Sunday, September 25, 2016

Do not buy the shares of airlines

Richard Branson says that you can start off as a billionaire, and then you buy an airline to become a millionaire.

Warren Buffett says that “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results.”

The moral of the story is: Do not buy the shares of airlines.

I am a Singaporean, and I am very proud of the achievement of the national airline, The Singapore Airlines Limited.

However, I will never buy the shares of The Singapore Airlines Limited.

The Singapore Airlines Limited is a multi-billion dollars company listed in the Singapore stock exchange.

It is part of the component of the Straits Times Index, which is the index stock representing the Singapore stock market.

Singapore Airlines has won multiple awards, and has many profitable quarters.

However, as with all airlines, retaining the cash it earns and shares the cash with the shareholder is a big challenge.

The nature of an airline requires it to have passenger planes.

That means it has to keep on buying new and large planes from Boeing or Airbus.  It has to spend a lot of money in servicing the planes so that passengers can fly safely.

It has to pay top money to the pilots and crew.  It has to spend a lot of money to train the pilots and crews.

When the oil price falls, the saving from lower fuel cost does not flow to the shareholders as special dividend.

The saving flows to the passengers instead.

The passengers expect a lower fare because the oil price is lower.  When the competing airlines reduce the fare to attract the passengers, Singapore Airlines has to do the same.

They cannot expect to charge very high fare, and still expect all flights to be full.

In this business, many unexpected events can affect the business and its profitability.

When MH370 went missing and MH17 got shoot down in Ukraine, many people dared not travel by air.

They were fearful of aviation disaster. 

When a country has mysterious disease afflicting the people, many people worldwide cancel their travel plan.

In the year when SARS affected a few countries, many flights were cancelled because of the cancellation.

No point flying a plane for just 10 passengers. 

However, the airlines still have to pay the salary of the office staff, pilots and cabin crew.  They still have to pay for the parking of the planes in hangar.

That is why an airline can have a few quarters of profits, and then a single quarter of devastating loss will neutralize all the profits.


Never buy the shares of airlines.    

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