Why The Airline Business Is Broken

Passenger airlines are a crucial industry in the global economy, but the sector is also extremely volatile. Running a passenger airline is an asset-intensive industry with narrow profit margins. Despite the risks, the industry has experienced some periods of consistent growth, which can lull investors into a false sense of security. Watch the video above to learn whether investors should steer clear of the sector and why passenger airlines struggle to stay profitable.

0:00 - Introduction
1:35 - Industry shocks
6:16 - Business models
8:28 - Deregulation and consolidation
12:55 - Industry outlook

Billionaire investor Warren Buffett once called himself an “air-o-holic” because of how tempted he is to invest in commercial airlines. But he learned the hard way, twice, that the industry can be a risky bet.

Airline stocks have been on a wild ride since the beginning of the pandemic, which shows just how volatile the sector can be.

“It seems that airlines once or twice a decade are hit with these really hard-to-process exogenous shocks, whether it’s something like 9/11 or the Great Recession,” said Adam Gordon, managing director and partner at Boston Consulting Group’s Airline Practice.

The passenger airline industry is already asset-intensive, with narrow profit margins.

Despite the risks, the industry has experienced some periods of consistent growth. Airlines saw big growth in profits for about a decade prior to Covid, which analysts attribute to the airlines restructuring post-9/11.

These periods can lull investors into a false sense of security. In 2017, the CEO of American Airlines said he was confident the business was never going to lose money again.

Airline stocks may be appealing to investors because the industry is crucial to the global economy.

“If you just step back and you think about what service airlines are offering, they’re putting you in a metal tube, taking you up to 40,000 feet, and transporting you in relative or absolute comfort at hundreds of miles an hour to get from point A to point B. And if you think about the substitutes for that service, like, there really aren’t any,” said Gordon.

“So it’s kind of surprising to me that an industry that delivers that kind of a service and does it with an absolutely impeccable operational and safety record is able to come under such pressure,” he added.

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Why The Airline Business Is Broken

[FGOKURULES]

_We Privatize the _*_Gains_*
_ And Socialize the *Loses*_


That was hitting the nail on the head right there!!! Modern Day Business tactics... Truly underrated comment.

[Mesozoic_mammal]

Short term answer: Yes
Long term answer: Still yes. Low margins, high competition, hardly any moats.

[johniii]

Airlines are one those industries you have to trade the stock in and out of the market a lot to make any money. Buy at the bottom and get out when you've made a nice profit before they hit the next turn down. Highly cyclical.

[vectorhacker-r]

I don’t buy into the narrative that we have to bail them out. And if they fail they fail, but in all likelihood they’ll go into some sort of restructuring and reorg in order to be more profitable. If we keep socializing the risky behavior through bailouts and subsidies, we legitimize that behavior and screw up the incentives.

[joser]

I do find the airline industry fascinating. It runs on razor thin margins, but it's so necessary.

[abec]

Once again CNBC trurns a blind eye to huge ceo compensations and bonuses.

[dvdragon]

How do you turn a billion dollars into a million dollars? Start an airline.

[dohc]

As a former regional airline employee who was laid off back in 2018 prior to the pandemic, I can definitely see it from different angles. There are too many jobs that are connected with the aviation industry and it is very much needed domestically as well as internationally. No one can predict what will happen in the future, but history has shown the legacy airlines the unexpected can and will happen. The first reflex is to lay off workers and at the same time satisfy your stockholders...what about a rainy day fund? Thats something I have never understood. Despite all of the events over the years, legacy airlines always bounced back and enjoyed alot of profitable years even though covid is a whole different beast all together. I am glad there were stipulations with the bailouts, but unfortunately its still on the tax payer regardless.

[AnythingMike]

Short term: Yes
Long term: they always get bailouts.
Rinse and repeat 🤘

[hbarudi]

My biggest problem with airlines is those flights that take you multiple stops for what can be done with a single regional flight of just 2 hours. When they take 20 hours or more with long layovers at multiple airports. And when booking amtrak train ride takes less time and require no hassle and no going through security to board the train. Now once better trains are built, they will be able to provide ground competition to flying.

[mmikael]

In long term, bailouts mean that everyone loses. Bailouts prevent the industry from healing and bad companies keep making bad business. This all so means that there are fewer jobs available in long term.

[tylergraston]

Aircraft maintenance is often forgotten on why it’s hard to stay profitable. It’s expensive to fix planes.

[daviidon]

No, they keep profits when they succeed and get bailed out when they fail.

[AlexanderSkinnerVids]

“They have had to increase the starting wages for new hire employees”

You say that like it’s a bad thing. Curious.

[thatpilatesguy]

If the legacy carriers weren't busy with stock buy backs, they wouldn't be struggling so much.

[srry]

COVID, GFC, 9/11 - the airline industry is one of the few where you could do everything right operationally and still get the rugged pulled from under you

[taganrose]

When it comes to the world of investing, most people don't know where to start. Fortunately, great investors of the present and investors of the past can provide us with guidance on how to invest 🙏🙏

[TheGeorgeous]

As long as you can't control oil prices. You can't win.

[georginalmartin]

I worked for an airline for 5.5 years in Australia. I took redundancy in 2020 due to COVID.
It is true a lot of airlines operate on thin margins. The cost of fuel, cost to repair and maintain a single aircraft and equipment for it is astronomical, paying employees, uniforms, hotel rooms for layovers, training (and maintaining), airline software/programs/computers, lounges, advertising, food, services, codeshares, paying for their “spot” within the terminal - check in counters/gates/aero bridges/food court then unforeseeable delays/cancellations…. the list goes on. Tie that in with that they’re an airline/business competing with other airlines and constantly have to lower their prices to get customers in the door and choose them so the profit margin really isn’t there. It is but it isn’t…

I’m 50/50 on the bail out scheme. I know multiple airlines got help from the Australian Government during COVID. It’s a tough one. They’re a business at the end of the day but they keep our country moving. Without airlines the country stops - it is probably more important than we realise. Every flight is loaded to the brink with cargo (in fact, cargo would take priority over having a bum on the seat - more $$$). More to the point though, there isn’t many domestic carriers Australia so if you lose one it creates a monopoly for the remaining airline and they essentially have no competitor which means they can start charging whatever price for tickets they want. So either way really the customer pays - be it tax or price of their airfare. Also, another point, is as far as I’m aware the airline I worked for used to put all their profits back into the company to keep “building it” and didn’t have much cash. This was a tax right off I believe and the company paid big time with COVID. But then being a business they need to have more accountability for their actions and need to operate with less risk (i.e. not loading all your profit back into the business to grow it and keep more “rainy day” cash at hand). So it kinda sucks for the consumer because either way we lose…

[gigilee]

in what universe is Southwest still a "low cost" airline? They're usually at least 20% more expensive than American or Delta.