Historically, the airline sector has been an investing graveyard.
In the 1976 film Network, after television anchorman Howard Beale is told that his show will be axed in two weeks due to falling ratings, Beale's response is to announce that he will kill himself on air during next Tuesday's show.
Beale's popularity soars as a result, leading the network to give him a new show where his catchphrase "I'm as mad as hell and I'm not going to take this anymore" enters the popular lexicon.
It's not unusual to find an investor who is, just like Beale, as "as mad as hell" thanks to the poor performance of their investments.
One sector where investors must be used to making losses is the airline sector. No matter how glamorous and profitable the airline business appears to be, owning an airline has historically been a terrific way to lose money. As the old joke goes, the fastest way to become a millionaire is to be a billionaire and buy an airline!
Zappa Air
The late great Frank Zappa once said that "you can't be a real country unless you have a beer and an airline." Many countries have taken Zappa's axiom to heart and treat their national carriers as some sort of virility symbol into which money is poured with no expectation of a return.
It's tough enough to compete in a market where potential customers tend to be very price sensitive. For commercial airlines the nightmare is when they are in direct competition against a state-owned airline that is largely indifferent to making losses.
Very often the national carrier can undercut the profit-seeking airline because they pass their losses onto their taxpayers, rather than shareholders.
Should you find yourself thinking, "I must buy shares in an airline", bear in mind that Warren Buffett says that the best thing for investors in airlines would have been if the Wright Brothers had been shot down! This is because the accumulated profits of the global airline business since 1903 are negative!
Jobs for life
Having to compete against state-owned airlines is bad enough on its own. Unfortunately many commercial airlines are saddled with large pension scheme deficits whilst having to deal with trade unions. British Airways (LSE: BAY) is the classic example.
Another problem for airlines is that the demand for passenger travel will sometimes fall sharply and disproportionately not just because of economic factors, but also in response to events such as terrorist attacks or wars.
The Eyjafjallajökull (don't ask me to pronounce it!) volcanic eruption last April severely disrupted European air traffic for weeks and the airlines were then stuffed by the European Union's attempt to saddle them with the bill for passenger compensation even though the delays were caused by the EU's over-reaction to the volcano!
A few good planes
I'm not writing off the entire airline sector, just most of it.
The sector contains some successful and profitable companies such as Easyjet (LSE: EZJ), Ryanair (LSE: RYA) and the low-cost pioneer SouthWest Airlines. But the profitable low-cost carriers are the exception to the rule; historically the vast majority of airlines soak up investors' and taxpayers' capital and give back little in return.
The profitable low-cost carriers all have one key factor in common. Low-cost carriers aren't saddled with the high legacy costs of conventional carriers such as inflexible labour agreements and final salary pension schemes which threaten to bankrupt the company.
For example, if you look at the notes to British Airways' accounts you'll soon be struck by the fact that its pension scheme assets are worth several times more than the company's stock market value! As is often remarked, British Airways is a pension scheme with a huge deficit which just happens run an airline as an expensive sideline.
The future -- it's mostly bad
Airlines currently have an advantage over their main competitors (buses, cars, ships and trains) because aviation fuel isn't taxed.
The tax-exempt status of aviation fuel is due to the Convention on International Civil Aviation of 1944 -- can this exemption last much longer whilst national budgets are under pressure and politicians need to placate the green lobby?
After all, taxing aviation fuel can be painted as environmentally friendly and doing so would hammer the airlines' main competitive advantage and cut the demand for passenger flights.
Despite the best attentions of European competition policymakers, politicians still haven't lost their love for subsidising national carriers and many of the privatised former state-owned airlines still manage to receive disguised subsidises. If these companies were wound-up, and their takeoff and landing slots auctioned off to the low-cost carriers, this might become a sector worth investing in!
The low-cost carriers are well placed for the future, particularly because passengers have become accustomed to flying to and from regional airports and then taking a taxi, bus or train to get to their destination (a bit like passengers to Heathrow and Gatwick already do). But the national carriers are likely to remain in business; at least until taxpayers get fed up with propping them up.
Airlines are not the sort of sector I'd normally look at, unless a particularly attractive opportunity arose. There are too many alternatives investments and any business where many of your competitors are largely indifferent to making losses is not a business I'd wish to invest in.
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