Learn more about the Top-Performing Airlines 2012 in an interactive presentation.

Call it the sweet spot—that stage in an airline's life cycle where its size is perfectly suited to its market and business plan. This high-performance window can be narrow, and once a carrier moves beyond it, it may never again see the same level of success.

Aviation Week's Top-Performing Airlines (TPA) study highlights the carriers that are currently in this elusive zone. And the inescapable conclusion is that almost all are smaller and exploiting a particular niche. In today's airline industry, bigger is not necessarily better.

This year important changes have been made to the TPA rankings. Instead of grouping airlines by business model and examining each category separately, they have been divided into tiers by size. This allows the same scoring formula to be applied to all airlines, inviting comparison between the best in each tier.

The results of this comparison are revealing. The overall Top-10 list is dominated by airlines in the medium and small categories. Nine of the 10 fall into these brackets, and only one—Singapore Airlines (SIA)—is in the largest tier. While SIA is once again the best large carrier, it is the relative newcomers like AirAsia that are upstaging the giants.

“It seems to be there is a sweet spot for high performance,” says Bryan Terry, a member of the TPA council of advisers (see box). “If you grow past a certain point it improves your viability, but it doesn't necessarily improve your overall performance.”

The advisers regard Southwest Airlines as an example of a carrier that has moved beyond its ideal size range. It is no longer an upstart, and growth opportunities are much harder to find, says Raymond Neidl, a TPA adviser. Terry notes that some of Europe's largest low-cost carriers may be the next to reach the same inflection point.

This dynamic obviously has ramifications for the big airlines that are attempting to lift their performance by merging into ever-larger combinations. So far, there is little evidence in the rankings to suggest that this is working. “There are economies of scope and scale up to a certain point, beyond which they diminish,” observes TPA adviser George Hamlin.

It is partly because of their size that the most successful smaller airlines can take advantage of market niches. Adviser Craig Jenks says their niches can be based on geography, market segment or product range. As Hamlin says, these carriers are thriving by “figuring out what they are and what they can do, instead of trying to be all things to all people.”

Another feature of this year's TPA study has been a general decline in scores, which are predominantly based on full-year 2011 data. In the large-airline tier, all but one of the 21 carriers saw their scores drop, with All Nippon Airways (ANA) the sole exception. This reflects a tough industry environment.

The smaller carriers toward the top of the rankings are much better equipped to thrive in such conditions, says Jenks. “They can take advantage of the non-growth of the larger players during downturns.” He notes that these airlines are more agile, make decisions faster, and can adapt capacity more quickly.

Neidl says the major carriers could see big gains when the global economy strengthens, and could be best equipped to leverage an improving industry environment. Terry, however, stresses that the comparative strength of the smaller airlines is no flash in the pan. TPA data show they also feature prominently when carriers are ranked by average score over five years.

The overall weakness in TPA scores from 2011 reinforces the International Air Transport Association's view that 2010 was the peak of the current market cycle. Higher fuel prices and Europe's economic woes are obvious culprits, and major carriers in particular are being affected by a soft cargo market.

Jenks says the continuing growth of the large Persian Gulf carriers is also a challenge for the mainline airlines. These carriers are not represented in the TPA study because they are privately owned, but they still cast a giant shadow over the results. Emirates, Etihad and Qatar are dominating certain one-stop international markets such as India-Europe and are pushing into more long-haul city pairs.

With all these factors to contend with, particularly the fuel-price surge, the surprising thing is that the TPA results did not dive more sharply, the advisers say. Compared to previous years, carriers “handled this fuel-price crisis relatively well,” says Hamlin.

TPA adviser Michael Dyment observes that when oil prices spiked at $147 a barrel in 2008, “airlines were bleeding to death and there was no capacity discipline, but today it's a remarkably different picture.” This is one area where consolidation has been a positive for the industry, says Terry, and the proliferation of cross-border joint ventures has also helped keep a lid on capacity.

Jenks, however, notes that capacity discipline has not been uniform, and it has been more apparent in some regions than others. It is still much more noticeable in North America and Europe than in the Asia-Pacific region, for example.

This is part of the reason why the fortunes of the airline industry vary from region to region. Asia-Pacific and Latin American airlines have generally seen the most dramatic score declines in this year's TPA study, with North American and European airlines not falling as much.

