the Top 15. “Small is still better, but the gap is starting to close,” Neidl says.

As in previous years' TPA studies, the successful smaller airlines occupy lucrative niches and are at an optimal point in their growth cycles.

George Hamlin of Hamlin Transportation Consulting observes that despite the better performance of the large carriers, there are still only three represented in the Top 15. It is the “small carriers that are reinvigorating the industry,” he says. A closely related dynamic is the preponderance of comparatively new airlines at the top end of the table, Hamlin says. Only two of the Top 10, and five of the Top 20, were in existence before 1970.

Another trend is that many of the “true” low-cost carriers—including Spirit Airlines, EasyJet, Southwest Airlines and JetBlue Airways—saw score declines. Hamlin, however, cautions against overestimating this effect, since LCCs are still very well represented in the Top 10.

Rather than linking LCC performance to the cycle, Hamlin says the LCC declines in the U.S. and Europe represent a “rebalancing,” and that “history is still being written as to how the balance between the LCCs and legacies” will evolve.

One of the main features of the global airline industry in recent years has been the number of mergers and acquisitions among leading carriers. However, the TPA results show that the jury is still very much out on how successful the wave of consolidation has been.

On one hand, there are carriers like Delta Air Lines and Lufthansa that appear to have digested their mergers/acquisitions, and their performances went up this year. Delta has logged an increased score in four of the past six years.

But others are not yet enjoying the same lift. In the large category, three of the most dramatic score declines were Latam, International Airlines Group, and United Airlines—all of which have recently completed mergers.

The more recent mergers are obviously at a disadvantage when compared to linkups that are more mature. “It takes a minimum of two years for a successful merger, and in some cases longer,” Neidl says.

However, execution is still a variable factor. The relative TPA ranks show that “mergers can be done right, but if they are not executed to perfection, they can be problematic,” says Hamlin.

Jenks notes that macroeconomic issues also come into play. For example, British Airways “saw a pot of gold at the end of the rainbow” with its merger with Iberia, but “at the other end of the rainbow was Spain” and its struggling economy.

Likewise, the LAN-TAM merger has coincided with an economic slump in Brazil, TAM's home market. Lowry points out that while “the economics [of the deal] were spot on, the timing was lousy.”

The advisers stress that some of the link-ups are not yet true mergers. Air France-KLM and IAG, for example, have not integrated some crucial parts of their operations, meaning that they miss some of the advantages of mergers.

As with previous TPA studies, airline fortunes vary widely by region. When the carriers are grouped geographically, most regions saw a decline in median scores—although the drop was shallower. North America was an exception, with the previous decline leveling off in 2012.

North America also provides the highest-ranked carrier overall. Allegiant's gain of 4.2 points was enough to move it above other perennial strong performers.

Allegiant considers itself more of a travel company than an airline, and it has a business model like no other carrier in its region. It relies more heavily than its peers on ancillary revenue, from holiday packages and inflight services. It buys used rather than new aircraft, and operates older types—mainly MD-80s. Allegiant's network is predominantly aimed at connecting small markets to holiday destinations, with relatively low frequency.

Other carriers also target ancillary revenue, but they have not succeeded to the degree Allegiant has. Neidl says that while airlines can replicate some elements of what Allegiant is doing, the business model itself would not work for anyone else—especially the larger airlines. Allegiant is the ultimate example of a small airline finding a niche that works and exploiting it, Hamlin says.

Southwest has typically been the highest-ranked of the U.S. major carriers, but it has slipped again and it was almost overtaken by US Airways. The legacy network carriers generally fared well, with all seeing a score increase apart from United.

Neidl says United's recent performance has been relatively disappointing. However, the advisers agree that the airline has the strongest assets and network, so it has the potential to be the best of the U.S. carriers.

In Canada, WestJet continues to rise, and is second in the mid-sized category of carriers and in the Top Five overall. Air Canada, however, is much farther back, and the advisers say it is being pressured on all sides—by WestJet domestically, and foreign carriers in international markets.

Latin American airlines overall did not fare well in the TPA rankings. All five of the carriers from this region included in the study saw their scores fall, mostly by large margins. Despite this, Copa was still the top-ranked airline in the mid-sized group and fourth overall.

The main problem is that Brazil's economic woes are dragging down many carriers. Overcapacity is also a factor, as rapid airline growth outstrips demand.

This region is “down but not out,” Neidl says. “This will still be a growth region and it is going to be very important for airlines.” Copa remains strong, and Latam will be a powerful player when it has moved beyond the integration process.

In Europe, the strongest performers are still the large LCCs Ryanair and EasyJet. However, the most notable improvements in this region have come from some of the smaller airlines. In many cases they are rebounding from serious slumps, thanks to restructuring efforts.

Of the majors, Lufthansa is trending upward as it absorbs airline acquisitions. Turkish Airlines is also up, and its recent expansion appears to be bearing fruit.

