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Airlines To Enter Another Bad Century?
BY HARJE RONNGARD - 15/01/2018 | VIEW MORE ARTICLES BY THE DAILY RECKONING

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



View More Articles By The Daily Reckoning

The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.



 

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