When Airlines Become Wonderful Investments

When Warren Buffett speaks, the investing world listens. In his 2007 Berkshire Hathaway annual shareholder’s letter, Buffett penned the following to express his disdain for airlines as investments:

“If a farsighted capitalist had been present at Kitty Hawk [the legendary place where the first powered airplane flights took place], he would have done his successors a huge favour by shooting Orville down.”

It’s hard to argue with Buffett. Airlines are in an industry with poor economic characteristics; operators require huge amounts of capital to run the business, yet their product (seats on a plane) is often seen as something that’s commoditized without much pricing power.

These difficulties are illustrated aptly by Singapore Airlines Ltd (SGX: C6L), Singapore’s flagship air carrier. Over the past decade, its business has been abject. For instance, its profit of S$1.4 billion in the fiscal year ended 31 March 2005 has become just S$578 million over the last 12 months.

But, does this mean that all airlines are necessarily lousy businesses and will thus make for poor investments? Not quite.

Since its initial public offering in 1998, the airline, Ryanair Holdings plc, has seen its shares generate a serious 1,464% return. Over the same period as we saw with Singapore Airlines, Ryanair’s profits had spiked from €280 million to €1.48 billion.

What this shows is that sparkling diamonds can at times truly be found hiding within big lumps of unappealing and dirty coal.

This does not mean that investors should ignore the fact that it can be exceedingly rare to locate a great business in a rubbish industry. But when looking at companies in industries with horrible economics, it may not make sense for us to automatically dump it into the same category as its peers.

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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 writer Chong Ser Jing owns shares in Berkshire Hathaway.