Will Warren Buffett Invest in Airlines?


The airline industry is one that has been infamous for being unforgiving to investors. Even renowned investors like Warren Buffett have lost money investing in airlines. Singapore Exchange is home to two airlines, full service carrier Singapore Airlines (SGX: C6L) and low-cost carrier Tigerair (SGX: J7X). We look at why airlines have the reputation of being one of the toughest industries to survive in.

Airline: Loss Making as an Industry

The global airline industry as a whole does not have a history of profitability. As airlines are a major part of a country’s transportation system, it is sometimes important for the respective governments to ensure their survival as many other industries – the tourism industry, for instance – are dependent on them.

Therefore, many loss-making airlines are still able to continue their operations through subsidies. This creates an unfair playing field for other players in the market, leading to aggressive price competition which further worsens the situation.

High Cost

Airplanes do not come cheap. A standard Boeing 777 might cost around US$250m to US$300m. Additionally, highly skilled (and highly paid) personnel are needed to operate and maintain these planes and miscellaneous equipment.  All these add up to significantly high costs for the airline operators.

Therefore, an airline without an exceptional management team will find it hard to successfully compete in this industry.

Time-Sensitive Commoditized Product

Lastly, an airline is selling a service of transporting a person from point A to point B. Most customers might take price as the deciding factor when buying a ticket. This means that a ticket is a highly time sensitive and yet commoditized product.

By the time the plane is scheduled to take off and if a seat is yet to be sold, it is considered a sunk cost for the airline. It is not possible for them to keep the seat in their inventory and sell it at a later date. The airline operator that is able to maximize their “revenue per seat” will thus have an advantage over its competitors.

Foolish Bottom Line

In every industry, there are winners and losers. We will still be able to find some winners within this space, even if the industry as whole continues to find profits to be elusive. Singapore Airline has always been considered as the gold standard for a premium airline operator.

In fact it is one of the largest enterprises in Singapore and is part of the Straits Times Index (SGX: ^STI). For every investment, if we know our “circle of competence”, there is always an opportunity to a find a diamond in the rough, even in an industry as tough as the airlines.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.