The other two majors, however, have slipped further into the doldrums, as their mergers—which are somewhat limited in scope—have not produced enough benefits to offset Europe's shaky economic climate. The LCCs have also been causing the majors headaches in short-haul markets, leading them to reconsider their approaches to regional and short-haul networks, Jenks says.

The European majors are also much more vulnerable to the big Middle Eastern carriers, which are taking larger shares of long-haul traffic. The legacy airlines have been hurting on the cargo side too, thanks to the competition from the integrated cargo carriers and the Middle Eastern airlines, and the global downturn in the cargo market. In contrast to a relatively optimistic outlook for the U.S. majors, the large European airlines face “some inherent structural difficulties,” says Terry.

The Asia-Pacific region is seeing a wide range of trends, as befits such a vast and diverse area. Some LCCs such as AirAsia continue to perform strongly. But the large Asian airlines have not shown the strength they have in past TPA studies.

As well as the familiar culprits of global economic weakness and new competition from LCCs and other long-haul connecting carriers, Asian airlines are even more exposed to the cargo slump than their European peers.

China's slowing economic growth has also been a major factor. The Chinese carriers generally saw their scores decline in the TPA study, and other Asian airlines that are heavily reliant on Chinese routes also took a hit.

Rapid fleet expansion and over-reliance on domestic traffic have become problematic for Chinese airlines due to cooling demand. However, Terry points out that although it is not meeting expectations, growth is going on in China. It is still an “under-served market with tremendous upside,” he says. Because of this, the large number of aircraft orders by Chinese carriers is rational in the long term.

Of the airlines that use nearby hubs to connect traffic to China, the slowdown is a cautionary lesson. “It is good to have exposure to China, but that does not mean that your future should depend on it,” Jenks says. “If you are a really good long-haul hub operator, you have a portfolio of thousands of geographically diversified connecting markets, so if some are weak, this can be offset by other strong ones.”

Singapore Airlines (SIA) is one such carrier, and it is consistently ranked among the best large airlines. Hamlin says that with SIA “we continue to see excellent execution of a quality product.” However, regarding its low-cost subsidiary Scoot, the advisers believe the jury is still out on whether it can succeed.

Cathay Pacific, meanwhile, has yet again declined. One adviser describes Cathay as being “squeezed on a lot of fronts, but its brand is what is [keeping] it up.”

All Nippon Airways (ANA) is once again a strong performer. Its overall ranking of ninth makes it the top major airline that is not a low-cost carrier.

Jenks says ANA is seeing gains from its revenue-sharing agreements with partner airlines on European and U.S. routes, which began in mid-to-late 2011. Its results are also helped by the 2012 bounce-back from the demand slump related to the 2011 earthquake and tsunami. Going forward, ANA should start to see efficiency gains from its growing Boeing 787 fleet. Increased slot availability at the Tokyo airports is also providing a boost.

Of course, most of the above also applies to Japan Airlines. JAL was not included in this year's rankings—not enough data was available since the carrier was relisted in September, following its emergence from bankruptcy. However, early data indicate that JAL would have scored very highly. There is “room for both [Japanese carriers] to do well,” says Terry.

Tap the icon in the digital edition of AW&ST for a breakdown of the Top 10 large airlines' scores in this year's TPA study, or go to

