Airline stocks may stall on the runway - Eddington

[Out-of-balance]

By Nick Lucchinelli
SYDNEY, Oct 30 AAP - Aviation's current sweet spot may be short-lived, particularly in the domestic market, says the Australian businessman who ran three international airlines, Sir Rod Eddington.
A Rhodes Scholar and business adviser to Labor leader Kevin Rudd, Sir Rod led Cathay Pacific, Ansett and British Airways at various times over the past two decades.
Sir Rod said aviation had been "cash flow negative since the Wright brothers".
"The industry is economically dysfunctional," he told an Australian British Chamber of Commerce luncheon today.
While capacity constraints had led to a temporary hike in profits, that would be tested soon when more planes and new airlines entered the market.
"In some ways, the domestic (Australian) market is one of the few truly rational markets in the world because it's not subsidised," Sir Rod said.
"History has said this market will support two airlines."
It was already supporting "two and a half", with the success of the Qantas-owned budget offshoot Jetstar.
Although "the vast majority of airlines that start fail" in the Australian market, the looming entry of the Singapore Airlines-backed Tiger Air would be interesting because it was well resourced and managed.
"It will be interesting if Tiger steps up to 20 planes," Sir Rod mused.
In addition to the new seats Tiger will introduce to the domestic market with its five planes next month, Qantas has orders for 12 new Bombardier Q400s turboprop aircraft for its regional Qantaslink network.
Similarly, Virgin Blue has orders for 20 Embraer jets to use domestically.
There will also be more international seats available, with Air Asia X promising $99 flights between the Gold Coast and Kuala Lumpur, and Qantas taking delivery of 65 Boeing 787 Dreamliners to support the long-haul international plans of Jetstar.
And Virgin Blue's V Australia brand will fly to the US from next year.
Sir Rod said the entire global industry generated only about $5 billion profit because of intense competition and government ownership and subidisation of airlines.
He said airlines were not a particularly good investment and the challenges would increase as global warming, infrastructure shortfalls and a shortage of pilots and engineers took their toll.
"For every Richard Branson ... there are hundreds who have failed," Sir Rodd said.
AAP nrl/jmc

[Launch_code_Harry]

If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You've got huge fixed costs, you've got strong labor unions, and you've got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: 'My name is Warren, and I'm an aeroholic.' And then they talk me down.

Warren Buffet 2002

[Going Boeing]

Sir Rodd said,

"For every Richard Branson ... there are hundreds who have failed,"

including, Sir Rodd. His performances at CX,AN and BA were mediocre at best (dismal in the case of AN). The media shouldn't be going to him as an industry "expert" - there are many others that have a more accurate long term view of what the airline industry is going to do than Sir Rodd.

[excellr8]

Interesting to note though that Buffet's company Berkshire Hathaway is a majority shareholder in NETJETS. Which is by no means a small charter company........He must really have the bug!

[Wod]

"In some ways, the domestic (Australian) market is one of the few truly rational markets in the world because it's not subsidised."

And even that statement has to be qualified.

We should perhaps be careful what we wish for because history suggests that growth is followed by (uneven) contraction.

[Buster Hyman]

dismal in the case of AN

I have to disagree, he did exactly what his snivelling Masters bid of him. AN was very profitable during his time...albeit the last time they were profitable. Its amazing how much a fire sale can add to the bottom line...

[The Bunglerat]

We've all heard the age-old joke: "If you want to make a small fortune out of aviation, start with a large one."

If such a notion is indeed true, then I'd say Eddington's comments are right on the money!

[redsnail]

Not only does Berkshire Hathaway own Netjets (USA, International and Europe), BH also owns Flight Safety, the sim training providers.

[Fred Gassit]

Neither of which are airlines who are obliged to fly sometimes half empty aircraft around.
I flew on a 777 during SARS and it was about a quarter full if that.
I've often thought since then that an airline would have to be one of the worst businesses to invest in, at least in the long term.

[Capn Bloggs]

Whinge Whinge Whinge. If they ALL put their fares up by 10% the pax couldn't give two hoots (not that they could do anything about it if they did) and everybody who actually worked, owned and ran the airlines would be happy. Sometimes it makes you wonder whether regulation was such a bad idea... Is my middle name Karl?

[redsnail]

Fred Gassit, we do have to do positioning flights. They are empty legs. Some of these positioning flights range from 10 min to well over 3 hours.
Fortunately, the business has grown so that the revenue to positioning ratio's improved a lot.

The bizjet market in Europe (yes I know it's not Australia but Asia's not far away) has grown massively since the demise of the Concorde, Sept 11 and any time there's a "scare" in London.

The smarter airlines are now teaming up with bizjet operators to provide intra Europe "first class" or setting up business class only aircraft to provide that service.

[Out-of-balance]

Don't believe everything you read!

Interesting - Sir Rod is a director of Allco Group. Remember them? Didn’t they try unsuccessfully to s buy an airline (some will say steal).

Hats off to Godfrey - Eddington is playing at something!

[QFinsider]

out of balance...

Beat me to the draw!
Spot on.
He is a current Director and despite being given a bigger pot to pee in by the queen, he always was a news corp stooge.
Funny how he bobs up now saying airlines aren't good investments...

[aircraft]

Well, well. Several posters on the same page of a PPrune thread expressing the idea that maybe aviation is not such a good business!

Thankyou, Launch_code_Harry, for that quote. Not one that I had yet seen. If people bothered to look, they would find that aviation history is littered with such quotes.

[ScottyDoo]

Yes, yes and most of them were by you. Aircraft, the visionary.

Let's hear it then Aircraft, how should the world be getting from A to B since airlines and airliners are all a waste of time and money?

Come back when you have something sensible to add!!

Sir Rod mused......Sir Rodd said

Rod...Rodd... How about Sir Rodney? Or maybe he doesn't wanna be compared with that moron from The Wizard of Id.....??

[Sunfish]

If any of you ever win the lottery or have an inheritance from a rich uncle and then visit a good accountant in Australia, they will give you the following advice................"Whinge with the rest of them. If someone whines to you how he is paying 40 cents in the dollar, you say you are too - you don't tell him how to avoid it. If someeone whines about the price of petrol, so do you. You never ever tell anyone how much money you are making or how much tax you don't pay."

The same applies to business, especialy private companies. You will never hear how much money they are making or how good business is, and which markets are the most profitable. All you will ever hear is whinging. It's the same with farmers, if it rains "theres going to be too much grass during the fire season", or "I can't get a tractor into the paddocks". If lamb or wool prices go up "I can't afford to buy stock".

Eddington is just whinging. The returns from airlines, if they are successful, can be spectacular, but like all activities, there is a risk attached, and the risks match the returns because investors are definitely not stupid. The Australian market is NOT a level playing field thanks to Qantas, which has a disproportionate amount of market power thanks to its close links to Government and what remains of its status as an Australian Icon.

Yes there are massive distortions and subsidies all around the world, but the rational approach to their existence is to make use of them and save your money to invest in something else that makes a better return.

For example, Ansett had its re-equipment purchase in 1979 financed by the good old American taxpayer at 3% when cash rates were about 15%. That was a good deal for Australia. If we really wanted our economy to benefit from better air travel, we would open the skies, cut Qantas adrift and let SIA, CX, and everyone else fight for market share and reap the rewards in rock bottom fares.