An industry worth a staggering $3.5 trillion globally, aviation is arguably one of the most lucrative industries to be in after ones like tech, healthcare and financial services yet so many aviation companies go out of business each year.
But it’s not just the small ones with limited financial resources that go bust; each year we see headlines with a major international airline declaring bankruptcy or entering bankruptcy protection, whilst others report record profits.
So all this begs the question: Is aviation a good investment?
All in all, assuming you have the knowledge in your particular sub-niche of aviation, and the financial resources to make it successful, aviation is a good investment. The things that sink a company quickly is bad management and a lack of money.
For the purpose of this article, we are defining investing as starting your own aviation company, not buying a share in one, although many of the same principles will apply.
Is Aviation a Good Investment?
Why do so Many Aviation Companies Fail?
Although there are typically many reasons why aviation companies fail, the leading reasons are:
Bad Management
A problem not unique to aviation, poor management seems to be endemic in the aviation industry.
Unlike in other industries whose executives are considered poor for not looking after the company’s bottom line or for not maintaining amicable relations with workers, aviation’s main management problem is simple: aviator vs businessman.
There are two types of people who set up aviation companies, those who are in it solely for the money (businessmen) and those who are in it for the love of aviation itself (aviators). And this very fact causes most aviation companies to go bust in less than three years.
For businessmen, they do not have the love for aviation that aviators do, as they are solely focused on return on investment (ROI) and their bottom line.
Likewise, aviators don’t possess the financial acumen of businessmen, nor their connections which would allow them to expand the company sustainably and cost-effectively.
All this means is that sooner or later a problem arises that causes them to throw in the towel.
Perhaps an unexpected cost hits the businessman’s wallet particularly hard and he decides aviation no longer has the returns he was expecting, or the company’s costs keep rising and the aviator can’t bring them down as he doesn’t know how to.
Sadly, outside of a few rare instances like Kenn Ricci (Directional Aviation), Tony Fernandes (AirAsia) and Herb Kelleher (Southwest Airlines) most aviation executives are either one or the other.
Acknowledging this, what many aviation companies have now begun to do is employ a management team comprised of half aviators and half businessmen to balance things out.
Fluctuating Costs
Even with a good management team leading them, airlines can’t escape
High Overheads
Fluctuating Demand
As if fluctuating costs and high overheads weren’t bad enough, most aviation companies experience fluctuating demand throughout a given year, characterized by so-called “peak” and “off-peak” (low) seasons.
During the Summer and holiday periods like Christmas, New Year and Easter, aviation companies experience a huge increase in demand as people want to travel to see loved ones during the holiday period or enjoy a well-deserved vacation.
It’s during these periods where airlines are operating at peak capacity and bring in the majority of their money.
On the flip side, whilst periods like the Spring and Autumn are not void of demand, it is significantly less than during the peak periods, and often sees them operating at only 50% capacity, sometimes even less.
And though this is predictable and something airlines take advantage of (that’s why airlines hike their prices during these periods), costs like wages and lease payments remain the same, even if they don’t have the cashflow to pay for it.
What most airlines do is sit on the cash they make in the peak periods to pay for their costs in the off-season.
For some airlines, however, this is simply not possible, as even during the peak periods, their revenue barely covers their costs of doing business, so when their revenue declines considerably in the off-season, they can’t pay what they owe and are eventually forced to file for bankruptcy protection.
Types of Aviation Companies
Though there are literally thousands of types of aviation companies, the overwhelming majority of them can be classified into one of the following:
Engineering
Operators
Brokers
Flight Services
Aviation Services
Which Are The Most Profitable?
Whilst there are profitable and unprofitable companies in every sub-niche of aviation, some are indeed more profitable than others. And here’s the secret: operating aircraft is rarely the way.
From financials published by those aviation companies currently listed on the stock market (where doing so is compulsory and audited by accountants) and from our own research, the consistently most profitable aviation niches are:
- Aircraft Brokers (charter and sales)
- Maintenance, Repair & Overhaul (MRO)
- Flight training
- Aviation information services
- For-profit air ambulances
For the most part, this is because unlike companies who operate their own aircraft (with the exception of air ambulances) the above companies don’t have to contend with fluctuating prices and high overheads. In many cases, their demand is also more consistent too.
And though many of these companies still have fluctuating demand – especially in relation to how well the economy is doing – many of them still turn in profit in bad years while other aviation companies file for bankruptcy en masse.
In particular, aviation information services such as aircraft tracking software, aircraft WIFI suppliers and charter broker portals, consistently report profits as even if their clients are losing money, they physically can’t afford not to buy their services.
After all, it’d very hard for a broker to do their job without the portals they access to book the flights of what few clients they do still have.
What do you think: is aviation a good investment or not? Tell in the comments!
Featured image courtesy of Mathieu Marquer via Flickr.