Terry Smith on the Airline Industry | Summary and Q&A

TL;DR

The airline industry is a consistently losing business, with average returns of -5% per annum, making it a poor investment choice.

Key Insights

• 🔠 The airline industry has consistently failed as an investment, with average returns on capital lower than the cost of capital.
• 👻 Recapitalization allows airlines to continue operating despite their poor financial performance.
• 🖤 Fund managers who invest in airlines may lack understanding or belief in the industry's track record.
• ⌛ Timing the market and predicting airline performance accurately is extremely difficult.

Transcript

by this this is an industry sector the airline industry it's a truly awful sector from an investment standpoint um this is 20 years so there's 1994 to 2014. i didn't choose them because they suit me it's pretty typical of the airline industry i didn't come up with the numbers on this chart they came from uh the airline industry uh trade association... Read More

Questions & Answers

Q: Why is the airline industry considered a bad investment?

The airline industry consistently loses money, with average returns lower than the cost of capital. This results in negative annual returns for investors.

Q: How do airlines continue to exist despite their poor performance?

Airlines go through frequent recapitalization, where they declare bankruptcy and get rid of their liabilities before resuming operations. This allows them to continue flying without interruption.

Q: Why do some fund managers still invest in airlines despite their terrible performance?

Fund managers may not be aware of the industry's poor track record or may believe they can accurately time the market by buying low and selling high. However, accurately timing returns is difficult, and the erosion of value while waiting for positive events can be detrimental to investments.

Q: Can investors make money by investing in the airline industry?

It is possible for investors to make money by investing in airlines, but the risks and uncertainties make it a challenging endeavor. The odds are stacked against investors due to the industry's consistent losses.

Summary & Key Takeaways

• The airline industry has a cost of capital of 8.5% but only manages to achieve an average return on capital of 3.5%.

• Airlines consistently lose money, with an average annual loss of 5% on a capital employed of $500 billion.

• Despite the industry's poor performance, airlines continue to exist due to frequent recapitalization.