The WORST Business to Invest in? Is it airlines..

isa2130953's picture
Rank: Gorilla | 595

What's your opinion of investing in an airline? Margins are pretty damn low, and it seems like everyone who starts one is getting crushed.

Let's take a look at what happened to WOW air last week.

Newsletter from The Water Coolest - Not Up in Here

Budget airlines have had a rough go at it lately. Even if the low fare operators can afford Boeing safety upgrades, they face headwinds in the form of fuel prices and stiff competition.

The latest victim of an ongoing European fare-war is WOW Air, an Iceland-based budget airline. WOW isn't alone, with eight European airlines failing since the summer, but it does seem to have a flair for the dramatic that its competition lacks.....

Not unlike the AAF, WOW's leadership was scrambling to secure funding ahead of today's news from Icelandair and PE shop Indigo Partners. The airline had already delayed the inevitable by convincing bondholders to convert debt into equity but alas it was leasing companies which pulled the plug on WOW's big old jet airliners that appears to have been the final nail in the coffin.

What is your take on this, and if you had to invest in one, what would the ideal situation be?

Comments (55)

Apr 18, 2019

Are airlines the worst business to invest in? If not which would you invest in and why.

The truth is like poetry, and most people fucking hate poetry.

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Apr 23, 2019

Whichever has the most excess assets on hand, as presumably they'll be the one acquiring the failures at flashsale pricing when the entire industry gets rocked. I have more confidence in the high level thesis of this than I do in trying to predict which airline will get fucked for some unique reason.

Thesis: At the end of the day, passenger airliners are a necessity. Kind of like in the great recession how all of the banks couldn't go insolvent and the mighty acquired the weak, all airlines can't simply fail at once. Find the one that has the cash to acquire their competitors and ride things out when everything goes to hell and it's probably a great investment.

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Apr 18, 2019

good analysis! this is true in terms of security that airlines are a necessity at the moment. most people are saying southwest is where they would bet if they had to make a choice

The truth is like poetry, and most people fucking hate poetry.

Apr 18, 2019

never touched 'em. plenty of other good opps out there. I don't feel like I have an edge in investing there, so call me chicken, but I stay in my circle of competence and have never invested in an airline

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Apr 18, 2019

thanks! its funny i actually heard this is a really popular interview question... although no one has ever asked me it i feel like its a trick question. i would never personally invest here either but if its a popular question id like to know why

The truth is like poetry, and most people fucking hate poetry.

    • 1
Apr 18, 2019

Only one I would touch is LUV because I know people who work there and how strong the company culture is (plus I think they have the best product outside of first class). That said, higher fuel prices will really hurt those airlines that aren't hedged properly.

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Apr 18, 2019

thanks! I agree. I am always hearing good things about them and it seems every airline thats not huge either gets shut down or has some type of scandal once a year

The truth is like poetry, and most people fucking hate poetry.

    • 1
Apr 22, 2019

Hedging does nothing for your dcf. Just short term profits. They don't hedge years into the future.

In medium term it depends how much pricing power they have to pass on fuel costs.

I for the most part like the US airlines. My gut says they've solved the domestic issues of when profits are good they boost capacity then lose all pricing power. And PEs are low. I think buffet came to this opinion a few years ago.

6-8 pe seems reasonable. It's a nice yield and the bet is basically that they've consolidated enough that price wars won't happen.

Array
Apr 18, 2019

I personally wouldn't touch a single airline stock except for Southwest (LUV). All the other legacy carriers are way too levered and still rely too much on the hub-and-spoke model. LUV's business model is genius - use only one type of plane (737) so that they are easy to repair at any location across the country and easy substitute when one needs to be set aside for whatever reason. Open seating and free bags encourage people to 1) get there early as possible, minimizing ground time for planes and 2) check bags more often, saving space for carry-ons and preventing further boarding/unloading delays.

LUV has also taken over smaller airports at major metropolitan areas (Midway vs. O'Hare, Love-Field vs. DFW, etc.), allowing them greater control over the operations at said airports and, again, minimizing time on the ground and maximizing air time.

There's a CNBC interview with Buffett a few weeks ago in which he said he no longer thinks the airline industry is a death trap (it used to be), but that the market tends to price airline stocks as such. With the rumored $75/share takeover of LUV by BRK that fell through back in February, Southwest looks pretty cheap right now, especially for a company that has never been unprofitable in 45 years in part because of the reasons I listed above.

