Running an airline is like having a baby: fun to conceive, but hell to deliver — C. Woolman, founder of Delta Air Lines
Yet life has just become a lot easier for airlines, at least temporarily.
Qantas (ASX: QAN) had fuel costs of $4.5 billion in 2014, accounting for some 30% of its operating expenses. So it’s probably no surprise that with the price of oil having fallen 60% since its peak in June 2014, Qantas and other airlines will be among the biggest beneficiaries.
But intense competition between carriers and the increasing number of budget options means any spike in profitability will be hard to sustain. Eventually, competition will drive ticket prices down and Qantas’s profit margin will probably return to its historical average of something between zero and peanuts.
That’s the trouble with businesses that don’t have a ‘moat’, as Warren Buffett likes to say. Profitability attracts price competition which, in turn, erodes profitability.
Anyone who has paid for parking at Sydney Airport (ASX: SYD) or Auckland International Airport (ASX: AIA) knows why airports are the real profit engines in the travel industry. Most are natural monopolies and, whether you're a passenger or airline, you play to their tune.
As airline ticket prices fall to reflect lower fuel costs, travel becomes more affordable and passenger numbers pick up – which leads to higher aeronautical fees and retail revenue for the airports.
Furthermore, Auckland and Sydney Airport’s fastest growing markets – China, India and Southeast Asia – are among the largest net importers of oil. This means their economies will get a boost from lower energy costs, which should further stimulate travel.
Unfortunately, AIA and SYD are up nearly 20% since June last year and have yields of just 3.5% and 4.7% respectively. Airports are wonderful assets, but they’re far from cheap.