The Asia-Pacific region offers the most stark contrast in performance between the mainline giants and smaller low-cost carriers. For example, Malaysia yields both the top-ranked carrier overall, AirAsia, and the bottom ranked, Malaysia Airlines.

AirAsia is a prime exhibit of an airline finding its sweet spot, and it could be in that zone “for a number of years,” says Terry. The carrier still has good growth opportunities, but it has also shown that it is willing to drop routes if they do not pan out—a sign of good management, says Hamlin. Jenks notes that AirAsia is following a multi-base strategy that is also succeeding for highly ranked smaller airlines such as Air Arabia, Allegiant and Vueling.

SIA once again tops the rankings in the large-airline segment, as it has done for seven of the last eight TPA studies. But its score has dropped by 23.8 points from the previous year (historical scores have been restated to reflect the change to a universal formula). Cathay Pacific has also traditionally been one of the strongest performers, but it declined by 20.4 points this year and has fallen to seventh in its segment.

The problem for SIA is finding areas where it can still expand profitably, says Jenks. Terry points out that many of Asia's traditional leading airlines are running out of organic growth options, which could be one factor behind the increasing number of low-cost subsidiaries and joint ventures in the region.

A major reason for the success of airlines such as Singapore, Cathay and the Taiwanese carriers has been their location on the doorstep of the Chinese market. But now their connecting flights between China and the rest of the world are coming under more pressure, says Jenks. The Gulf carriers have increased their presence in China, and Dyment notes that the Chinese carriers themselves are gaining ground. The region's low-cost airlines are also making inroads.

Another factor hurting Cathay, Korean Air and some of the other Asian majors is that they are more heavily reliant on cargo, says Terry. High fuel costs tend to depress cargo demand more than passenger traffic, so this hits these airlines harder.

There are some larger airlines that are flourishing in the Asia-Pacific region, however. ANA, for example, achieved a score increase that pushed it up to second in the large carrier list.

ANA obviously benefitted from rival Japan Airlines' recent foray into bankruptcy protection, but both carriers are seeing gains from restructuring and extensive cost cuts. “They've rationalized their business models, as airlines in the U.S. and Europe have done, and are doing what most [in their region] are not,” Dyment says. In contrast, other Asian carriers are still more focused on market share than “rationalization and efficiency,” says Jenks.

Latin America is another region where the larger airlines have seen a dramatic decline in TPA scores. These carriers have been hurt by economic weakness in many Latin markets, particularly Brazil's, the region's largest. Aside from domestic headaches, Brazil's carriers find it increasingly difficult to compete with overseas airlines on international routes, says Jenks. For example, China is now Brazil's top trading partner, but the Shanghai-Sao Paulo route is dominated by Emirates, he says.

Many airlines in this region are also taking a while to digest mergers, Neidl notes. But he stresses that the mergers will eventually make these carriers much stronger, particularly the LAN/TAM deal.

Copa is again the standout among the Latin American airlines, and this year is ranked eighth overall. In keeping with the global trend, one of the smallest carriers in the region is outshining its larger rivals.

The Panama-based airline benefits from a geographical location which makes its hub ideal for connecting traffic between the U.S. and Latin America. It still has “multiple areas of really profitable growth potential,” says Neidl. Most importantly, Copa has proven it can keep its operating margins high while growing rapidly.

North American airlines had a relatively good year in 2011, the TPA advisers say. The major carriers saw score declines, but not as much as their peers in other regions.

The large U.S. airlines are still working to streamline themselves after a round of consolidation. So it remains to be seen how much stronger the mega-carriers will be when the mergers are fully absorbed.

While it is uncertain if being bigger helps, having fewer players certainly does. Particularly if American Airlines and US Airways merge, the industry will be reduced to a “rational level where the airlines can get an adequate return on investment,” says Neidl.

Neidl projects the U.S. carriers are set to have a better year in 2012 than they did in 2011. Financial reports show that Delta Air Lines in particular has seen a surge over the last two quarters. Concerns over the U.S. economy persist, but most of the majors should continue to be profitable even if fuel prices climb above current levels, says Dyment.

