 120 years ago, two brothers in their mid 30s, Orwell and Wilbur Wright, went up to the hills of Kitty Hawk and changed the history of the world. A century later, Warren Buffett, the world's most famous stock market investor, would say this about that historic flight. If a fast-sighted capitalist had been present at Kitty Hawk, he would have done his success as a huge favour by shooting Orwell down. Now, why would Buffett say such a thing about the world's first controlled airplane flights? That's because the airline business is notoriously difficult and almost no one makes any money in it. So what about this historic mega deal by the Tatars to buy a new aircraft to completely revamp Air India? How does that make business sense? The reason I'm asking this question is because over so many decades that airlines have been flying, virtually no company has got back the money they invested. In the US, which along with China has the heaviest air traffic in the world, airlines have gone bankrupt repeatedly. One estimate suggests that between 1981 and 2011, airline companies in America lost 60 billion dollars. Now, why did that happen? The first is that running an airline involves huge costs. Fuel makes up between 20 to 25% of the operating costs, leasing planes or financing their purchases, another very hefty cost. Then there are salaries. They have to be at the top end of the scale because it involves expertise and training and it is considered to be risky. On the other side, there are far too many airlines in the world and they compete with each other to offer cheap flights to passengers. And if an airline tries to raise ticket prices too much, then the demand immediately drops sharply. So earning revenues is a very difficult game in the aviation sector. And what is true for the world is actually true for India as well. Look at what has happened to all the private airline companies which launched with such a lot of fanfare. Kingfisher Airlines folded up and Vijay Malia ran away to London. Jet Airways went under in 2019 after operating for 26 long years. SpiceJet wrapped up losses, then changed hands, made some money for a while and has come back to making losses. It has lost over 4000 crore rupees in the last 4 years. And Indigo Airlines at one time considered to be the best-run Indian airline has reported over 12000 crore in losses in the past 3 years. Of course, one big reason for these losses is the impact COVID had on air travel. In fact, before that, for almost a decade, the aviation industry was doing reasonably well. Globally, many airlines went out of business in the early 2000s. So by the mid-2010s, which meant there was much less competition. So most airlines increased the number of seats in each plane, increasing the number of passengers they could carry in each flight. And that reduced the average running costs. And if you've travelled in economy class in the past decade, you would have seen how that has affected passenger comfort, right? And finally, probably most importantly, oil prices remained subdued for a very long time. Bringing their biggest single operating costs down. That made even a skeptic like Warren Buffett change his views on the aviation industry. And he invested a lot of money in the big 4 American airline companies sometime around 2015-2016. But this, as Buffett later admitted, was a mistake. We put whatever was 7 or 8 billion into it and we did not take out anything like 7 or 8 billion. And that was my mistake, but it's always a problem if there are things on the lower levels of probabilities that happen sometimes. And it happened to the airlines and I'm the one who made the decision. Buffett exited the airline business in 2020, selling all his shares at a loss. It wasn't that he was saying that the shares wouldn't recover. His idea was that COVID had changed the airline business forever because it had changed the way companies do business. For all airlines, business travelers are key because they travel throughout the year and often choose to pay more to get more comforts. Leisure travelers, on the other hand, travel during holiday seasons. They always look for the cheapest tickets and sometimes change their plans if tickets are too expensive. So COVID has made a big chunk of business travel redundant. More companies are now focusing on virtual meetings because it is less time consuming and it's significantly cheaper. But this is bound to happen one day, but COVID has speeded up that process. It has made even the most tech-resistant people comfortable with video conferencing. Warren Buffett is part of a growing tribe of investors and analysts who believe that the aviation industry cannot make up for the decline in business travel. It is in this context that Air India's decision to lease and buy 47 new planes seems risky. It's risky business to say the least. The deal size is not known but it is estimated to be anywhere between 80 to 110 billion dollars. There's a huge plan to expand in an industry where expansion always leads to losses. The only periods airlines have made money is when there's low capacity, many flyers and few seats. This expansion plan is taking place in a country where a very small percentage of people can afford to pay the real cost of flying. So there's a limit beyond which airlines cannot raise prices. The only time they're able to is when there's a shortage of seats in key sectors for short periods like Delhi, Mumbai, or flights going to Bangalore or Hyderabad. Now on top of that the Modi government is planning to start high speed bullet trains on some of the most lucrative sectors which will be a direct competition for airlines. The Tata Group will have to end up taking a lot of debt to finance the deals with Boeing and Airbus which as I said earlier has been estimated to be anywhere between 80 to 110 billion dollars. That's 6.5 to 9 lakh crore rupees. That's a lot of money. Now most aviation industry experts say that the Tata's will get cheap loans because they have a very good credit history. The trouble is that if they borrow abroad the loans will have an additional foreign exchange risk. The cost of borrowing will keep going up with the dollar's trendings. And then Indian banks especially public sector banks will be called upon to refinance these loans. This is risky not just for the Tata Group by the way but for the entire banking sector. This is potential NPA or bad loan territory. Mind you I'm not saying that Air India absolutely cannot make big money out of these huge investments. I'm just pointing out that the lessons from the aviation sector's history. They tell us that expansion is bad for business and that is precisely what Air India is doing right now. That's the show today. If you liked this video do press the like button and do subscribe to our channel and don't forget to press the bell icon so that you get notified every time there's a new video. Until next time, goodbye.