If you have a controlled risk appetite, then you should probably consider investing in firms with minimum variables and maximum diversification. And in both these metrics, the airline industry bottoms out.
Let’s start with the simplest example. The popularity of video conferencing technology is cutting down the need and expenses related to business travel. Higher-margin business class tickets are thereby taking a hit, in turn denting their overall topline growth.
This kind of butterfly effect will become more evident and common in the next five to ten years.
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Another big variable is the regulations that are thrust upon the aviation industry. Airline firms have to strictly abide by not only the regulations of its parent state but also of the countries they operate to. With climate change once again getting the limelight following Greta Thunberg’s moving speech at the United Nations Climate Change Conference, regulations are likely to get stringent to cut down carbon emissions from aircraft, which is regarded as one of the primary reasons for the accelerated climate change.
The International Civil Aviation Organization is currently working on a program, Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is aimed at achieving carbon-neutral growth in the industry. However, the industry is expected to incur huge expenses to become compliant with this program, once it’s put into force.
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Separately, the possibility of a global economic slowdown sometime next year dims the prospects of investing in airline stocks. Already, many regions including China and Germany are witnessing economic weakness. The aviation industry, being heavily reliant on economic prosperity and low unemployment for growth, sees this as a potential threat.
Heightened political tensions and certain regions like the Middle East lavishly supporting their state-owned firms offer little respite to the aviation industry back home. This, complemented with the traditional headwinds associated with oil price fluctuations and lack of operational diversity in the sector exponentially raises the stake in the coming years.
Whether the increase in air travel can offset these headwinds is one that is to be seen. But in the retrospect, is it worth taking all that risk? Probably not.
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