Taking flight and taking fright

In summary:

• After two years of excitement, Artificial Intelligence (AI) has, for the first time, had a meaningful negative impact on markets.
• Nonetheless there is still considerable uncertainty over how it will ultimately change businesses, markets and the world economy.
• In the meantime, time-tested investment principles still apply.

On the 9th of February 1969, the Boeing 747 took its maiden flight. It entered full commercial service the following year. Although Boeing no longer produces the 747, upgraded versions of the “Queen of Skies” remain in use to this day, much to the delight of plane enthusiasts everywhere. It is remarkable to think that the distance between its launch date and today – 57 years precisely – is similar to the time between the launch date and the first ever powered flight by the Wright brothers in 1904. In other words, between 1903 and 1969, there were incredibly rapid technological advancements (1969 was of course also the year humans stepped on the moon for the first time). From 1969 to today, there have been many incremental improvements to jet airplanes, but the basic concept and architecture remain the same. Someone from the 1970s would not feel completely out of place in a modern airplane, nor would someone from today feel lost on a 1970s PanAm flight (aside perhaps from people smoking on board).

However, that same time traveller from the past would find the internet, ecommerce, laptops, and digital displays everywhere bewildering. They will wonder why everyone is constantly bent over, swiping away on small devices clutched in their hands. They would read about how drones have completely changed the nature of warfare in Ukraine, allowing the much smaller army to hold off mighty Russian tanks and warships. And when it comes to AI chatbots, it will blow their minds.

All of this is to say that technological progress is uneven and unpredictable. This makes it advisable to apply a pinch of salt whenever a new technology is hyped. A few years ago, the economist Robert Gordon went further, proposing a thought experiment along the following lines: if you had to choose, would you rather go without indoor plumbing or video streaming? Would you rather go without electricity in your home, or a smartphone in your pocket? Would you rather have a car, or a laptop? Would you rather have antibiotics, or AI? In many cases, people would probably choose the technology from the first half of the 20th century over much more modern versions. Luckily, we get to have the old and the new technologies. But remember that earlier generations also experienced rapid technological change.

Slow take off
A further point is that it normally takes time for people to figure out how to use technologies. The writer Morgan Housel notes that after the Wright brothers’ historic flight at Kitty Hawk, almost no-one thought that a revolution was at hand. Only a handful of newspapers reported on the event, and it took several years and a world war for the public to pay serious attention to the idea of manned flights. It took another world war to cement the full military, logistical and commercial potential of airplanes. Today, air travel is indispensable for business and leisure, and the industry continues to grow. To name just two examples, Dubai is spending $35 billion on a giant new airport, expected to be the largest in the world, while a $12 billion project has just kicked off in Ethiopia to build Africa’s largest airport.

Did this make air travel a sure thing from an investment point of view? Not according to legendary investor Warren Buffett, who famously remarked that if a "farsighted capitalist” was present at Kitty Hawk all those years ago, they would have shot down that first flight given that the cumulative net return to airline shareholders since then was negative. There are profitable airlines, but there have been many bankruptcies in a sector subject to high fixed costs, volatile fuel prices, competition from subsidised state-owned entities, economic cycles, wars and, in 2020, a global pandemic. Listed airlines have collectively far underperformed global equities, as chart 1 shows.soft.

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