Airlines have, over the last few decades had a reputation for losing money. As famed investor Warren Buffett put it, in 2002, “airlines are a deathtrap for investors.” “If a capitalist had been present at Kitty Hawk (the site of the first aeroplane flight) in December 1903, “he should have shot Orville Wright. He would have saved his progeny money,” he said.
It’s true that the airline industry has suffered over the years, mainly in the wake of four major shocks: US airline deregulation (1978), the first Gulf War (1991); the September 11, 2001 terrorist attacks in the US; and the 2007–2009 global financial crisis (GFC).
Each of these had a profound impact on the industry. Many US carriers did not survive the newly competitive market after deregulation; the Gulf War crisis turned the global industry unprofitable for six years; and one year after the 9/11 attacks, the airline industry had lost more money than it had made since deregulation. Then came the GFC: from the early-2008 peak to the early-2009 trough, premium travel fell 25%, while economy travel fell 9%.
Along the way, both privately run airlines and inefficient, bloated state-owned carriers were punished. Private companies such as PanAm and TWA disappeared, while Alitalia and (almost) Air France joined them. In the decade from 2002 to 2011, the three largest US legacy airlines – American Airlines, United Airlines and Delta Air Lines – each filed for bankruptcy, and had to merge with other large airlines (US Airways, Continental and Northwest respectively) that had themselves sought legal protection from creditors. Globally, airline operators faced new threats, from aggressive, deep-pocketed Middle East airlines such as Emirates, Etihad and Qatar Airways at one end, to the low-cost and ultra-low-cost operators at the other end.
It was just after the 9/11 attacks that Australians lost Ansett in 2001; the company had been running since 1935.
In 2014, Australians were shocked to see Qantas post a $2.8 billion loss – as it wrote down the value of its international fleet by $2.6 billion – and an operating loss of $650 million. By that point, investors who had bought shares in the Qantas float in 1995 were facing a hefty capital loss over almost two decades of owning the stock.
Times have seen a change
But a sea-change has blown through the airline industry, as a combination of factors has enabled a rebound.
Economic and demographic changes around the world have driven passenger growth, lower fuel costs, more efficient aircraft design, higher inflation for ticket prices and careful capacity management – matching the supply of flights and plane seats in the carriers’ favour – cost-cutting and a general shareholder-oriented mindset have all contributed to strong profit growth for the industry, after a multi-decade decline.
Consequently, the investment performance has turned around.
The New York Stock Exchange (NYSE) Arca Airline Index lost 91% of its value between the 9/11 attacks and March 2009: since that low point, it has risen seven-fold. Until the three recent major hurricanes in the US disrupted business and leisure travel, the index was showing double-digit gains for the last 12 months (it is now up by 4.4%).
And guess who has noticed?
Late last year, Buffett surprised investors by buying back into the major US airlines. In February this year, his Berkshire Hathaway investment behemoth doubled its holding in American Airlines Group, lifted its stake in United Continental Holdings six-fold, took a large position in Delta Air Lines and spent US$2.4 billion on a new position in Southwest Airlines.
Berkshire Hathaway is now the largest shareholder in United Continental and Delta, and is a top three shareholder in Southwest Airlines and American Airlines. Buffett has described the investments as a “call on the industry itself” rather than a choice of individual companies, but clearly, he has decided that what has historically been a loss-making industry has turned itself around.
Australian investors have seen this recovery, with Qantas: in 2016, the airline reported its largest-ever underlying pre-tax profit, of $1.5 billion, and followed that with $1.4 billion this year. From its 2013 low of $1, Qantas’ stock has risen to $6.
Airlines is still a cyclical industry – despite the boast last month by American Airlines CEO Doug Parker who said he didn’t think we’re ever going to lose money again. But while investors might have winced at that hubris, the drivers for the airline industry are very strong.
According to European manufacturer Airbus, air traffic (revenue per kilometre, or RPK) doubles every 15 years. It says air transport has grown by 60% over the last 10 years and more than doubled since the 9/11 attacks. The plane maker estimates global air traffic growing at 4.4% a year between 2017 and 2036. Airbus sees demand for 34,900 new aircraft by 2036, worth US$5.3 trillion ($6.9 trillion), with the Asia-Pacific region accounting for 41% of the demand, with the US and Europe together representing 36%.
While economic growth remains an important driver for air transport, it is not the only factor: Airbus says other important influences are political liberalisation, tourism development, working-age population, disposable personal income, oil prices, employment, domestic investment, private consumption, urban population, government consumption, industrial output and global trade.
Domestic China will become the largest aviation market before the end of the forecast period, says Airbus: it expects almost 1.6 billion passengers to travel within China in 2036, almost four times the number of passengers that travelled by air in 2016. In July, Airbus won a US$22 billion ($28.6 billion) order to supply state-owned China Aviation Supplies Holding Company with 140 aircraft: China Aviation will allocate the aircraft to individual airline operators over the next five to six years.
Similarly, Airbus projects the number of domestic Indian passengers to grow almost six times in the next 20 years, reaching the level as domestic USA is today.
Traffic between emerging countries is forecast to grow at 6.2% a year, and will represent a growing share of air traffic, from 29% of world traffic in 2016 to 40% by 2036. But growth is not wholly an emerging market story: Airbus expects the domestic US market to increase by 50% by 2036, from an already high base.
For its part, the International Air Transport Association (IATA) predicts that the number of air passengers will almost double by 2035, from 3.8 billion (in October 2016) to 7.2 billion.
Australian investors have several avenues to play in the aviation sector. Global/domestic airline operators Qantas and Air New Zealand are listed on the ASX, as well as domestic/Asia-Pacific (and global codeshare) operator Virgin Australia.
Investors can also participate in aviation by investing in Sydney Airport, which is one of the prime beneficiaries of Australia’s growing attractiveness to Asian tourists, and is a strong generator of cash. Auckland International Airport is also listed on the Australian Securities Exchange (ASX).
Investors wanting a pure-play investment in global aviation could look at the New York Stock Exchange-listed US Global Jets ETF (JETS) exchange-traded fund, which holds stocks in most of the major global airlines – its four largest holdings are American Airlines, Delta Air Lines, Southwest Airlines and United Continental, but Qantas is also in there, at just over 1% of the portfolio – as well as plane makers, airport owners and aviation services suppliers
JETS is priced in US dollars, so Australian investors bear currency risk, but it would appeal to an investor wanting a broad, diversified exposure to the global aviation industry.
Investing into the airlines, like any investment, requires careful research on individual companies and insight into the boarder market – being that airlines rely on fuel prices (oil), the impact of geopolitics (eg war, political tensions), population demographics (their propensity to travel), and the overall competitiveness of the industry (eg. cost to fly). All these aspects are important factors to assess when looking at ultimately delivering a profitable outcome for the investor.
Information current as at 20 November 2017. This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). This This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Westpac Financial Services Limited and some of its related entities may have invested in the past, currently or in the future, in some of the companies referred to in this document. The content of this document is in no way a recommendation to invest in, hold or sell interests in the companies referred to. These projections are predictive in nature. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by inaccurate assumptions or may not take into account known or unknown risks and uncertainties. The actual results actually achieved may differ materially from these projections. ©Westpac Financial Services Ltd 2017