If you are wondering why are airline stocks such bad investments, you need to look no further than the mishaps and broken business models that each of the airlines have embraced.
Few weeks ago, while chaos over Ethiopian Air crash was in the news, Wow Air – a budget Icelandic airline that’s been offering ridiculously cheap tickets at $99 across the Atlantic since 2012, abruptly closed operations stranding more than 1,000 passengers across the U.S. and Europe. It was well known that WOW Air was rapidly losing money and cutting routes, and a purchase by Icelandair or another major airline would be needed to rescue the airline. Well, no one stepped up to buy them.
But, the passengers paid no heed to any of the news of an impending shutdown and instead, gobbled up the $99 fares, until the music stopped. Wow Air is not alone in the graveyard. United’s Ted is dead and Delta’s Song is long gone. And there are several more low cost airlines that have gone six feet under.
So, why are airlines constantly trying to win the low price game only to fold eventually?
Future Wealth’s View
In many ways, the airlines are fighting the wrong battle. Instead of fighting to offer lowest fares, what they need to focus on is getting people to their destination as soon as possible. Most friends and colleagues at the office are quick to commiserate when you tell them you are going to Hong Kong for business meetings. The reason is that whether you are travelling coach or business or first, it is still 12-14 hours of painful travel that leaves one exhausted. While the caviar in first class and flat-bed in business class may help, it is still uncomfortable travel, be it to Hong Kong or Sydney or Tel Aviv.
Now, consider this – what if there was a supersonic flight like the Concorde (without the pollution, noise and inefficiency) that could take a select few (30-50 people) on United’s new “Supersonic” or Delta’s “Mach One” from San Francisco to Hong Kong in 6 hours from a private terminal with the caviar and flat-bed for the same price as a first class ticket? Would’nt you then be much happier without the jet lag and would your colleagues still feel bad for you then? But ah, you say, no one will pay for it.
Well, if one can buy a Tesla for $100K instead of buying 4 Nissan Leaf’s for the same price, just to show off to neighbors and office colleagues that they now one of the select elite – yes, they will pay for the privilege of ultra expensive travel. Not because they can afford it but when everyone at the office says “That is a long flight to Hong Kong”, these “select few” cannot wait to say “It could have been a long flight but I am going on Delta’s Mach One from a private terminal in San Francisco”. Oooh, the prestige of feeling pompous and showing off material wealth never gets old!
But, this scenario of faster flight may never happen because Boeing is busy building airplanes that take people into the water instead of their destination and Airbus is occupied with transporting entire towns of people in one aircraft. To put in perspective, it took 55 years from the time the Wright Brothers invented a plane flying 7 miles an hour to the Boeing 707 that flew 550 miles an hour in 1958. And since then, we have become stuck at that speed but have added fine wine, massages, caviar, flat-bed, poor service and not much else.
As Paul Newman fondly said on the film – Butch Cassidy and Sundance Kid, “I have the vision and the world is wearing bifocals”. Stay away from airline stocks – you will sleep better – flatbed or not.