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Does Warren Buffett’s Investment Predict Airline Future Performance?

Does Warren Buffett’s Investment Predict Airline Future Performance?

In a very surprising move, billionaire investor Warren Buffett acquired significant stakes in the four US major airlines, namely: American Airlines, Delta Air Lines, United Airlines and Southwest Airlines. In this edition of Airline Profits, we are offering our perspective as to what these unexpected transactions may really mean for the American airline industry.

From the start let’s recall that many wealthy people, including Mr. Buffett, CEO of Berkshire Hathaway also known as the Oracle of Omaha, and Sir Richard Branson, the founder of the Virgin empire, have invested in the airline industry and have lost a great deal of money. It might be fair to state that they made money in other industries, but their venture into the airline business was a disaster. The bitter taste that experience left in their mouth led them to make caustic or sarcastic comments about the airline industry. For instance, Sir Richard Branson offered the following advice: “If you want to be a millionaire, start with a billion dollars and launch a new airline.” Warren Buffett went even further by questioning the intelligence of the Wright Brothers when he stated: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive since the days of the 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.”

And here we are many years later to learn that Mr. Buffett who is revered by most would be investors, suddenly changing his mind and investing close nearly US $10 billion in four US airlines. This is not only surprising but also puzzling, considering what he said in the past about the airline business. The first reaction is that the financial market followed, as it usually does when the Oracle of Omaha invests in a stock. The main reason for that is the strong reputation Mr. Buffett has established as a savvy investor. The Oracle of Omaha was reported to have started investing from the age of 11 and had chosen investing as his profession.  This explains why airline stocks went up following the announcement of Berkshire Hathaway taking positions in the airline industry again. The same stocks went slightly down when Mr. Buffett suggested that he did not intend on increasing his stakes in these airlines. The main questions which are worth pondering are the following:

  • What caused Warren Buffett to change his mind about the airline industry?
  • What can this sudden change of direction from Mr. Buffett really mean for the airline industry?

What caused Warren Buffett to change his mind regarding the airline industry?

In a recent interview with CNBC, Mr. Buffett stated that ‘’he likes airlines because they just got a bad century out of the way.’’ Said differently, the financial performance of the US major airlines over the past 7 years tend to indicate some significant improvements compared to past century of existence. For instance, apart from Southwest Airlines that can boast about posting profits for 44 consecutive years, the journey of the other three airlines has been one of heavy losses and bankruptcies. From 2001 to 2009, US airlines have collectively lost 65.03 billion dollars. The following six years (2010 to 2015) has seen their cumulative profits skyrocket to $48.12 billion. Furthermore, the combined profits for 2016 and 2017 are projected to reach nearly $40 billion.  Such financial performance and growth potential are too strong to ignore. Investors including previously skeptic ones cannot help it, but to reconsider their perception of the US airline industry.

What can Mr. Buffett stakes mean for the airline industry?

As highlighted earlier Warren Buffett who was considered the richest man in the world for several years is known to be a very successful investor. And for that reason, the financial market follows him very closely. On that basis, Mr. Buffett’s recent position’s in the four major US airlines can be viewed as a strong endorsement not just for these airlines, but for the US airline industry as a whole. It also appears to be a seal of approval for the changes, which have led to the phenomenal financial performance highlighted earlier. Put differently, Mr. Buffett liked the recent performance of these airlines. However, can that be considered an anticipation of the US airline’s future performance? Yes, in a sense, but can one be 100% sure that such spectacular growth will be sustained over the coming years and decades? And that is the million dollar question no one including Warren Buffett can be 100% sure to have the right answer to.

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Kofi Sonokpon

Kofi Sonokpon

Managing Editor of Airline Profits, the first aviation magazine devoted to improving airline effectiveness and profitability, Kofi Sonokpon has more than 20 years of international experience in aviation. Kofi holds an IATA sponsored Master of Business Administration (MBA) in Air Transport Management from the John Molson School of Business at Concordia University in Montreal. Kofi Sonokpon is a speaker, an airline business thought-leader, and author an innovative book series intended for the 21st century airline, namely Airlines for Business and Airlines for Technology.