As with other regions, in North America the smaller niche airlines are the stars. The Top-10 list for the region features no fewer than eight carriers from the medium and small tiers (see chart). Allegiant is the best in the region and fifth overall. Spirit Airlines boasts the second-highest overall score improvement, with its westward expansion into new markets obviously paying off.

Southwest Airlines is still the highest-ranked of the large U.S. airlines, but it also had the second-highest score decline of any North American carrier. While this is partly due to Southwest's acquisition of AirTran Airways, Southwest also faces serious challenges. It has reached a transition point, Neidl says. It is no longer a niche carrier owing to its nationwide presence, and has limited domestic growth opportunities. This is why Southwest is turning to markets in the Caribbean and Mexico.

In Europe, the larger low-cost carriers may soon find themselves with the same dilemma as Southwest. Ryanair and EasyJet are both standouts in the TPA study, with Ryanair third overall, but growth in Europe is becoming much harder, says Terry.

Ryanair's ability to outperform the industry is likely to diminish as new market opportunities become more scarce, the advisers say. Jenks points out that EasyJet is “going up the product and complexity ladder” to try to penetrate business markets, while “Ryanair's DNA is not suited for that.”

The European majors, meanwhile, have dropped in the TPA rankings. International Airlines Group (comprising British Airways and Iberia) and Lufthansa both saw their scores decline by 7-8 points, and Air France-KLM was down 9.5 points.

The Gulf carriers are having a much greater effect on the European airlines than those in North America. However, Terry says the European majors “can point their fingers all they want at the Gulf carriers, but I would say their own governments are doing them more harm.” New passenger taxes, night flight restrictions and emissions penalties are major handicaps for the industry in Europe, he notes.

2012 TPA Council of Advisers

Michael J. Dyment

Managing Partner, Nexa Capital Partners

George W. Hamlin

President, Hamlin Transportation Consulting

Craig Jenks

President, New York-based Airline/Aircraft Projects Inc.