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Apr 18, 2019

Great analysis!

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Apr 18, 2019

^ I agree. great analysis. they have a solid business model and employee and customer satisfaction is almost synonymous. in my other post i mentioned that every other airline also always has scandals. it definitely is a hard business to start and very hard to maintain, especially with fluctuating gas prices.

The truth is like poetry, and most people fucking hate poetry.

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Apr 18, 2019

Thanks, definitely agree with the whole point about the scandals. If anything, this whole B737 Max fiasco has created a great buying point on LUV. 1-2 years from now people will have completely forgotten about it. I'm hoping they miss earnings hard on 4/25 so I can buy more (personal price target is $45 based on some BS technical analysis). They already revised estimates downward from the MAX groundings and customer fear/uncertainty. I think with the way the MAX and LUV have been prominent in the news cycle these last few months, the results might be a bit worse than people are expecting.

To the point about the volatility in fuel prices, if they are hedged properly they should be fine. I read something interesting the other week that low oil prices can actually be bad for airlines because people expect cheaper prices and it starts a price war.

Apr 23, 2019

Yeah I think the fact that they are a bit more customer-oriented really works to make it a positive experience. I can still buy the cheapest fare and cancel and use the funds later, albeit i have 12 months, but other airlines you pay cancellation fees and practically lose it all. And if you find out your flight is delayed, they are good about putting you on an earlier flight to mitigate any further issues such as being force on to a flight the next day instead.

Most Helpful
Apr 22, 2019
ib123456789:

I personally wouldn't touch a single airline stock except for Southwest (LUV). All the other legacy carriers are way too levered and still rely too much on the hub-and-spoke model. LUV's business model is genius - use only one type of plane (737) so that they are easy to repair at any location across the country and easy substitute when one needs to be set aside for whatever reason. Open seating and free bags encourage people to 1) get there early as possible, minimizing ground time for planes and 2) check bags more often, saving space for carry-ons and preventing further boarding/unloading delays.

LUV has also taken over smaller airports at major metropolitan areas (Midway vs. O'Hare, Love-Field vs. DFW, etc.), allowing them greater control over the operations at said airports and, again, minimizing time on the ground and maximizing air time.

There's a CNBC interview with Buffett a few weeks ago in which he said he no longer thinks the airline industry is a death trap (it used to be), but that the market tends to price airline stocks as such. With the rumored $75/share takeover of LUV by BRK that fell through back in February, Southwest looks pretty cheap right now, especially for a company that has never been unprofitable in 45 years in part because of the reasons I listed above.

I won't ever invest in a company where I don't believe in the product. Screw their cattle car boarding procedures...I've worked at an actual slaughter house for cattle. Their boarding process is not dissimilar.

Apr 23, 2019

Between TSA, people who can't get on/off a plane in any semblance of order, and you assholes out there with large carryons who won't just walk to the baggage claim or pay another $25, it is not the most stress-free experience.

Apr 22, 2019
TechBanking:
ib123456789:

I personally wouldn't touch a single airline stock except for Southwest (LUV). All the other legacy carriers are way too levered and still rely too much on the hub-and-spoke model. LUV's business model is genius - use only one type of plane (737) so that they are easy to repair at any location across the country and easy substitute when one needs to be set aside for whatever reason. Open seating and free bags encourage people to 1) get there early as possible, minimizing ground time for planes and 2) check bags more often, saving space for carry-ons and preventing further boarding/unloading delays.

LUV has also taken over smaller airports at major metropolitan areas (Midway vs. O'Hare, Love-Field vs. DFW, etc.), allowing them greater control over the operations at said airports and, again, minimizing time on the ground and maximizing air time.

There's a CNBC interview with Buffett a few weeks ago in which he said he no longer thinks the airline industry is a death trap (it used to be), but that the market tends to price airline stocks as such. With the rumored $75/share takeover of LUV by BRK that fell through back in February, Southwest looks pretty cheap right now, especially for a company that has never been unprofitable in 45 years in part because of the reasons I listed above.

I won't ever invest in a company where I don't believe in the product. Screw their cattle car boarding procedures...I've worked at an actual slaughter house for cattle. Their boarding process is not dissimilar.

LOL at getting shit on for this...I guess we have some amateur travelers on this site.

