The airline industry…
Where investment dreams go to die.
It sure does look appealing at first.
Airlines collect revenues up front. Costs like fuel and plane leases have been coming down.
Collecting cash up-front and paying suppliers later is a quality many investors are looking for.
But the problems outweigh these minor benefits.
The industry has little to no regulation making it easy for competitors to jump and in and out whenever profits are abound (it doesn’t happen often).
If you want to become a millionaire, Richard Branson says, ‘start as a billionaire and then buy an airline’.
While he’s probably correct, there is a pocket in the industry, where investors don’t get banged around.
I’m talking about airports. Enter Sydney Airport Holdings Pty Ltd [ASX:SYD]…
The government is terrible at everything
Sydney Airport is the only one in Sydney.
It’s why sales have increased each year since 2010. It’s also why 23% of the $1.5 billion Sydney Airport makes in sales drops down into profits.
It’s amazing to see such a profitable company remain that way for so long.
Usually competition will ruin it all for investors. Other people will jump into the Airport game, Sydney Airport will lose their monopoly and that will be that for this high flyer.
But no one is entering the airport game. The Aussie government won’t let them.
It’s regulation that makes Sydney Airport such a wonderful business.
Any air carrier wanting to land in Sydney has no other choice. They’ve got to pay the exorbitant runway fee. Or they can turnaround.
So why weren’t investors scared in 2017, when Sydney Airport was about to lose their monopoly?
From the ABC:
‘The Federal Government has confirmed it will build Sydney’s second airport at Badgerys Creek, after Sydney Airport declined their first option to take on the project.
‘Sydney Airport Group cited the “risks” on monetary return for their investors as its main reason for declining the Government’s offer.’
Wait a minute…
Why would Sydney Airport not want to own another airport?
With another competitor in the market, Sydney Airport loses their monopoly and pricing power.
Here’s the rub…
Sydney Airport does want to own the second airport in Sydney. They just don’t want to build it. They’ll leave that to the government who has oodles of money but are terrible at making it.
That’s also what investors are expecting.
Sydney Airport shares didn’t even blink at the mention of a second airport. They remained at their extremely fat 44-times earnings multiple.
Why spend the billions to build it when the government will do it? Then, when the public sector fails to turn a profit (which usually happens), Sydney Airport can step in and take it off their hands.
It’s not just airports the government sucks at either.
The national broadband network (NBN) is a wonderful example.
In 2009, a Rudd-led government announced a new $30 billion project. It would roll fast connectivity to 93% of Aussies.
Our fixed line internet speeds were going to get four-times faster, from 25 megabits per second (Mps) to 100 Mps.
What we got instead was a network, hardly different from original copper wire. Costs have blown out to $51 million and we’re almost three years past the planned finished date.
Rudd’s attempt to rewrite history
You’ve seen the headlines. Maybe you even have NBN.
It’s hard to find anyone who likes it. That is, other than Kevin himself.
Rudd recently hit back against the critics.
‘It was never envisaged that the NBN generate a commercial rate of return,’ he said.
‘That has never been the case with fundamental economic infrastructure. If it were, the railway and road networks would never have been built. Such ideological claptrap fails to understand the fundamental economic drivers that basic infrastructure provides for the rest of the economy.’
Sorry Kevin, but the Australian Financial Review (AFR) is calling bullshit…
‘Rudd stood in the Prime Minister’s courtyard beside Wayne Swan on April 7, 2009 as his then Treasurer uttered these immortal words: “I believe this is a responsible investment. We are establishing a commercial entity. We are putting it together on commercial terms. And it should give a return over time to the Australian people. So there couldn’t be a better investment.”’
Then Rudd’s party members went on to say things like…
‘The Government can expect a return on its equity investment sufficient to fully cover its cost of funds.’
Or they said…
‘The study (a viability study of the NBN project) confirms that the NBN business model establishes that taxpayers are paid back their investment with a modest return by year 15 of the project on the basis that privatisation is completed.’
One good thing to come out of this botched project…
Investment opportunities as the private sector comes in to pick up the pieces.
Reclaiming your NBN tax
You might have heard about this whole 5G thing.
It’s the fifth generation of connectivity.
It’s better than 4G, in that it allows us to send and receive more data faster.
Every man and his dog have built up this 5G revolution.
With more data and faster speeds, technologies like driverless cars and the Internet of Things all becomes possible on a larger scale.
Whether you believe in the hype or not, there’s money to be made.
The government has bungled yet another project. And there’s an opportunity for the private sector to come in and profit.
With a choice investment, you might even make back the tax the government spent on the blown out NBN fiasco. What you might want to look for is a telco like Sydney Airport.
Competition is bad. Regulation (if it keeps others out) is good.
Like the only runway in Sydney, you may want to find telcos with fibre optic networks that are very hard to copy.
Maybe they own the strategic rights to a cable that goes from city to city, or country to country. Have a look around and see if you can clean up from yet another government failure.
Editor, Money Morning
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