Warren Buffett and Airlines Industry
Warren Buffett is the most followed Investor billionaire in the world. People follow his advice and watch his moves very keenly. His quotes are legendary.
The US airline industry was disrupted in early 1990 when low-cost airlines undercut the legacy carrier's fares. The rapid growth of low-cost airlines led to big losses across the industry. Legacy carriers were forced to match their competitors otherwise their base customers would drift away.
Author : Dr Nishikant Sharma MD FACP
References from Berkshirehatahway.com and Businessinsider.com
Warren Buffett is the most followed Investor billionaire in the world. People follow his advice and watch his moves very keenly. His quotes are legendary.
In early May 2020, he suddenly exited the airline's Industry selling his entire stake. He said: American magic has always prevailed and it will do so again
The world has changed for airlines and we wish them well.
In this article, we have discussed his views on the Airlines Industry. References are taken from his letter to shareholders that are published every year on the Berkshire Hathaway website.
.His views have changed about the industry. Recently he changed his views turning 180 degrees. His views can be divided into 3 different phases.
Phase 1 (1987-2007) :
The worst sort of business is the one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines. Here durable competitive advantage has proven elusive ever since the days of Wright brothers. Indeed if a farsighted capitalist had been present at Kitty Hawk, He would have done his successors a huge favor by shooting Orville down. Warren Buffett wrote in his letter to shareholders in 2007.
The demand for capital by the airlines' industry has been insatiable. Investors have poured money into a bottomless pit, attracted by the growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy US Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer paid. But we got lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines we were actually able to sell our shares in 1998 for a hefty gain. In the decade that following our sale, the company went bankrupt. Twice.
Buffett's remarks that investors would have saved billions of dollars if someone had shot down the Wright Brothers plane is perhaps the best-known criticism of Airlines Industries. Indeed just in the 2001-2005 period, US airlines collectively lost $40 billion.
For decades the airline industry has hovered between profit and loss. In most cases, the losses have outweighed the profits over time.
In 1994 Warren Buffett in his letter to shareholders wrote- As the capacity of the low-cost operators expanded, their fares began to force old-line high-cost airlines operators to cut their own, Eventually the fundamental rule of economics prevailed: In an unregulated commodity business, a company must lower its cost to competitive levels or face extinction.
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| Airplanes waiting on a busy Airport Terminal |
The US airline industry was disrupted in early 1990 when low-cost airlines undercut the legacy carrier's fares. The rapid growth of low-cost airlines led to big losses across the industry. Legacy carriers were forced to match their competitors otherwise their base customers would drift away.
Phase 2 (2015-16)
In 2015-16 Warren Buffett decided to buy Airlines Stocks. He changed his long standing stance. He had already purchased Railroad companies in the 2000-2003 period and was interested in transportation. He purchased shares in Delta, American, Southwest, and United Airlines. Probable reasons were as follows.- Rising Demand for Seats.
- Consolidation in the Airlines Industry
- Reliable Buybacks in Stocks
- Relative Stable Prices
- Efficient Managers.
Warren Buffett knew they have terrible economies but stable outlook may have caused him to change his mind. He had thought that Berkshire will get a higher rate of return because of the low multiples of the stocks. He purchased about 9%-11% in each of these stocks. In between, there was a rumor that Berkshire may purchase majority shares in Southwest Airlines. Possibility of share buybacks by companies also made him change is views.
Phase 3 (COVID 19 Pandemic 2020):
The COVID 19 Pandemic hit the airline industry badly. The shares of Airlines started falling. The passenger numbers started falling. The buyback of the shares was put on the backburner.
The current crisis is creating a huge amount of anxiety and changing consumers psyche. Some industries may be permanently altered by the coronavirus such as airlines. Berkshire was a top three shareholder in American Airlines Group Inc, Delta Airlines Inc, Southwest Airlines Co, and United Airlines Holdings Inc, as recently as April 2020. Buffett has decided to completely exit from his positions. The world has changed for airliners and we wish them well.
Even though Buffett is the long term believer of the US economy as a whole his 180-degree turn on the airline industry shows that he sees virus changing some consumer behavior. I believe in the American story and I hope my successors will continue to believe in the same.He informed his shareholders about the same. He took money out of the Airlines Industry. This was done at a substantial loss.
He said: American magic has always prevailed and it will do so again
the world has changed for airlines and we wish them well.
Author : Dr Nishikant Sharma MD FACP
Health care Professional
Content Writer
