Motorised air travel is now over a century old.
Airlines: Fly 'em, but don't buy 'em, advises the Motley Fool. Photo: Brendon Thorne
Motorised air travel is now over a century old. It was in 1903 that the Wright Brothers, widely credited with the first powered flight, took humanity into the skies.
And impressively, only 17 years later, the Queensland and Northern Territory Aerial Services took flight, starting Australia's love affair with both air travel and our national airline. Well into the 21st century, we still retain some of the old-world romance and wonder of flying. Maybe it's the storied history of Qantas, perhaps it's the fact we still marvel at our ability to get a huge, very heavy metal tube into the air so gracefully. Or, it could be the envied safety record of the Flying Kangaroo.
Whatever the reason, and even in this economically rational age, most Australians would admit a good degree of pride in our national carrier. Me too, but you won't catch me owning shares in the company ��� or in Virgin Australia or any other airline, for that matter.
Whoa��� what about the share price?
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That probably seems like a rash comment. After all, hasn't the Qantas share price risen from under $1 to over $4 in the past couple of years? What do I have against making money?
But that's the thing about historical numbers ��� you can choose whatever time period suits your case. Indeed, if you'd bought Qantas shares at the end of 2007, you'd still be down around 35 per cent on your investment.
Long term results are far more useful than short term numbers. More useful again, though, is a decent understanding of an industry, itself.
So let's look at the airlines. Despite the best efforts of management (and Australia's airline managers are among the best in the world), and the undoubted technical wizardry that goes into the miracle of flight, it's an awful industry. The inputs are almost identical ��� fuel, leased planes, pilots, cabin crew and support staff. The outputs are even more identical ��� they get you from point A to point B in an uncomfortable seat with unspectacular food.
In the investment lingo, we tend to save the word "commodity" for something like iron, gold or copper, where the product in question is, for all intents and purposes, indistinguishable from that made by another company ��� an ounce of pure gold is the same no matter who produces it, and from where.
And, despite what otherwise seems a complex and expensive product, air travel can essentially be lumped into the same category. Sure, you mightn't choose to fly Aeroflot or Scott's Discount Air, but when you're weighing up the choice of Western airlines, you know you'll be flying in similar aircraft, to identical destinations, with similar food and entertainment.
And so something that at first blush appears to be anything but a commodity ends up being just that.
Airline profits have surged recently, thanks to falling oil prices that have delivered strong profit margins. But, sure as night follows day, excess capacity (more seats than passengers) will see prices fall (you can fly to the US return for under $1000 from the east coast at the moment). And when they do, profit margins will go with them.
How do I know? Because that's always been the case with commodity industries in general (hello, iron ore) and airlines in particular.
Foolish takeaway
No less than Warren Buffett has said "Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down."
Australia's airlines? Fly 'em, but please, don't buy 'em. And if you own 'em, I'd suggest it's time to sell.
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Scott Phillips is a Motley Foolinvestment advisor. You can follow Scott on Twitter @TMFScottPor email him at ScottTheFool@gmail.com. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).