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Strategies & Market Trends : Buffettology
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To: Jurgis Bekepuris who wrote (650)12/8/1998 9:58:00 AM
From: Robert Douglas  Read Replies (3) of 4691
 
Jurgis,

You wrote the following statement about Boeing:

Also BA does not have the Gillette model -
planes are not replaced very often, resulting in
business cycles and potential long term glut problems.

While your statement is certainly true, I think it masks the dynamics of the aircraft market. Consider that aircraft are retired about every 20 years. James probably can shed better light on this number. If you use this number you can infer that 5% of planes are replaced every year. Add this to the secular growth rate of air travel which is also about 5% and you get a nice unit growth of about 10% annually. In the past decade the demand for new planes has been tempered by rising load factors, a luxury that will not exist going forward. The demand lull is temporary.

Now 10% may not seem like much compared to growth rates of companies like Dell or internet providers, but I would wager that Gillette will have trouble achieving a 10% unit growth during the next decade. Also any potential “glut” is being mitigated by the demand for “retired” planes by the air cargo industry. Did you see the Barron's article titled “Internet Bargain?; All that stuff sold online has to be delivered, which makes Federal Express an Internet stock, and the cheapest one around.”? Internet commerce invariably makes an appearance on board a plane sometime. Is the demand for aircraft going to attenuate going forward? Not likely.

I haven't bought BA yet, but doubt I can resist much longer at these prices.

-Robert
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