Aviation

The aviation industry comprises companies engaged in all aspects of air travel and transport. This high-flying sector is much more than just the airlines you book for your holidays. It includes giants that manufacture aircraft, the airports that serve as bustling hubs, and the vast network of companies providing everything from engine maintenance to in-flight catering. For investors, aviation is a notoriously turbulent industry, characterized by colossal capital expenditure (think billions for new planes), fierce competition that constantly squeezes profit margins, and extreme sensitivity to economic cycles, fuel prices, and global events. It’s a business where a single technological leap, political crisis, or health scare can ground profits overnight.

For decades, the aviation industry has been a powerful engine of globalization, connecting people and economies. This essential role often makes it an exciting and tempting area for investors. However, the economics of the business are, to put it mildly, challenging. Warren Buffett once famously quipped that if a capitalist had been at Kitty Hawk, he should have shot Orville Wright down, saving investors billions in the long run. Why the harsh critique? The industry is plagued by several structural problems that make it a graveyard for capital:

• Intense Competition: The skies are crowded. For most routes, particularly in the US and Europe, multiple carriers battle for passengers. This often leads to brutal price wars, where the only winner is the consumer. Airlines are forced to lower fares to fill seats, destroying their profitability in the process.
• High Fixed Costs: An airline has to pay for its aircraft (whether leased or owned), staff, and airport slots regardless of whether the plane is full or empty. This high operating leverage means that small dips in passenger demand can lead to massive losses.
• Cyclicality and External Shocks: Airlines are acutely sensitive to the health of the broader economy. When a recession hits, both business and leisure travel are among the first expenses to be cut. Furthermore, the industry is uniquely vulnerable to external shocks that are impossible to predict, such as pandemics (COVID-19), volcanic ash clouds, acts of terrorism, and volatile oil prices, which directly impact fuel costs—one of their biggest expenses.

Given the headwinds, a value investor should approach the aviation sector with extreme caution. Finding a company with a durable competitive advantage, or an economic moat, is exceptionally difficult. However, not all aviation companies are created equal. If you insist on exploring the sector, it’s crucial to differentiate between the business models.

Legacy carriers (like British Airways or Lufthansa) operate on a “hub-and-spoke” model with a complex fleet, unionized labor, and a mix of long-haul and short-haul routes. In contrast, low-cost carriers (LCCs) like Ryanair and Southwest Airlines have often been more successful for investors. Their model is built on ruthless efficiency:

• Standardized Fleet: Using only one or two aircraft types (e.g., the Boeing 737) simplifies maintenance, training, and operations.
• Point-to-Point Routes: They fly directly between cities, often using secondary, cheaper airports.
• Quick Turnarounds: Getting planes back in the air faster means more flights per day and better asset utilization.

Even with a better model, LCCs are not immune to the industry's fundamental problems. A strong balance sheet with low debt is non-negotiable for any airline investment.

Sometimes, the best way to profit from a gold rush is to sell the shovels. A value investor might find more attractive opportunities in the companies that support the airlines:

• Aircraft Manufacturers: The commercial aircraft market is a global duopoly dominated by Boeing and Airbus. This structure gives them significant pricing power and massive backlogs, providing more predictable revenue streams than the airlines they supply.
• Airport Operators: Some airports are natural monopolies with predictable revenue from landing fees, retail concessions, and parking.
• MRO and Parts Suppliers: Companies specializing in Maintenance, Repair, and Overhaul (MRO), or those that manufacture critical, hard-to-replicate parts, can have wide moats and long-term service contracts that generate consistent free cash flow.

In a surprising move, Buffett's Berkshire Hathaway invested heavily in the four largest U.S. airlines in 2016. He reasoned that years of consolidation and more rational management had changed the industry for the better, curbing the self-destructive price wars of the past. For a few years, the thesis seemed to hold. However, the 2020 COVID-19 pandemic completely upended the industry, bringing global travel to a standstill. Recognizing that the fundamental outlook had changed for the worse, Berkshire sold its entire airline portfolio, booking a significant loss. This episode serves as a powerful lesson for value investors: even when it seems “different this time,” the aviation industry's inherent fragility can reappear with a vengeance. It’s a reminder to always be prepared to re-evaluate your thesis when the facts change—and in aviation, the facts change very fast.