Raymond E. Neidl

Airline/Aerospace Analyst, Maxim Group

Bryan Terry

Director, PwC Transportation and Logistics

1 AirAsia 81
2 Air Arabia 78
3 Ryanair 78
4 Hainan Airlines 77
5 Allegiant 77
6 TransAsia Airways 72
7 Vueling Airlines 72
8 Copa Airlines 71
9 Singapore Airlines 70
10 WestJet Airlines 69
Source: TPA Study
RANK COMPANY Ending ($ millions) SCORE
1 Singapore Airlines Mar. 12 11,848 70
2 All Nippon Airways Mar. 12 17,891 68
3 Qantas Airways Dec. 11 13,532 64
4 Deutsche Lufthansa Dec. 11 33,079 60
5 Southwest Airlines Dec. 11 15,658 59
6 International Airlines Group Dec. 11 20,890 58
7 Cathay Pacific Airways Dec. 11 12,641 55
8 United Continental Holdings Dec. 11 37,003 53
9 Air France-KLM Dec. 11 33,943 48
10 US Airways Group Dec. 11 13,055 48
11 Turk Hava Yollari Dec. 11 7,062 48
12 China Southern Airlines Dec. 11 13,499 47
13 TAM Linhas Aereas Dec. 11 6,976 47
14 Air Canada Dec. 11 11,740 47
15 Air China Dec. 11 14,442 47
16 Delta Air Lines Dec. 11 35,115 45
17 AMR Corp. Dec. 11 24,022 44
18 SAS Dec. 11 6,382 43
19 Thai Airways International Dec. 11 6,265 42
20 Korean Air Dec. 11 11,078 40
21 China Eastern Airlines Dec. 11 13,093 39
Source: TPA Study
RANK COMPANY Ending ($ millions) SCOREa
1 Ryanair Holdings Mar. 12 5,767 78
2 Hainan Airlines Dec. 11 4,065 77
3 WestJet Airlines Dec. 11 3,105 69
4 Alaska Air Group Dec. 11 4,318 66
5 Easyjet Sep. 11 4,387 65
6 Garuda Indonesia Dec. 11 2,830 60
7 Transat A.T. Jan. 12 3,720 59
8 Air New Zealand Dec. 11 3,554 58
9 Aeroflot Russian Airlines Sep. 11 4,235 56
10 Virgin Australia Dec. 11 3,688 55
11 JetBlue Airways Dec. 11 4,504 54
12 SkyWest Dec. 11 3,655 53
13 Lan Airlines Dec. 11 5,585 52
14 AviancaTaca Holding Dec. 11 3,823 51
15 Finnair Dec. 11 3,145 48
16 Republic Airways Holdings Dec. 11 2,876 47
17 EVA Airways Dec. 11 3,862 47
18 China Airlines Dec. 11 4,499 45
19 El Al Israel Airlines Jun. 11 2,009 43
20 Jet Airways (India) Mar. 11 3,190 39
21 Asiana Airlines Dec. 11 5,065 35
22 GOL Linhas Aereas Inteligentes Dec. 11 4,048 34
23 Air Berlin Dec. 11 5,881 33
24 Malaysian Airline System Dec. 11 4,463 11
Source: TPA Study
RANK COMPANY Ending ($ millions) SCORE
1 AirAsia Dec. 11 1,462 81
2 Air Arabia Dec. 11 663 78
3 Allegiant Travel Co. Dec. 11 779 77
4 Transasia Airways Dec. 11 308 72
5 Vueling Airlines Dec. 11 1,192 72
6 Copa Holdings Dec. 11 1,830 71
7 Regional Express Holdings Dec. 11 269 68
8 Aer Lingus Group Dec. 11 1,792 67
9 Spirit Airlines Dec. 11 1,071 65
10 Cebu Air Dec. 11 679 64
11 IcelandAir Group Dec. 11 680 55
12 Kenya Airways Sep. 11 1,108 54
13 Hawaiian Holdings Dec. 11 1,650 53
14 Norwegian Air Shuttle Dec. 11 1,879 51
15 Aegean Airlines Dec. 11 930 50
16 PAL Holdings Mar. 11 1,539 49
17 Chorus Aviation-Jazz Air Dec. 11 1,683 48
18 Royal Jordanian Airlines Sep. 11 939 48
19 Air Mauritius Mar. 11 576 48
20 Shandong Airlines Dec. 11 1,496 45
21 Pinnacle Airlines Sep. 11 1,233 37
22 Tiger Airways Holdings Dec. 11 396 30
23 Meridiana Fly Sep. 11 865 28
24 SpiceJet Dec. 11 767 21
25 Pakistan International Airlines Sep. 11 1,485 13
26 Cyprus Airways Dec. 11 295 10
1 Ryanair 78
2 Vueling Airlines 72
3 Aer Lingus 67
4 EasyJet 65
5 Deutsche Lufthansa 60
6 Int’l Airlines Group 58
7 Aeroflot 56
8 Icelandair Group 55
9 Norwegian Air Shuttle 51
10 Aegean Airlines 50
Source: TPA Study
1 AirAsia 81
2 Hainan Airlines 77
3 Transasia Airways 72
4 Singapore Airlines 70
5 All Nippon Airways 68
6 Regional Express 68
7 Qantas Airways 64
8 Cebu Air 64
9 Garuda Indonesia 60
10 Air New Zealand 58
Source: TPA Study
1 Copa Airlines 71
2 LAN Airlines 52
3 AviancaTaca 51
4 TAM 47
5 GOL 34
Source: TPA Study
1 Allegiant Air 77
2 WestJet Airlines 69
3 Alaska Air Group 66
4 Spirit Airlines 65
5 Transat A.T. 59
6 Southwest Airlines 59
7 JetBlue Airways 54
8 Hawaiian Holdings 53
9 United Continental 53
10 SkyWest 53
Source: TPA Study
1 Garuda Indonesia 16
2 Spirit Airlines 16
3 Vueling Airlines 9
4 Copa 4
5 Transasia Airways 3
6 Regional Express 3
7 Allegiant Air 3
8 All Nippon Airways 2
9 Aegean Airlines 2
10 WestJet Airlines 2
Source: TPA Study
1 Air Arabia 88
2 Singapore Airlines 79
3 Allegiant Air 78
4 Ryanair Holdings 76
5 AirAsia 75
6 Hainan Airlines 71
7 Copa 66
8 Aer Lingus 65
9 WestJet Airlines 65
10 Deutsche Lufthansa 64
Source: TPA Study