Apr 23, 2019

Bought 100k, thanks for investing advice, if thing goes south, I will blame you

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Apr 24, 2019

By this logic then you should also invest in Ryanair and EasyJet or other low cost airlines in Asia/Europe. Many LCCs follow this model of using a single plane type (Ryanair = B737, EasyJet = A320 family) and cater to smaller remote airports. In fact, some of these LCCs in Europe have double digit margins so not bad after all.

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Apr 18, 2019

I also would not own airlines, but I don't think it's the worst industry, at least not now that they sell their frequent flyer miles to the banks for their credit cards.

Construction is a terrible industry with low single digit operating margins when things are good, and huge money losers when projects go wrong (see CB&I).

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Apr 18, 2019

I don't think they're the worst, at least for now... If southwest wasn't in the game tho i think that would make a big difference in my answer.

I definitely wouldn't own or try to start anything. Extremely low margins and hard satisfaction rates unless of course you duplicate LUVs business model.

A lot of airlines go in the direction of spirit airlines, like wow air, but it just doesn't seem sustainable long term, and if it is it's always a headache.

I will look into that though! thanks

The truth is like poetry, and most people fucking hate poetry.

Apr 19, 2019

where have you heard that hedge funds ask shout this? just curious

    • 1
Apr 18, 2019

i have had a few people tell me and it is also on some forums about HF interviews

The truth is like poetry, and most people fucking hate poetry.

Apr 19, 2019

I asked because this happened to me when I interviewed for a private equity position and they asked me and I didnt know if it was a trick question either

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Apr 22, 2019

I don't know if this is "the worst", but I think coin operated pay phones are a much worse investment right now. In the '80's, everyone would have said the opposite.

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Funniest
Apr 22, 2019

Immensely entertaining industry, not appropriate for long term investment. Take it from the horses mouthes:

"This industry attracts more capital than it deserves."
-- Stelios Haji-Ioannou, founder of EasyJet

"People who invest in aviation are the biggest suckers in the world."

-- David G. Neeleman, after raising a record $128 million to start New Air (the then working name for what became JetBlue Airways)

"The airline industry is full of bullshitters, liars and drunks. We excel at all three in Ireland."

-- Michael O'Leary, Ryanair CEO

"I'm here to tell you that I am proud of a couple of things. First, I am very good at projectile vomiting. Second, I've never had a really serious venereal disease."

-- Herb Kelleher, addressing the Wings Club in New York regards his time at Southwest, 2001

"I think historically, the airline business has not been run as a real business. That is, a business designed to achieve a return on capital that is then passed on to shareholders. It has historically been run as an extremely elaborate version of a model railroad, that is, one in which you try to make enough money to buy more equipment."

-- Michael Levine, Executive VP Northwest Airlines, 1996

"These days no one can make money on the goddamn airline business. The economics represent sheer hell."

-- C. R. Smith, President of American Airlines.

"A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you've lost your trousers - you're in the airline business."

-- Sir Adam Thomson

"You cannot get one nickel for commercial flying."

-- Inglis M. Uppercu, founder of the first American airline to last more than a couple of months, Aeromarine West Indies Airways, 1923.

"If the Wright brothers were alive today Wilbur would have to fire Orville to reduce costs."

-- Herb Kelleher, Southwest Airlines, USA Today, 8 June 1994.

"I've never invested in any airline. I'm an airline manager. I don't invest in airlines. And I always said to the employees of American, 'This is not an appropriate investment. It's a great place to work and it's a great company that does important work. But airlines are not an investment.'" - Bob Crandall, American CEO

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Apr 18, 2019

Well if that's not a sign to steer clear than what is? haha

what is your input on this
https://www.wallstreetoasis.com/forums/should-vert...

The truth is like poetry, and most people fucking hate poetry.

Apr 23, 2019

Phase 1 biotech, probably the fastest and most reliable way to lose large amounts of money I can think of.

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Apr 18, 2019

You and about 3 others have said that same thing. I can definitely see why that can be true. Biotech is always a major hit or miss

The truth is like poetry, and most people fucking hate poetry.

Apr 23, 2019
isa2130953:

You and about 3 others have said that same thing. I can definitely see why that can be true. Biotech is always a major hit or miss

I'm speaking from experience xD

Apr 22, 2019

Airlines are the second most volatile subsector after biotech and without comparable upside on the right tail

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Apr 23, 2019
Anchor:

Airlines are the second most volatile subsector after biotech and without comparable upside only the right tail

I wish I could give this 2 SB's for being helpful and funny at the same time

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Apr 23, 2019

biotech and airlines are good answers but in recent times I was thinking pharma.....many pharma companies have insane profit margins (generics) but in recent times I've seen margins fall due to competition.

