Profits don't move in straight lines. Here's what matters

Summary: A small rise in revenue can sometimes trigger a massive jump in profits. In other cases, it can deepen losses. The difference lies in operating leverage. Here is how fixed costs quietly magnify both gains and pain, and why investors often misjudge it at turning points. In some businesses, a 20 per cent rise in revenue barely nudges profits. In other cases, the same can turn around losses into sizeable earnings. The difference is not managerial genius. Nor is it pricing power. It is the cost structure. Businesses with high fixed costs behave very differently from those with flexible expense bases. Aircraft leases, employee salaries, depreciation, finance costs and overheads must be paid whether demand is strong or weak. These costs do not fall simply because sales fall. When volumes are low, this structure hurts. When volumes rise, it can be transformative. That sensitivity of profits to changes in revenue is called ‘operating leverage’. Industries such as airlines, cement, metals and hotels are classic examples. Capacity is built upfront. Once that capacity exists, the economics depend heavily on utilisation. A few extra seats filled, a few more tonnes sold or a few more rooms occupied can alter profitability disproportionately. How operating leverage shows up in numbers Consider the quarterly performance of InterGlobe Aviation from the table below. A turnaround in fortunes How a jump in revenue and a fall in

This article was originally published on February 14, 2026.