Posted by: sanjayshetty | June 21, 2005

Thin Air

Airline companies in India have placed orders for 50% of the total airplane orders placed worldwide. (Source TOI http://timesofindia.indiatimes.com/articleshow/1146389.cms and Economic times http://economictimes.indiatimes.com/articleshow/1144332.cms)

The general sentiment seems to be estatic, with numerous new airlines companies springing up. Each spending a few billion $$ and offering the lowest possible flight tickets.

Ok now why the hell did I bother thinking about this or reading about this? Well I’m trying to figure whether it makes sense to invest in airline companies? as in buy their stocks.

Funnily this is an industry which has collectively never made a return on it’s collective capital. Supposedly Buffet said this about this industry.

Frankly I don’t know whether the above statement was truly made by Buffet.
But here is my simple if stupid analysis:

Cost of investment in buying planes for a new airline company: $ 3-4 Billion ( 1 Billion in America is 1000 Million)
Cost of maintainance of the planes my guess is at least: $ 1 million a year which is approximately (0.1% of the cost of the planes. If I’m not wrong car maintainance is much higher per year)
Note: Here is an interesting site to understand how much a billion or trillilon is.

I have no idea of how much money an airline company makes in a year but I find it hard to believe that the cost of aquiring the planes+maintaining it+operations cost of the company equals profit made by flying people around. Especially with todays latest fashion of low cost airlines.

Lets take the scenario that the airline company has purchased planes worth USD 1 Billion.
In addition lets say that they make a profit of USD1 Million per month by flying people. It would take them close to 83 years to recover the cost of purchase of the planes. Here I’m not including maintainance costs and other costs.

I have made 2 assumptions, one the cost of maintainence which I have no idea about but have assumed at .1% of cost of purchase, and 2nd the profit(USD 1 Million) the airline makes per month(not considering taxes)

I wonder what the actuall maintainance costs are and average profits. If any of you reading this have more information, I would love to know.

Sanjay Shetty

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