Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Wisdom

What Airlines can teach us About Uber?

Strangely enough airlines can teach us a great deal about Uber and the growing ecosystem of ride-hailing apps.

Both airlines and Uber were variations on traditional business models that took advantage of new technologies to disrupt a segment of the transportation market. Airlines disrupted and eventually took over intercity and long-range passenger travel by adapting railroad and shipping lines’ business model to airplanes. Uber has disrupted urban travel by adapting taxicab companies’ business model to an app.

The differences between the two are vast; it took airlines four decades to achieve a mass market. Uber accumulated 40 million active users in less than a decade. The reason for that is Uber relies upon a digital technology that is far easier and cheaper to scale than airplanes.

Airlines vs. Uber

Even though airline service began in the 1920s, it was not until the 1960s that the industry became a viable mass passenger hauler. The causes of that were better technology (jets) and massive government intervention in the market in favor of airlines.

Governments invested heavily in aviation technology during World War II which gave it a massive boost. The war-time spending included; financing the development of new technologies (radar, jets and long-range aircraft), massive investment in infrastructure (air bases which became airports) and training thousands of pilots and mechanics.

After the war politicians in the United States spent heavily on aviation but refused to finance passenger rail. To make matters worse government stifled railroads with a wide variety of highly restrictive regulations (such as a speed limit on passenger trains). Railroads unable to compete abandoned the intercity passenger business which provided a mass market for airlines.

Is Uber the Southwest Airlines of Cabs?

Uber can be compared to non-frills airlines; such as Southwest (NYSE: LUV), which succeeded by serving people who had never flown before – mostly the middle class. Southwest provided cheap air-service to the masses, much as Uber provides cheap cab service to the masses. Uber has also been able to lure new customers such as young and middle class people into cabs.

Like Southwest, Uber came into a heavily-regulated industry; where players historically served a select clientele and enjoyed strong government protection from competition. Before Uber, taxis in most US cities were a monopoly controlled by a few politically-connected companies that catered to a small segment of the population. In other countries cabs were more widely used but they were still a heavily-protected monopoly.

Like Southwest, Uber identified a business with a large potential market that was poorly served by existing players. Uber also broke a lot of rules just like Southwest; Southwest refused to serve meals on flights and had its flight attendants dress in casual clothes. Uber basically ignored cab regulations, and refused to adapt the standard industry model of directly owning marked vehicles.

What can Southwest’s Finances Tell us about Uber?

This brings us to the interesting question what can Southwest Airlines’ finances tell us about Uber’s future? Uber is a tightly-held private company so all we know about its finances is hearsay.

Southwest is publicly-traded so we have a few hard numbers to look at. From them I’ve drawn a few lessons that potential Uber investors ought to take to heart:

  1. Uber will have a high profit margin but not necessarily make that much money. Southwest reported a profit margin of 7.55% on September 30, 2016. Yet it had free cash flow of just $359 million on the same day.


  1. Uber might generate a lot of float. Despite its low free cash flow, Southwest reported $3.446 billion in cash and short-term investments, assets of $23.04 billion and $3.908 billion cash from operations at the end of third quarter 2016.

  1. Revenue is easy to grow but hard to maintain. Southwest’s revenue hit a high of $20.50 billion in June 2016, but fell to $20.33 billion in September 2016.


  1. Uber’s stock price might not be that high. Southwest was trading for just $51.60 a share on January 10, 2016. It also achieved a market capitalization of $31.76 billion on the same day.


  1. Investors can make money from such transportation stocks. Southwest rewarded shareholders with a return on equity of 29.92% on September 30, 2016. Investors also received a dividend of 10¢ on December 6, 2016.

The comparison between today’s Southwest and a future Uber is more credible than some observers might believe. Uber CEO Travis Kalanick has made no secret of his final game plan which is for Uber to own (or lease) and operate the cars; much as Southwest owns and operates the planes. Massive investments are being made in self-driving technology to make that a reality.

This will greatly increase Uber’s expenses, but potentially greatly expand its revenues by making it to provide service to vast numbers of new customers. It might also lead to a much lower profit margin.

Why Uber Will Need a New Business Model

A new business model will be necessary because Uber is currently losing a lot of money, potentially $5.5 billion in 2016 according to anonymous sources cited by Bloomberg Technology. The company is subsisting on venture capital and private equity investment that can dry up at any time.

There are some advantages to Uber owning and operating vehicles. It will have actual assets and an ecosystem of suppliers with a vested interest in preserving its operations. IE: Ford (NYSE: F) or Volkswagen might have to chip and help Uber out because it is buying a lot of cars. Among other things that will let Uber traditional sources of capital such as the stock market and bank loans which are more stable than direct investments.

So yes, airlines can teach us a lot about Uber. Whether it will ever become as big a part of our lives as the airline industry remains to be seen.