Friday, July 04, 2008

The Airline experience

The progression (if not evolution) of successful industrialists sometimes baffles me. Doesn’t success yield some experience? I see airline after airline collapsing all over the world. Oil prices and operating costs are soaring, demand slows down, flights get cut. Few of them have even gone bankrupt. Still enterprises that make money from successful businesses head straight towards the airstrip. Vijay Mallya made money from his liquor and other businesses set up Kingfisher airline that is bleeding. Subroto Roy (Sahara, now sold out), Dr.B.K.Modi (Modiluft, sold out), East West, NEPC, Damania (closed down / soldout) are all examples. Mallya found LCCs as the culprits and bought out Air Deccan (now eyeing Spicejet) to consolidate his business. May be he'll get to own 40% market share. But to what purpose when the pie itself is shrinking? The high passenger load factor that allure investors is because of LCC fares. If they are gone, passengers too will be. Remember they used to take the trains before. They will, in future. [The upright seating airlines offer has already forced many to reconsider their mode of travel, now they drive up fares and cut flights too - last nail?] That leaves the managements to put up with soaring fuel costs, expensive pilots and maintenance crew. Here is Naresh Goel’s Jet Airways endorsement. I am sure fellow industrialists would be watching this spectacle.
Or did they? At least some of them who are up close, like GMR infrastructure – that builds large Airports are expected to know better. Apparently they see something that we obviously don’t. Perhaps they are right. But I am certainly curious. Who can bet on this business? What are the odds of success?
Here's Warren Buffett on Airline industry -

"I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.

But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You've got huge fixed costs, you've got strong labor unions and you've got commodity pricing. That is not a great recipe for success.

I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: "My name is Warren and I'm an aeroholic." And then they talk me down."

Prove me wrong. I'd be obliged.


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