Getting there – or, as has more often been the case, getting back – may be another matter, not just because there remains the outstanding question of what a Brexit ‘no deal’ will mean for airlines flying to the UK, but because their numbers appear to be dwindling by the week. Last month saw the collapse of two more European operators, Cypriot operator Cobalt Air and Danish airline Primera Air, adding to a growing list of casualties that have at several points over the past few years left passengers stranded in various European destinations.
But should investors give up on this troublesome sector altogether? Warren Buffett has been consistently critical of airlines as investments, and his view that “the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money” perfectly describes many airlines, not least Flybe which this week put itself up for sale after consistently struggling to turn a profit. Of course, many failed airlines have been very small – a massive disadvantage in an industry in which scale is becoming a necessity to overcome rising costs, not least – until the last couple of weeks at least – a rising oil price. With no sign of air travel demand abating, bigger players could ultimately benefit from the current squeeze as overcapacity is taken out of the market.
Yet as the collapse of flag-carrier Alitalia in 2017 shows, industry conditions are toughening for major players, too, with the finger pointed firmly at aggressive competition from the likes of Ryanair. The Irish airline has itself suffered a difficult year disrupted by strikes and, last week, the confiscation of one of its planes by French authorities over an unpaid bill of €525,000 relating to a dispute over its receipt of illegal state subsidies from a regional airport. Ryanair eventually coughed up the cash, but this is a situation worth keeping an eye on – last month, the European Commission opened an in-depth investigation into whether the airline had again been in breach of state aid rules, this time in respect of its agreements with Frankfurt-Hahn airport in Germany. It is concerned that these “may give Ryanair an undue economic advantage vis-à-vis its competitors that might amount to incompatible aid in favour of Ryanair”, similar to concerns previously expressed by rivals.
Whatever the outcome of the probe, it is symptomatic of the incredible complexity that sits behind the airline industry, whether logistical, political or financial. So, while airline shares may be cheap right now, like a Ryanair flight they are cheap for a reason.
