Most large private sector based capex booms tend to end up in a bust at some point even if the technology goes on to revolutionalise productivity. We discussed the likes of canals, railways, fibre, and 3G rollouts. Today’s CoTD looks at airlines which rather than being a singular event, saw repeated boom-bust cycles throughout the 20th century. Commercial aviation has always been a capital-intensive business – requiring huge investments in aircraft, airports, and technology – and it has often attracted waves of optimistic capital, only to disappoint investors when profits prove elusive.
After Charles Lindbergh’s solo Atlantic flight in 1927, an initial boom turned to bust when the Depression hit. Then after WWII, the Jet Age in the 1950s–60s saw airlines investing heavily in new jetliners (Boeing 707s, 747s) and expanding routes. Again, a bust followed: the 1970s oil shocks left airlines with overcapacity (half- empty jumbo jets they had ordered during optimistic times) and high fuel costs, causing heavy losses. In 1978, the US deregulated its airline industry, unleashing another boom of new-entrant airlines and price wars in the 1980s – many startups went bankrupt within a few years. More recently, the 2000s saw airlines investing in newer fuel-efficient fleets, only to be hit by recessions or shocks like 9/11 and the COVID-19 pandemic, which forced yet more restructurings.
There is little doubt that the sector’s growth has improved productivity immensely and enriched our lives, but those who invested in its growth have often lost money, and long-term investors have seen massive underperformance, as seen in today’s CoTD. Since 1967 the US airlines sector’s price change (ex-dividends) has been 1.22% p.a. against the 7.49% p.a. for the S&P 500.
Warren Buffett has famously made light of the sector's plight over time: "The airline business from the time of Orville Wright up to 1991 made no money. If a farsighted capitalist had been present at Kitty Hawk, he would have shot down the Wright Brothers". Also, the well-used joke: “How do you become a millionaire in airlines? Start as a billionaire”, is often cited as originating from the airline sector.
There isn’t a specific read through to AI capex, but it's further evidence that many major technological breakthroughs that have transformed the global economy, and our lives forever, haven't necessarily rewarded long-term investors due to the enormous capex required to fund their growth.
