Have you ever wondered whether airlines make great investments? I certainly have. The science that makes air travel possible is nothing short of miraculous but sometimes great products don't necessarily make great investments.
Most airlines have gone through turbulent times at some point in their history with the majority going bankrupt. The ones that do survive have typically gone on to provide spectacular returns for shareholders.
This makes analysing the performance of airlines particularly tricky because it depends on their period under review. I arbitrarily picked the last 10 years to assess the performance of Qantas Airways Limited (ASX: QAN), Virgin Australia Holdings Ltd (ASX: VAH) and Air New Zealand Limited (ASX: AIZ).
| Airline | Share price movement
(last 10 years) |
10 year total shareholder return
(average annual rate) |
| Qantas | 78% | 10.7% |
| Virgin Australia | (15%) | (2.6%) |
| Air New New Zealand | 270% | 22.6% |
| Vanguard Australian Shares Index
V300AEQ/ETF (ASX: VAS)
|
58%* | 9.84%* |
*since inception date of May 2009
From the table above, Air New Zealand has dramatically outperformed the market, Qantas has narrowly outperformed whilst Virgin Australia has significantly underperformed.
What is driving this performance?
For a start, oil prices (which also affect companies such as Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH)) have decreased from US$90 a barrel 10 years ago, to a low of US$29 in 2016, although they are now steadily rising with the price currently at US$70.
Secondly, interest rates have been at record lows which makes borrowing for capital expenditure a lot cheaper.
A third factor is tourism and corporate travel have been on the rise, a factor which has also benefited adjacent businesses such as Sydney Airport Holdings Pty Ltd (ASX: SYD), Auckland International Airport Limited (ASX: AIA), Corporate Travel Management Ltd (ASX: CTD) and Flight Centre Travel Group Ltd (ASX: FLT).
Foolish Takeaway
So do airlines make great investments? Well, I think they are highly cyclical businesses and the best times to buy them is at the bottom of the trend when no one else wants to buy them.
