‘For some years, I have been afflicted with the belief that flight is possible to man. My disease has increased in severity and I fell that it will soon cost me an increase amount of money if not my life.’
This is what Wilbur Wright wrote three years before his brother Orville and he tested their powered aircraft at Kitty Hawk.
Orville managed to stay in the air for just 12 seconds on his first attempt. On the fourth, Wilbur flew for 57 seconds.
It was a monumental moment in aviation history.
Right after their flight, the Wright brothers walked 6 km to send a telegram to their father.
‘Success four flights Thursday morning all against twenty one mile wind start from level with engine power alone average speed through air thirty one miles longest 57 seconds inform Press home Christmas.’
Had Warren Buffett been there at Kitty Hawk, he’d have shot Orville and Wilbur out of the sky, saving investors a lot of pain to come.
Demand cuts bad century short
Want to lose money fast?
Put it in the airline industry.
From the late 1970s to the 2000s, investors avoided airlines like the plague. The performance of the industry was abysmal.
Investors like Warren Buffett went as far as to call airlines ‘death traps’.
A lot of this had to do with the economic reality of airlines.
Passengers usually care about price more than anything else. Investments into planes and other equipment are massive. But there aren’t many other barriers stopping new competitors from coming into the industry.
Essentially, airlines are in a race to the bottom price. And it doesn’t help that running costs, like labour and equipment, keep rising.
Consulting management firm, McKinsey & Company said it best, advising investors to ‘just pack their bags and go home.’
But in just the last few years, the industry has produced some of the best performers in the market.
US airlines like Southwest Airlines [NYSE:LUV] and Delta Air Lines [NYSE:DAL] are up 390% and 288% over the last five years.
Source: Google Finance
Even our very own Qantas Airlines Ltd [ASX:QAN] has climbed more than 220% over the same time.
It’s made many investors reconsider the industry and its potential for the future. Even Buffett has changed his tune.
In 2016, Warren bought stakes in American Airlines Group [NASDAQ:AAL], Southwest, Delta and United Continental Holdings [NYSE:UAL].
‘It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope,’ Buffett told CNBC.
So why are airlines around the world continuing to climb?
One word. Demand.
We can’t train pilots quickly enough
Since 2009, air travel demand has grown every year. And according to the International Air Travel Association, demand could double over the next 20 years.
Its why Boeing Co. [NYSE:BA] has recently said we are in dire need of more pilots. The aircraft manufacturer predicts we’ll need 637,000 new airline pilots by 2036.
That’s 87 new pilots a day.
Why so many?
Not only do we need more pilots because more people want to travel by air. We need more pilots because airlines need to replace current pilots approaching retirement. Pilots usually have a maximum working age of about 65 years old.
And it’s why Qantas is now planning to set up a new pilot training schools.
Bloomberg wrote on Friday:
‘The Australian airline is setting up a school to train as many as 500 pilots a year, it said Thursday as it reported record first-half profits. The carrier will initially produce about 100 pilots a year just for Qantas.
‘…The Qantas facility due to open in 2019 will meet just a fraction of the industry’s needs. The Asia-Pacific region alone will require more than a quarter of a million new pilots by 2036, about 40 percent of the global total needed, according to Boeing Co.’
Almost anyone might draw the conclusion that the good times are still ahead for airlines. And in the short-term that could well be true.
But could extremely fast trains send airlines back into another bad century?
The fastest way to travel
I wouldn’t say I’m a well-travelled man. But last year I went to France.
It was a marketing conference, which drew people from all corners of the earth.
Those coming from the UK took the train. The Euro Star, an underground train, can get you from London to Paris in a little over two hours.
The flight between the two countries is far shorter, a little over an hour. However, when you add up waiting times and getting on and off the plane, the train starts to look far more appealing.
In fact, considering check-in waiting times, travelling on the Euro Star saves you more than an hour.
Imagine if the speed of these trains was to increase dramatically.
The fastest train in the world is the Shanghai Maglev, which travels 429 kmph. Proposed ‘hyperloop’ trains could top speeds of 1,126 kmph.
Such speeds would get you from Melbourne to Sydney in around 45 mins.
The concept of hyperloop travel was proposed by Elon Musk, and is currently under development.
A good way to wrap your head around it is to think of a pod like train traveling in an underground tube. The tube is sealed, and has the air pumped out to create a vacuum or semi-vacuum.
Magnetic accelerators would be planted along the length of the pod, propelling it forward. And it’s in this low pressure environment, surrounded by cushions of air, that these pods could reach incredible speeds. If it works as designed.
And according to live science, Musk’s boring (digging) company, Boring Co. received approval to start digging a hyperloop tunnel under Washington, D.C.
While the commercialisation might still be years away, the speed and convenience of hyperloop travel could seriously reduce demand for air travel.
But for now, there’s still time to profit from airlines. Just be sure you get out before the industry nosedives.
Editor, Money Morning