Israel's TEVA is being consumed alive by cheap Indian generics......

Having said that, all businesses are risky - but some are significantly riskier than the rest.

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Apr 18, 2019

Good analysis.... I have seen a lot about pharma and biomed on here.

Whats your input on this discussion?
https://www.wallstreetoasis.com/forums/should-vert...

The truth is like poetry, and most people fucking hate poetry.

Apr 22, 2019

Seeing some misconceptions in these comments. The industry has moved away from hedging which is actually good, hedges produced temporary cost advantages which allowed some carriers to ramp capacity and take share. If the cost structure is more aligned between carriers, they will be more inclined to raise fares and limit capacity growth as fuel increases. No one has talked about the other large cost - labor. Pilot strikes can trash earnings in a few days and you can't replace pilots, plus there's a shortage due to new training hour requiremnts. This results in a scenario where unions can essentially hold the Airlines hostage, their incentive being to take as much of the economic earnings as possible without bankrupting the airline, a balance they fail from time to time. Also unions favor the senior pilots so any new airline will have a labor cost advantage from newer pilots and no union as well as a fuel cost advantage from having the latest aircraft and a maintenance cost advantage from having the newest planes. Leases are dirt cheap with excess financing available from sovereign wealth funds. Carriers make all their money from bookings that are close to departure (corporate) with leisure bookings basically just serving to fund a schedule with enough frequency to attract business travelers. When new low cost carriers come in and use their temporary cost advantage to take away the leisure passengers, legacy carriers must either fly at a loss to try to bankrupt the new carrier or cut their flights thus becoming less attractive to corporate and causing a death spiral. Assets can move with little notice to wherever there is profit to trash, pricing changes 5+ times a day based on a system that was originally created for military war games simulations which is fitting because the entire industry is completely unnecessarily cutthroat.

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Apr 18, 2019

People always seem to forget about the cost of labor, and it is way too expensive to forget. You are definitely right about how volatile the industry has become. SO many people have started airlines with the "cheaper" approach and almost none but spirit airlines have lasted. on the other hand you have southwest that is not as cheap but always seems consistent. But as you mentioned in this industry things change on a dime.

I'd like to have your input on this as well if u can
https://www.wallstreetoasis.com/forums/should-vert...

The truth is like poetry, and most people fucking hate poetry.

Apr 24, 2019

To all of those who said pharmaceuticals or biotech, I would like to clarify some points (although I agree that there is a lot of risk in it):

  • Product development: especially in Phase 1 or pre-clinical, companies will develop multiple assets in the hopes of a few making it to the next round. In the airline industry you don't have this luxury early on. If you look at true start-up airlines (like Ernest Airlines) they stay with only 1-2 planes and have to use the shit out of it until they can get some cash to justify getting more debt for the next planes and so forth
  • Investment protection: R&D is expensive but if you make it to market (which in itself is also difficult) your drug is patent is patent protected for multiple years. The airline industry doesn't have this benefit; if you uncover that route PointA-PointB is profitable and has higher demand than expected, within a couple months you'll have competitors deploy their planes on that route to steal market share
  • Easier to start up initially: both pharma and aviation require a lot of regulation and admin behind them but 3 egghead scientists and 1 talented BD/finance guy can get a drug to pre-clinical or phase 1. Even if you start an airline with 2-3 planes, you need a lot more staff (air staff, pilots, ticketing, back-office staff etc).
  • Exits are better: a lot of young biotechs aim to perform like kings until phase 1 where they get bought out and that takes off a lot of financial pressure. In the airline business, the only companies being bought are those dying and are scraped up for pennies on the dollar. If you perform well as a start-up airline, don't expect one of the major ones to scoop you up. You have to keep the momentum going, scale yourself and deal with whatever happens alone.
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Apr 25, 2019

Warren Buffett once said that there ought to be a 1-800 number to call every time an investor considered an airline investment that would remind them not to do it. But he's back in now.

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Apr 27, 2019

Yes this is right, i agree.

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Apr 27, 2019
Comment
    • 1
Apr 27, 2019
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D.I.

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Apr 27, 2019
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Ty

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