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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