You Don’t Want to Run an Airline

This 300-foot aluminum tube I'm about to step into is going to take me from San Francisco to Denver, ski trip. I'm excited, and so are most people when they click "buy" on a plane ticket.

Yeah, I can get there Thursday. Come on, focus, focus. I got a meeting in 3 minutes.

Sweet. Let's do this. Entering this little world of airport, plane airport, boom, you're entering a new place. People love to travel. People are taking more flights than ever before. So how have airlines been such a reliably terrible investment for 5 decades?

American Airlines stock is down.

The shares have been their worst day since 2009.

Spirit appears to be headed toward bankruptcy.

The amount of money invested in the airlines over that 50-year period is tens of billions more than the amount of profit they've made. The problem is they're all the same. They can fly to and from the same airport as every other airline.

No airline has a monopoly on, say, the Denver airport. Flying from Boston to Miami doesn't mean you have to fly Delta. You can fly any of 5 airlines on a given Monday. So to win customers, airlines can compete on price, who can do it cheaper, or what type of seat you get to sit in.

But even with seats, airlines don't have some huge number of options. They can realistically choose from only about 4 different planes to buy from Boeing or Airbus, all of which are the same basic shape that can only be configured in so many ways.

Maybe one airline has 28 inches of leg room and another has 30 inches, but that 2-inch difference or having a few more first-class seats isn't something you can build a major market-beating advantage on. So even though air travel is at an all-time high and planes are more full than ever before, airlines are on this treadmill, flying the same planes into the same destinations, into the same airports.

And then all of this routine travel is punctuated by the occasional catastrophe.

We've had a national tragedy. Two airplanes crashed into the World Trade Center.

The House rejected the $700 billion bailout plan, sending shockwaves through Wall Street. Stay at home. That is the order tonight. Those orders cover 75 million people across the United States.

Three mega events that either grounded planes completely or caused people to travel a lot less for months or even years. The absolute worst-case scenario for airlines is planes sitting idly on the ground. It's just money evaporating into the air.

It's not just that the planes aren't making money; they're losing money. For every hour a passenger plane spends idle on the ground, the major airlines lose at least $400, but this can easily creep toward $800, depending on the type of plane and how it was paid for.

It's such a problem area for airlines that it's how Southwest bucked the money-losing trend of airlines in the 2000s. Their entire fleet was built up out of exactly one type of plane, the Boeing 737. A departure from all the other airlines should flew multiple planes: bigger planes for longer or in-demand routes, medium-sized planes for national or less in-demand routes, and then small planes for short regional hops.

But with just one plane, Southwest only had to train staff and pilots on one plane with one seating layout. They only had to keep parts on hand for one plane, and their mechanics only needed to know how to troubleshoot and fix one plane.

So with fewer mistakes to be made and the ability to do things faster, they made their name on not having planes sit idly on the ground. Land the plane, get people off, get people back on, take off. Do it quicker than the other airlines.

10 minutes. That's how fast they turned around a plane in the '70s. Recent years, it's crept up to 35 minutes, but it's still the fastest of all the airlines. This was their magic sauce. The entire outperformance of Southwest Airlines stock, compared to other airlines, was almost entirely due to keeping their planes in the air.

This allowed them to keep their costs low, serve more destinations, and therefore keep ticket prices low. So imagine the inverse of that. When you don't even have the option of taking off, even if you wanted to, even if the customers wanted to, but the government says no.

Except the cost of fuel expenses for airlines are almost exactly the same. Still have to keep the lights on for all the staff that support the planes: health insurance, pensions, the fees they pay to airports for terminal space.

But most importantly, airplanes are huge, expensive, complicated machines that, just like a car, lose value and continue to lose value the moment an airline takes possession of them. They are a depreciating asset. There are 28,000 passenger planes in service around the worldright now.

If an airline wanted to roll out a new strategy to attract a more loyal customer base by offering more routes than any of its competitors, they would need more planes. To get these new planes, they would need to add themselves to the list of 15,000 planes that are currently on order but haven't been built.

This is the commercial passenger plane order backlog sitting at an all-time high. Every single one of these planes will need to be built by just one of two companies: Boeing or Airbus. Boeing has 3 assembly lines in the US, and Airbus has 4 around the world.

Massive complexes where each plane body slides along at a snail's pace, assembling parts and riveting all the pieces that started to be collected for it over a year before it reaches this stage. A single narrow-body jet takes about 1 year to build, and a wide-body jet like the 787, 3 to 5 months longer.

Combined, these two companies can manufacture about 100 planes per month. Any stoppage, and the backlog just continues to grow. So today, if an airline were to buy either a Boeing 737 or an Airbus A320, they won't get it for at least 8 years.

