Buying The Airlines

Here’s a question for you.

Would you rather buy an airline ticket or a car park ticket at an airport?

It’s not a trick question. I just want you to notice how each option makes you feel.

Got it?

OK, here goes it.

Since last Wednesday morning, when it was announced Ozzie’s (that means everyone) could begin making plans to travel overseas again, I’ve had a few clients ask if now is a good time to buy airline stocks?

In a sentence, I’ve never been a fan of the airlines.

Here’s why…

Firstly, airlines are in the business of selling seats (and reheated meals) which means they have very little pricing power.

Secondly, their profitability is mostly determined by the price of oil, not passengers. i.e. when oil prices spike, airlines have very little profit margin.

Incidentally, have you noticed fuel prices recently? In the UK, they recently hit a high of AU$2.63 per litre. And don’t think they’re coming down any time soon. Inflation is about to scream.

Hello interest rates! (up)

Thirdly, airlines are very cyclical businesses. Meaning, passenger numbers are heavily leveraged to the economy, so when the economy slows, people tend to travel less.

Finally, airlines sell a discretionary item which means they’re not very recession proof. At least, not when you juxtapose them with banking, telecommunications, utilities, food, and some areas of healthcare as investment options.

Now consider this…

If you go back to the opening question, airline ticket versus airport parking ticket, which one made you cringe?

It was the airport parking ticket. Right?

And why? Because you feel like you’re being fleeced on something you’re forced to pay.

Airports are in the business of infrastructure which means they have high barriers to entry and tremendous pricing power.

They make their money by taking a clip from passengers who use their carparks, shop owners who lease their retail precinct, and airlines who use their runway facilities.

And if inflation takes off (pun unintended), you need to be invested in businesses that can increase their prices without worrying about their competitors, like airports.

Airports are price makers, while airlines are akin to price takers.

Put simply, if you resent a business because of its ability to take money out of your pocket, like an airport or a bank, then it’s usually a good investment.

Don’t buy the plane, buy the runway.

Safe travels!

Adam

Please note – this is not a recommendation, just an opinion piece. Please seek your own financial advice before making any investment decisions.

Back paddock – speaking of airlines, how’s this…Sara Blakely, the founder of Spanx, which sells the body-shaping underwear, started her business almost 20 years ago with just $5,000. And last week, sold a large slice of her business to a venture capitalist for $1bn!

Anyway, to thank her all-female staff, she gifted each one of them, two first class tickets to fly anywhere in the world plus gave them $10,000 spending money each.