Rank Company 12 Months Ending Revenue ($ millions) Total Score
1 Ryanair Holdings Dec. 2012 $6,356 62
2 All Nippon Airways Dec. 2012 18,084 61
3 Singapore Airlines Dec. 2012 12,177 55
4 Turk Hava Yollari Dec. 2012 8,317 51
5 Air China Dec. 2012 15,787 51
6 Deutsche Lufthansa Dec. 2012 39,248 49
7 Aeroflot Russian Airlines Dec. 2012 8,138 48
8 Qantas Airways Dec. 2012 16,348 47
9 Southwest Airlines Dec. 2012 17,088 45
10 US Airways Group Dec. 2012 13,831 45
11 Cathay Pacific Airways Dec. 2012 12,822 43
12 China Southern Airlines Dec. 2012 15,845 42
13 Thai Airways Dec. 2012 6,718 41
14 Air Canada Dec. 2012 12,117 41
15 China Eastern Airlines Dec. 2012 13,847 40
16 Delta Air Lines Dec. 2012 36,670 40
17 United Continental Holdings Dec. 2012 37,152 37
18 Air France-KLM Dec. 2012 33,376 35
19 Latam Airlines Group Dec. 2012 9,771 35
20 AMR Corp Dec. 2012 24,855 35
21 Korean Air Lines Dec. 2012 11,959 35
22 International Airlines Group Dec. 2012 23,539 34
23 SAS Jan. 2013 6,290 31
Rank Company 12 Months Ending Revenue ($ millions) Total Score
1 Copa Holdings Dec. 2012 $2,249 68
2 WestJet Airlines Dec. 2012 3,427 64
3 EasyJet Sep. 2012 5,991 62
4 Alaska Air Group Dec. 2012 4,657 60
5 Air New Zealand Dec. 2012 3,738 52
6 Hainan Airlines Dec. 2012 4,596 51
7 Garuda Indonesia Dec. 2012 3,473 47
8 EVA Airways Dec. 2012 4,101 45
9 Grupo Aeromexico Dec. 2012 3,040 45
10 China Airlines Dec. 2012 4,898 44
11 SkyWest Dec. 2012 3,534 43
12 Avianca Holdings Dec. 2012 4,328 42
13 Republic Airways Dec. 2012 2,811 42
14 Finnair Dec. 2012 3,190 42
15 JetBlue Airways Dec. 2012 4,982 41
16 Norwegian Air Shuttle Dec. 2012 2,237 41
17 Transat A.T. Oct. 2012 3,720 41
18 Virgin Australia Dec. 2012 4,160 40
19 El Al Israel Airlines Dec. 2012 2,016 33
20 Air Berlin Dec. 2012 5,611 30
21 Malaysian Airline System Dec. 2012 4,301 29
22 Asiana Airlines Dec. 2012 5,536 27
23 Jet Airways (India) Mar. 2012 3,282 25
24 GOL Dec. 2012 4,096 17
Rank Company 12 Months Ending Revenue ($ millions) Total Score
1 Allegiant Travel Co. Dec. 2012 $909 75
2 Regional Express Holdings Dec. 2012 275 69
3 AirAsia Dec. 2012 1,617 68
4 Spirit Airlines Dec. 2012 1,318 64
5 Air Arabia Dec. 2012 801 59
6 Cebu Air Dec. 2012 916 56
7 IcelandAir Group Dec. 2012 896 54
8 Vueling Airlines Dec. 2012 1,421 52
9 Aer Lingus Dec. 2012 1,813 51
10 Chorus-Jazz Air Dec. 2012 1,710 50
11 Kenya Airways Mar. 2012 1,300 44
12 Shandong Airlines Dec. 2012 1,764 42
13 Hawaiian Holdings Dec. 2012 1,962 42
14 Comair Dec. 2012 554 39
15 Flybe Group Sep. 2012 974 39
16 Aegean Airlines Dec. 2012 857 39
17 Transasia Airways Dec. 2012 343 37
18 Tiger Airways Holdings Dec. 2012 634 37
19 Air Mauritius Dec. 2012 597 32
20 TunisAir Jun. 2012 789 31
21 PAL Holdings Dec. 2012 1,756 23
22 SpiceJet Mar. 2012 821 9
23 Pakistan International Airlines Sep. 2012 1,374 8
24 Meridiana Fly Oct. 2012 822 1
Overall Top 10 TPA Rankings, by total scores
1 Allegiant Travel Co. 74.8
2 Regional Express Holdings 69.3
3 AirAsia 68.3
4 Copa Holdings 67.8
5 WestJet Airlines 64.4
6 Spirit Airlines 64.2
7 Ryanair Holdings 62.1
8 EasyJet 61.5
9 All Nippon Airways 61.0
10 Alaska Air Group 60.4
1 Allegiant Travel Co. 74
2 Regional Express Holdings 70
3 Copa Holdings 68
4 Air Arabia 65
5 AirAsia 64
6 Singapore Airlines 60
7 Ryanair Holdings 59
8 WestJet Airlines 58
9 All Nippon Airways 57
10 Hainan Airlines 56
Source: TPA Study
1 Copa Holdings 68
2 Grupo Aeromexico 45
3 Avianca Holdings 42
4 Latam Airlines Group 35
5 GOL 17
Source: TPA Study
1 Regional Express Holdings 69
2 AirAsia 68
3 All Nippon Airways 61
4 Cebu Air 56
5 Singapore Airlines 55
6 Air New Zealand 52
7 Hainan Airlines 51
8 Air China 51
9 Qantas Airways 47
10 Garuda Indonesia 47
Source: TPA Study
1 Ryanair Holdings 62
2 EasyJet 62
3 IcelandAir Group 54
4 Vueling Airlines 52
5 Turk Hava Yollari 51
6 Aer Lingus 51
7 Deutsche Lufthansa 49
8 Aeroflot Russian Airlines 48
9 Finnair 42
10 Norwegian Air Shuttle 41
Source: TPA Study
1 Allegiant Travel Co. 75
2 WestJet Airlines 64
3 Spirit Airlines 64
4 Alaska Air Group 60
5 Chorus-Jazz Air 50
6 Southwest Airlines 45
7 US Airways Group 45
8 SkyWest 43
9 Republic Airways 42
10 Hawaiian Holdings 42
Source: TPA Study