Can an Airline Be a Growth Stock? Reinventing the Traditional Airline Model

Abstract

Historically, equity markets have viewed the airline business as cyclical: airlines shadow the broader economy, soaring when the economy is strong and sinking when it sags. Markets have seldom rewarded commercial air carriers - whether established stalwarts or new startups - with price multiples that reflect potential for strong earnings growth. For no matter how explosively an airline may expand during an upturn in the business cycle, it seems inevitably to suffer proportional shrinkage when the boom in business travel recedes. Early-stage investors have had limited success with airline start-ups employing the traditional airline model. Their poor track record has shrunk the pool of early-stage airline private equity, further reinforcing the expectation that profitable growth potential is problematic. This has created a neglected industry attracting little capital aimed at fundamental innovation But this prevailing orthodoxy takes as a given the model of airline operations embraced by nearly all of today's carriers. Might the market value more favorably a carrier that adopts a fundamentally different way of doing business? If the analyst are correct that the traditional model is inherently growth-constrained, the opportunity may exist for an innovative company to escape those constraints and reap rewards of rapid growth and robust profitability through a fundamentally different business design.