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Hyperloop: The Airline Industry Killer

For some years, I have been afflicted with the belief that flight is possible to man. My disease has increased in severity and I fell that it will soon cost me an increase amount of money if not my life.

This is what Wilbur Wright wrote three years before he and his brother Orville tested their powered aircraft at Kitty Hawk, North Carolina.

Orville managed to stay in the air for just 12 seconds on his first attempt. On the fourth, Wilbur flew for 57 seconds.

It was a monumental moment in aviation history.

Right after their flight, the Wright brothers walked six kilometres to send a telegram to their father:

Success four flights Thursday morning all against twenty one mile wind start from level with engine power alone average speed through air thirty one miles longest 57 seconds inform Press home Christmas.

Had Warren Buffett been there at Kitty Hawk, he’d have shot Orville and Wilbur out of the sky, saving investors a lot of pain that would later come for the aviation industry.

Demand cuts ‘bad century’ short

Want to lose money fast?

Put it in the airline industry.

From the late 1970s to the 2000s, investors avoided airlines like the plague. The performance of the industry was abysmal.

Even Warren Buffett went as far as saying that airlines were ‘death traps’.

A lot of this had to do with the economic reality of airlines.

Passengers care about price more than anything. There aren’t many barriers stopping new competitors from coming into the industry. Investment into planes and other equipment is massive.

Essentially, airlines are in a race to the bottom, frantically trying to outdo one another on price. And it doesn’t help that running costs, like labour and equipment, keep rising.

Consulting management firm McKinsey & Company said it best, advising investors to ‘pack their bags and go home’.

However, in the last few years, the industry has produced some of the best performers in the market.

US airlines like Southwest Airlines Co [NYSE:LUV] and Delta Air Lines, Inc. [NYSE:DAL] are up 390% and 288% respectively over the last five years.

Southwest Airlines and Delta Air Lines, Inc. 26-02-2018

Source: Google Finance
[Click to enlarge]

Even Qantas Airlines Ltd [ASX:QAN] has climbed more than 220% over the same time.

These gains have made many investors reconsider the industry and its future potential. Even Buffett has changed his tune.

In 2016, he bought stakes in American Airlines Group, Inc. [NASDAQ:AAL], Southwest, Delta and United Continental Holdings Inc. [NYSE:UAL].

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

So, why are airlines around the world surging in the market?


We can’t train pilots quick enough

Since 2009, air travel demand has grown every year. According to the International Air Travel Association, demand could double over the next 20 years.

It’s why Boeing Co. [NYSE:BA] has recently said that the world is in dire need of more pilots. The aircraft manufacturer predicts we’ll need 637,000 new pilots by 2036.

That’s 87 pilots a day.

Why so many?

For one, we need more pilots because more people want to travel by air. And we need more pilots because airlines must replace those that are approaching retirement — typically around the age of 65.

And it’s why Qantas is now planning to set up a new pilot training school.

Bloomberg reported on Friday:

The Australian airline is setting up a school to train as many as 500 pilots a year, it said Thursday as it reported record first-half profits. The carrier will initially produce about 100 pilots a year just for Qantas.

‘…The Qantas facility due to open in 2019 will meet just a fraction of the industry’s needs. The Asia-Pacific region alone will require more than a quarter of a million new pilots by 2036, about 40 percent of the global total needed, according to Boeing Co.

Pilots Required 26-02-2018

Source: Bloomberg
[Click to enlarge]

You might draw the conclusion that the good times are still ahead for airlines. And in the short term, that could very well be true.

But could extremely fast trains set airlines for another ‘bad century’?

The fastest way to travel

Trains, a seemingly bygone means of travel, are making a comeback.

The Eurostar, an underground train crossing the English Channel, can get you from London to Paris in a little over two hours.

The flight between the two countries is far shorter, at a little over an hour.

However, when you add up waiting times and getting on and off a plane, the train starts to look far more appealing.

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

But imagine if the speed of these trains was to increase dramatically.

The fastest train in the world is the Shanghai Maglev, which travels at 429 kilometres per hour.

Hyperloop travel — a pod-like train — could top speeds of 1,126 km/h.

Such speeds would get you from Melbourne to Sydney in around 45 mins.

The concept of hyperloop travel was proposed by Elon Musk, and is currently under development.

A good way to wrap your head around it is to think of a pod-like train traveling in an underground tube.

And according to Live Science, Musk’s boring (digging) company, Boring Co., received approval to start digging a hyperloop tunnel under Washington, DC.

Magnetic accelerators would be planted along the length of the pod, propelling it forward. In this low-pressure environment, surrounded by cushions of air, these pods could reach incredible speeds.

While commercialisation might still be years away, the speed and convenience of hyperloop travel could seriously reduce demand for air travel.

For now, there’s still time to potentially profit from the success airlines are enjoying. But if train travel can realise its full potential, the writing could be on the wall for the airline industry.

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