Airlines to Enter Another Bad Century?

How do you lose a lot of money fast?

Some would tell you to go into the airline industry. It’s extremely competitive. Travelers usually pick their flights based on price. So for many air carriers, it’s a race to operate at the cheapest price possible.

Decades ago, staying out of the airline industry might have been good advice. But in recent years, airlines have been posting massive returns.

Over the past five years, stocks like American Airlines Group Inc. [NASDAQ:AAL], Delta Air Lines Inc. [NYSE:DAL] and Southwest Airlines Co. [NYSE:LUV] climbed 3,888%, 311% and 471% respectively.

Even our own Qantas Airways Ltd [ASX:QAN] ran up as much as 90% from January to October last year.

The airline comeback has prompted the Oracle of Omaha to dip his toe into the industry. Warren Buffett has voiced his disdain for airlines on a number of occasions. But in late 2016 he bought stakes in American Airlines, Delta Air Lines, Southwest Airlines and United Continental Holdings Inc [NYSE:UAL].

It’s true that the airlines had a bad 20th century,’ Buffett told CNBC. ‘They’re like the Chicago Cubs. And they got that bad century out of the way, I hope.

But the euphoric times for airlines could soon abruptly end. For so long airlines only had to compete against other airlines. But they might soon face a threat, which could ground share prices.

The fastest way to travel

I wouldn’t say I’m a well-travelled man. But last year I went to France. It was a marketing conference, which drew people from all around the world. Those from India, South America and Australia all flew to Paris.

But those coming from the UK took the train. The Euro Star, an underground train, can get you from London to Paris in a little over two hours.

Europe map

Source: Google Maps

The flight between the two countries is far shorter, a little over an hour. However, when you factor in waiting times and getting on and off the plane, the train option starts to look far more appealing.

In fact, considering check-in waiting times, traveling on the Euro Star saves you more than an hour.

But short train trips like these are about to get a real boost, thanks to high-speed rail. As reported by Bloomberg:

Speedy trains and planes are generally competitive until your travel plans extend beyond 1,000 kilometres (621 miles), at which point travellers consider flying superior for time savings, according to an overview of academic research by the Journal of Advanced Transportation. But new technologies may push that boundary in the years and decades to come. The chart below gives examples of key global routes where the two are currently comparable.

train speed Europe

Source: Bloomberg

It will take some time for technology to rapidly decrease long distance travel on trains. But when that happens, it could be the start of another bad century for airlines


Härje Ronngard,

Junior Analyst, Markets & Money

PS: With equities rallying hard, it’s creating far too many highflying stocks. If investor sentiment were to change, many could come crashing down to Earth.

There are plenty of stocks financial adviser Vern Gowdie wouldn’t personally buy. And in his five fatal stock report, he lists the ones you should definitely give a wide berth.

To download a free copy of Vern’s report, click here.

Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.

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