MAPPING YOUR INVESTMENT ROUTES
In this section, we extract some important lines of enquiry from our sector analysis framework that will help to move your analysis forward. If you plan to invest in an airline company, consider these several factors before you make a final decision.
Leading airline operators usually offer several airline brands, which can be split into three groups: the traditional FSC carriers; the so-called hybrids, which have low-cost business strategies but still offer some full-service features; and the “pure” LCCs, which get passengers from A to B but provide little else. For this framework, we will classify the hybrids and the LCCs together.
To begin with, it is worth noting a company’s route profile. Is the route profile dominated by low-cost brands or fullservice operations? How does the company decide where to deploy each business model?
Having established the company’s business model, figuratively look inside its aeroplanes and understand how seat demand reacts to changes in price. At a broad level, analyse if this differs according to passenger profile – leisure/business. If you would like to dig deeper, observe if price sensitivity varies with route type (e.g., short-haul versus medium or long haul; domestic versus international) and with the time of year.
Unless the company is a niche, single-country player, it will most likely offer a mixture of domestic and international routes. Study what these are and the number of passengers who travel for business compared with those who journey at their leisure. Does the airline plan to expand its route network or has it earmarked routes for closure?
NETWORKS AND FLEET MANAGEMENT
If your flights are always quiet or, conversely, constantly operating at full capacity, it may indicate that the company has capacity-related issues. Scrutinise which routes experience the most significant mismatch between supply and demand. What add-on services or promotions does the airline offer to increase the load factor, and do these have an impact on cost?
Not long ago, time spent at an airport was a reasonably enjoyable part of the flying experience. Now that time often feels like an endurance test. Airlines still need airports, however, so how do they decide which ones to use? Identify whether the airports an airline company is using are centrally located or situated many kilometres from the actual destination. Lastly, look at time slots and, where possible, gate numbers – this information can be quite revealing.
Old aeroplanes make passengers—and investors—nervous. Study the makeup of a company’s fleet and determine its average age. Does it align with the operator’s route profile (e.g., larger aircraft for long-haul routes; smaller planes for shorter trips)?
Key routes, such as Singapore/Hong Kong, used to be the preserve of a select few FSC carriers. Fortunately, this arrangement has been disrupted by the LCCs, who introduced competition and sensible fare structures. Take time to look at the number of carriers on a company’s key routes and determine how the market will evolve and the impact that evolution may have on demand and pricing.
Among the key quantitative metrics to track, ascertain the company’s capacity growth expectations, measured in available seat kilometres (ASKs). Simultaneously, assess per-unit revenue expectations, also known as revenue passenger kilometres (RPKs).
TECHNOLOGY, EFFICIENCY, AND COST CUTTING
Earlier, we mentioned the statist mindset prevalent among airlines companies, which can influence attitudes toward technology. Consider how well an operator is embracing change. For example, does the airline offer web/mobile check-in, then follow through with automated bag-drop facilities? What about the use of robots in the baggage handling, cargo, supplies, cleaning, and refurbishment divisions?
THE ENVIRONMENT AND CLIMATE CHANGE
Up to now, the airline industry has avoided intense environmental scrutiny, but that doesn’t mean you shouldn’t examine a company’s plans to reduce emissions and become more fuel-efficient. Find out if the company monitors the cabin air quality of its passenger flights. Another line of enquiry could relate to the regulations governing noise produced by the company’s aircraft during takeoff and landing.
PREPARE FOR LANDING
And finally, remember Warren Buffett and his gloomy view of the airline industry? Well in 2016, he spent more than USD1.3 billion accumulating stocks across four major US airlines: American Airlines, Delta, Southwest Airlines, and United Continental.
Changes of heart are, of course, free, but Buffet’s actions serve to highlight the undulating dynamics of the airline business model: one minute it’s a complete disaster and the next a heaven-sent opportunity. It also underscores why analysis is so enjoyable – you never know what you are going to discover.
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