Masters of the Air

The early aviation industry, much like today's AI sector, experienced intense competition and disappointing investor returns, a point reinforced by Warren Buffett's observations on the motor and airline industries' historical performance.

Post-Cold War consolidation transformed the aerospace market into an oligopoly for aircraft (Airbus/Boeing) and engines (Rolls-Royce, Safran, MTU Aero Engines), significantly improving competitive dynamics and investor returns since the 1990s.

A critical factor driving current success for engine OEMs is the tight supply of new aircraft from Boeing and Airbus, which face production issues and backlogs extending into the 2030s, leading to existing engines being flown longer and requiring more profitable aftermarket services.

Engine manufacturers operate on a "razor-blade" model, incurring billions in upfront development costs but generating substantial, long-term profits from aftermarket services (repairs, per-flight-hour agreements) over product cycles that can last over 40 years.

Companies like Rolls-Royce (which has seen a nearly 900% return in five years), Safran, and MTU Aero Engines are exhibiting strong performance, with mid-to-high teens annual EPS growth, robust balance sheets, and increasing shareholder payouts, suggesting their high valuations are sustainable.