Individual investors may ask: “What is portfolio management?” Essentially it’s a way for investors to spread their investments over a range of options, some of which may be considered to be risky and others to be relatively safe. Riskier investments offer better returns but, as with any risk, nothing is guaranteed.
Investing in the aviation industry as part of a portfolio can be a good way to maximize profits as part of a careful investment strategy.
Since the dawn of time humans have wanted to soar with the birds in the sky, and it was the advent of the first powered flight by the American Wright brother that made the dream a reality. Since then aviation has really taken off, generating a multi-billion dollar industry and technological innovations that have fed into a huge range of consumer products.
Before the advent of commercial passenger airlines, the industry developed quickly due to the usefulness of airplanes during the First World War in Europe. Massive advances were made, and though between the First and Second World Wars commercial aviation started to increase, it was the advent of jet engines, originally invented by Englishman Sir Frank Whittle, that allowed the development of mass transit airplanes that now span the globe.
Airlines, for the most part, started out as flag carriers for their countries, but the privatization of many of these coupled with the rise of new private organizations means that there is potential for investment for consumers as well as for the major investors such as financial institutions and pension funds.
Top operators include the American Delta Airlines, owned by a wide range of investors, United Airlines, also American and is a subsidiary of United Continental Holdings and wholly owned by it, and China Southern Airlines, owned by China Southern Airlines Limited.
National carriers include British Airways, owned by its shareholders as a public limited company, the German carrier Lufthansa, and Holland’s KLM.
Other major players include Emirates, based in Dubai and owned by the Dubai government and Air Canada, originally created by the government, it is now a private organization owned by shareholders.
A glamorous business
It’s easy to think that the world of air travel is full of glamour and excitement, and it certainly can be for regular travelers. Richard Branson has helped break the monopoly of the national carriers with his Virgin brand, expanding his investment portfolio to aviation having started off in humble beginnings with his Virgin music label in the early 1970s.
One of the difficulties for individuals interested in investing in the aviation business is that it is so huge, turning over many billions of dollars a year. It is geared to corporate investors, yet there are certainly opportunities for consumers to get involved in the action.
The first thing to do is to look at balance sheets. Who is making money? What are the growth prospects for a particular airline? What are the threats and risks to the bottom line? It’s essential to understand how these organizations are performing and to understand that just because they performed well one year doesn’t mean it will happen the next year.
Analysts consider that there will be significant profitability in the aviation industry in 2014. Much of this is down to the cost of jet fuel, which has been dropping, and is an airline’s single largest expense.
Looking at some figures from the first quarter of 2014, a slow time for business, the parent company of American Airlines posted a loss of $341 million compared to a loss in 2012 of $1.6 billion in the same quarter. Revenue, however, was up by one percent, hitting $6.1 billion. Seven of the nation’s biggest carriers, including American, Delta, Southwest and JetBlue have posted a profit for the quarter, excluding special costs.
Where does the money go?
It’s easy to think that the money paid to an airline is just for getting a traveler from A to B. It isn’t. That’s what the traveler wants and expects but there are costs an airline has to meet apart from employing pilots, cabin crews, paying for their airplanes and fuel and maintenance.
When setting their fares and considering profitability, airlines have to factor in other cost centers. These include insurances, landing fees, “free” food and drink for those who offer it, and taxes by government, not to mention baggage fees and the cost of security screening.