Billionaire investor Warren Buffett once described himself as a “dummy” because he is tempted to invest in commercial airlines. But he learned twice the hard way that the industry can be a risky bet.
Airline stocks have surged since the start of the pandemic, showing how volatile this sector can be.
“It seems that airlines once or twice a decade are faced with these really hard-to-handle exogenous shocks, be it something like 9/11 or the Great Recession,” said Adam Gordon, managing director and partner of Boston Consulting Group’s Airline Practice. …
The airline industry already requires significant assets and has narrow margins.
Despite the risks, the industry has experienced periods of consistent growth. In the decade leading up to Covid, airlines saw significant revenue growth, which analysts attribute to airline restructuring after 9/11.
These periods can give investors a false sense of security. In 2017, the CEO of American Airlines said he was confident the business would never lose money again.
Airline stocks can be attractive to investors because the industry is critical to the global economy.
“If you just take a step back and think about what services the airlines offer, they’ll put you in a metal tube, lift you 40,000 feet, and take you in relative or absolute comfort at hundreds of miles per hour to get from point A to point B. And if you are thinking about replacements for this service, it seems like they really are not, ”- said Gordon.
“So it’s kind of surprising to me that an industry that provides this kind of service and does it with absolutely flawless performance and safety record can be under such pressure,” he added.
Watch the video above to see if investors should stay out of the sector and why passenger airlines are struggling to stay profitable.