Warren Buffett Is NOT Convinced This Time Is Different With the Airlines

American CEO Doug Parker has been asking investors to take a ‘leap of faith’ that this time is different in the airline industry.

In the most recent quarterly earnings call Parker suggested in support of this view that all the bad things airlines have been through are happening (lower ticket prices, higher fuel prices, higher labor costs, increased capacity) and they’re still profitable.

Delta wants to be valued as a ‘high quality industrial’.

US airlines think investors ought to trade their stocks at a higher multiple. And many investors took a serious signal when Warren Buffett made big investments in American, Delta, United and Southwest.

Buffett had been famously negative on the airline industry since his 1989 purchase of US Airways debt (convertible to stock, he never converted). In fact, he once said,

If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.

But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.

airline stocks
Copyright: rido / 123RF Stock Photo

At Berkshire Hathaway’s annual meeting, Buffett clarified that he’s not convinced airlines are high quality industrials and that the business is entirely different than it’s been in the past just better than it used to be.

Airlines are a “fiercely competitive industry” but even so, it’s not as competitive as it used to be, he says.

The industry “has been operating for some time now at 80% or better capacity” measured by seat miles, and he predicts they’ll continue operating at above average capacity for the next few years.

“They actually at present are earning quite high returns on invested capital,” higher even than FedEx or UPS, he says with a couple caveats. But there could be a price war, which will sap results, he warns.

“It is no cinch that the industry will have more pricing sensibility” than they have in the past, but the conditions have improved, including with its labor relations. All four are buying back stock “at a good clip” and he expects this to continue.

Airlines aren’t growth businesses. Their stock value has been predicated on the idea that they won’t grow quickly. Airlines have been making money and pouring much of it into stock buybacks to bolster share price. At the annual meeting Buffett makes the obvious point (which I’ve been making as well) that stock buybacks are something you do “with funds that (can’t) be deployed well.”

Buybacks are an indication of limited opportunities for profitable investment.

Buffet clearly thinks he can make money on his airline investments. But we shouldn’t take his bet to mean that the industry has been transformed as an investment vehicle.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. For those that have forgotten, he was famously high on IBM, until he wasn’t.

  2. Not exactly an accurate spin here. Buffett is saying they’re RISK with his airline investments, but that he thinks the rewards outweigh the risks. Your headline does not accurately capture the real sentiments of a guy who’s
    currently investing BILLIONS in these companies and has no plans to change his strategy!

  3. I’m with @iahphx, Buffet does seem to think things are different this time or he wouldn’t be investing. Berkshire has a lot of cash on hand and is running out of places to stash it, so with changes to the industry and a need to put his money somewhere it will earn a return, airline stocks make sense. Berkshire had already dipped their tow into aviation with their purchase of Precision Castparts which makes a lot of avionic parts.

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