Viking Global Application Question
Hi monkeys, not actually applying, but chanced upon an interesting sample question on their careers website. Interested to know how seasoned hedge fund investors would answer this question:
“Which of these businesses has the best business model (and why)? An airplane manufacturer (e.g., Boeing), an airplane lessor (company that owns airplanes and leases them to airlines), an airline (e.g., Delta), or an online travel agency (e.g., Expedia).”
I thought it was obvious it’s Boeing
Otas asset light two sided network businesses with higher roic than the other types
ykb - this is the correct answer
Lease. Planes and engines in demand given Boeing issues, don’t need to worry about travel fluctuations, can part out pieces at the end
Not in HF, but some thoughts:
Off the bat, because there are so many options, I knock out Lessors and Travel agencies.
Lessors: Hard to predict fluctuations – could have a lot of "undeployed" planes; As more and more planes get made at cheaper costs and fleets fill out, there will be no need (Idea of # of flights or planes needed/made hitting some logistic cap soon)
Travel Agencies: Slightly cop-out answer, but most prone to dying out to AI. They will literally call it "Travel (AI) Agents." It is, however, nice because they don't have a lot of variable costs.
—————
Now that I've gotten it between Manufacturers and Airlines, here are some pros and cons of each:
Manufacturers
Pros:
Cons:
———
Airlines
Pros:
Cons:
———
I think I'd have to give it to manufacturers at the end of the day, they can make solid money, and if we are talking about a company that we could just up and run, I'd take a Boeing. It was also way harder to write pros for the airlines for me lol.
Again, don't know much about the industry nor am I in finance but curious what others think.
Airlines is actually one of the worst of the lot. Huge competition, high fixed costs, huge amount of op deleverage, alot of reliance on consumer environment / cyclical, cost structure dependent on oil prices which have no control over, usual reputation risk
Could you explain what you mean by op deleverage, if most of the costs for airliners are fixed?
Yeah as I was writing the pros and could only come up with "fan culture" + a bunch of cons I kinda realized that. I would probably put it lower now given the 4. I looked it up a bit and I think lessors arent bad
All puts and takes, but now airlines have loyalty programs / credit card offerings that are extremely profitable. Premium offerings (biz & first class seats + lounges) are becoming a larger % of Sales, have proven sticky, and are margin accretive. All said, I would pick either lessor or airline.
The otas dying to agentic is just not true
Maybe - I needed some way to filter out and in my mind like I said it was a bit of a cop out answer. But regardless, I'd still have it lower for sure.
If OTAs are a middleman that help with flight path finding, comparing prices, and booking flights for you indirectly, I have no doubt that agentic is coming for that. Those are all things that AI does already pretty efficiently (minus booking flights). Plus, we are seeing the rise in using agents to pay – walmart partnership with GPT etc.
and lets say OTAs actually leverage AI instead and become better and are still worth it (or agentic fails for a few more years - I hope). As a middleman, you are generally getting squeezed out. As a customer, why would I pay a commission if I could just GPT it and get the same findings? As an airline my margins are already shit so yk... Having pressure on both ends is not great imo – but I've never used an OTA so I could be full of it
Airplane lessors don’t really face the “undeployed” issue. These tend to be capital/finance leases. They don’t really order planes and just hope to rent them out. They place orders based on like 20 year contracts.
They are essentially a bank who only deals in ABF. And imo banking is a great industry.
I don’t understand how nobody has said Boeing is a duopoly with Airbus in a vital industry with high barriers to entry
True, but one of those is still not FCF+
thats because of internal fuck ups, the business model isnt bad boeing just fucked up basic principles of airplane manufacturing
I used to cover OTAs a decade ago and while I'd say OTA is the best business model, they don't actually make much $ (0%-3% take rate) on airline tickets. They make most of their margin on accommodations (15-30%+ take rate depending on merchant vs. agency model) and airlines is purely a wedge to cross-sell other experiences.
If you want a spicy (not necessarily accurate take) say "none of the above" the best business model is the Global Distribution Systems. They power the inventory data required for airlines, OTAs, agencies, and eventually AI agents to access and book flights, car rentals, accommodations, etc. Duffel.com is the newest version of this business model but Amadeus is a EUR 30B company.
That gets disintermediated too.
The best business is the recurring aftermarket engine maintenance business. Noneof the above
Is this not a stupid question bc it's based on a firm's mandate?
Are we an opportunistic value investor looking to purchase at a cheap price for a company that has a durable moat, arguably a duopoly, with a good amount of end-markets (defense, consumer) like Boeing? Demand isn't going anywhere any time soon, and consumers are relatively locked in for purchases. Can go on and on.
Are we looking to invest in asset-light businesses? Then sure, take the company that leases, since lease expenses are on the income statement, you'll see higher EBITDA multiples. But at the same time, you have RyanAir and all these cheap airlines companies, so is the moat really there like it is with boeing?
Online traveling agency has no competitive edge whatsoever; expedia could be easily replicated by another app, or a startup.
Honestly, i do sorta like airlines, and i like a company like Boeing, but Boeing is in the shit with management that isn't aligned with shareholders, continual problems with their planes, and probably high fixed overhead costs, and delays.
So tbh all mid.
This is not meant to be exhaustive; just an insight into how I see the question as OP asked.
I view the question as more of an attempt to see if you understand the main drivers and higher/lower-order effects.
The right way to think about this question isn’t "which is best" but "which business model is advantaged under different conditions".
In the most extreme outcomes you can have periods where travel isn't possible so the assets and associated cash flows are more important or you can have periods of high travel consumption and being asset-light with greater consumer exposure is a strength.
The current market may have an expectation that trends in one of these directions. The market may also have different expectations, this is not inclusive of all outcomes. Focus on the main drivers for your preferred thesis and the main drivers trending toward your preferred outcome.
(Note: some of these may include off balance sheet financing and liabilities that require more work than a screening pitch may warrant and I am leaving out a lot of nuance)
At a high level this is my initial perspective;
Manufacturers - tell me about the multi-year outlook because of how the production and payment cycle works; production, delivery, and servicing/maintenance are important but also financing and leasing contracts
Lessors - tell me about the spread from leases and funding costs, credit exposure, and the value of the fleet (acquisitions, depreciation, residual...)
Travel - tell me about customer acquisitions and fulfillment rates I probably also want to know how exposed they are to specific loyalty programs for specific hotel and credit card partners
Airlines - Here is as an extended example I am not a sector specialist; Airlines derive great value from credit card mileage programs as opposed to actual ticket sales, (some airlines have periods where those revenues exceed ticket sales), hence, loyalty revenues are a primary driver you should be tracking then.
In periods of consumer weakness you are likely to see diminished demand for travel consumption but how sensitive is Airline XYZ to loyalty revenue fluctuations?
This is one higher/lower-order effect to discuss. Your thesis may have many others.
My advice would be to pick any one of the companies and keep a consistent perspective.
If you think the economy is going to be strong I think the easiest option is to pick the online travel agency. If you think the economy is going to be weak maybe the lessor or manufacturer. You're less likely to encounter unusual circumstances in your discussion if you pick the one where you have the most confidence in your thesis.
This is unrelated but I would say something different based off who the audience is;
Leases are the answer if PM might have a financials background
Online travel might be the answer if you are earnings focused
Manufacturers might be the answer if you are looking for value or there is something event-driven
Off topic but companies similar to TransDigm and Heico are the answer if you're ignoring all the choices.
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