Warren Buffett has a reputation as the world’s most savvy investor. With a net worth north of $70 billion, that reputation is well earned. And for more than twenty years, the world’s most savvy investor has notoriously stayed away from investing in airlines. So it’s a little surprising when Warren Buffett suddenly changes a decades-long stance and purchases shares in all four major U.S. airlines. What changed? Should investors follow his lead?
Warren Buffett Just Purchased Shares In All Four Major US Airlines. What Gives?
In a letter from Warren Buffett to Berkshire Hathaway shareholders in 2007, Buffett famously wrote, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines”. And as recently as 2013, he called airlines a death trap for investors. Yet now, the man himself is invested in American Airlines, United Continental, Delta Airlines, and Southwest Airlines. What changed to get Berkshire Hathaway to go from not investing in any airlines whatsoever, to investing in the top four U.S. companies?
For starters, this may not be Buffett’s choice. He’s admitted to other execs within Berkshire Hathaway purchasing large stakes in tech, which he wasn’t completely in favor of. However, Buffett’s offhand mention of purchasing shares of Southwest Airlines in addition to the others during an interview seems like he has a strong hand in this play. Buffett is a long term investor. He purchases shares in companies he believes are sound businesses. And right now, he believes airlines are a good investment.
Airlines are not the same ungainly, unorganized, revenue bleeding machines they once were in the early 2000s. Since 2000, there have been 14 major airline bankruptcies, including American, Delta, and United, in which Buffett is now invested. But those bankruptcies taught the airlines a lesson. They got smaller and consolidated, merging with other airlines to reduce just how many options existed in the space. That consolidation led to a more organized and logical industry.
But airlines expenses and pressure are still a concern. A strong dollar could cost the airlines on international flights, especially as discount carriers start offering cheaper international fares. In addition to that, oil prices may start to rise again, and companies could begin to see higher labor costs with Trump in office and unions clamoring for raises. Yet, even with that, airlines are more profitable than they’ve ever been. They’ve done so by reducing spending based on mistakes.
The biggest waste of profit for an airline is when airlines are over capacity or late, causing passengers to miss flights and not get to their destination. Whenever the airline is at fault, the company pays for food, lodging, and travel vouchers for the passenger. Those costs used to add up quickly for airlines, but by minimizing avoidable errors, airlines have raised their value – to the tune of $11.5 billion. That’s how much American, United, and Delta earned (combined) in 2016 from bookings. Ten years earlier, the same companies brought in just $910 million. Those numbers do not include unbundled services, such as baggage fees, seat upgrades, drinks, and snacks, which brought in an additional $17 billion for the top four U.S. airlines in 2015.
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One thing all investors know is never bet against Warren Buffett. The market agrees, as shares of Delta (DAL), American (AAL), United (UAL), and Southwest (LUV) airlines are all up on the news. Expect shares of all four airlines to continue to fly UP.
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