And that's assuming that nothing goes wrong along the way, like, oh, I don't know, an emergency exit door blowing out mid-flight that causes Boeing to have to stop producing planes on 2 of its assembly lines. The airlines are at the mercy of two companies designing and assembling what is arguably the most complex product on the planet.

United Airlines did some math last year and found that because of just how severe this plane shortage had become, the cheapest planes it could buy were actually its own fleet. Their stock had become so cheap, never having really recovered from COVID.

Investors worry of yet another event that hit airline stocks, that the market value of the company was less than the value of its fleet by a lot. United Airlines has 950 planes in its fleet. Despite an average age of 16 years, the stoppage of production at Boeing had caused the value of planes to hold up much better than at any other point in history.

So instead of putting down more orders for planes or buying aircraft off the secondary market, United started buying its own stock back from the market. This is why United Airlines stock did this between August and December of 2024.

It's also part of the reason Elliott Management began an activist campaign into Southwest Airlines, explicitly pointing out that the total market value of the company was less than the total value of Southwest's fleet. In other words, even if you had all the cash necessary to buy 857 planes like was in Southwest's fleet, you wouldn't be able to take delivery of them for 8 to 10 years, making any planes that were well-maintained and in flyable condition today far more valuable than normal.

Let's just back out a second and see how this all looks going back 20 years. As the smoke cleared and travel really came back in 2004, post-9/11, the reasonable investor might see the airlines as a good buy. Warren Buffett even loaded up in 2016, Delta, United American, and Southwest.

Some returns, but huge swings. That same reasonable investor also figured the plane manufacturers would be a part of the conversation. Boeing, Airbus. Okay, this is a much better group. But then the lesser-known, equally important companies that help airlines maintain their fleet or lease additional planes.

The airlines have to repair their planes just as a normal course of business, but that dynamic has been amplified as they wait to have their new plane orders filled, using planes that they would have preferred to retire in the meantime.

FTAI helps store and lease planes for the airlines. PICO helps maintain planes with a variety of different parts. TransDime also helps maintain commercial planes with a variety of parts. The entire stack of the airline industry, I don't even have to say it, the chart says it all.

You would have actually lost money on American Airlines over that period, and only Delta has eclipsed Boeing, and that has only happened in the last couple of months of 2024. All with these wild gyrations and 2 major bankruptcies along the way.

And then TransDime. Turns out it's a much better business selling parts to airlines rather than flying the passengers. Just ask Spirit Airlines, the latest bankruptcy in a long list of airline bankruptcies. In fact, the 213th airline bankruptcy since 1977.

This company, in the budget category, fiercely competing for the least profitable customer segment, with Southwest and Frontier, was paying about $1.08 million per year just to maintain each plane in its fleet. A chunk of that going to TransDime, a chunk of that going to FTAI.

And just because Spirit's planes aren't carrying the Spirit logo anymore, it doesn't mean they're going out of service. They'll go to another airline who will pay about the same $1.08 million per year to maintain them. A chunk of that going to TransDime, a chunk of that going to FTAI.

Airlines are trapped in this little area of the air travel industry that takes the brunt of all the bad parts of the industry: weather, customer service, huge capital costs, and mostly competes on price. Who can fly me cheaper?

It amazes me that people continue to start new airlines. I mean, look at this list of airline bankruptcies since 1977. United is on here, Delta is on here, Hawaiian, Continental, Pan Am, American. And so after 50 years, after all of the bankruptcies, after all of the bailouts, the entire profit of the airline industry is just $22 billion, which is a lot of money, but it's less than Google makes in profit in one quarter.

And most people would agree that the air travel product kind of sucks. It's not that customers are being delighted, and delighting them just happens to cost so much more. It is, though, an incredible investment for the areas around airports.

You get on a plane and end up in some faraway place, sipping coffee in a café with money that had no other way of making its way there. You are a wallet with legs, and the airports are the portals for which you can walk into a new ecosystem.

This is no secret to governments. Many of them publish reports on just how lucrative their airport systems are. Travel to Florida using one of the state's 122 airports, and they calculate you'll be spending, once you get there, bare minimum, $1,258.

A figure that easily climbs over $2,000 in total economic impact. So air travel isn't going anywhere, but the excess profits are never going to end up in the pockets of the airlines or the investors of the airlines. Yes, there's definitely time to trade them, but to own them?

The airline industry, it's a labor-intensive, capital-intensive, largely commodity-type business, and it's been, you know, a death trap for investors.

They're one of 4 big and well-known businesses that are not great places to put your money as an investor. We're going to be talking about one of the other 3 here in the next couple of weeks, so if you enjoyed this, hit the subscribe button, and I'll see you in the next one.