Iconic investor Warren Buffett has made a fortune over the years investing in companies and sectors which have durable competitive advantages and long-term upside. Given this, Mr. Buffett has traditionally been adverse to recommending investments in capital-intensive industries prone to bankruptcy, such as airline stocks. In fact, the airline industry has been one of the Oracle of Omaha’s shining examples of a sector to avoid at all costs.
Citing an investment gone sour in US Airways in the 1980’s (that Mr. Buffett came out ahead on, nonetheless), Buffett was famously quoted as calling airline stocks a “death trap for investors.” Things have undoubtedly changed in light of the billions of dollars he’s invested in the country’s top four airlines in recent years.
Significant investments by Mr. Buffett in U.S. airline stocks since 2016 have changed the way many investors view sectors such as airlines, conflicting with many long-time views held by other prominent investors who were on both sides of the fence with respect to the long-term viability of the airline sector and airline stocks.
Investors who have followed in Mr. Buffett’s footsteps and invested an even amount in the four aforementioned airlines would today have received a return of 9.3%, excluding dividends, since the beginning of 2016 — a modest, yet very reasonable, return over this time frame.
How much of this return is due to the “Buffett effect” or coattail investing by Bufett-like investors is up for debate, however the continued purchase of equity in the country’s airline oligopoly by Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) has driven expectations that the rally in airline stocks has only just begun, with these companies not yet having “taken off” (pardon the pun).
When viewed as a whole, the airline industry does represent some of the key elements of a traditional Buffett investment. With valuation multiples for most large airlines largely reflecting a storied past filled with consolidation and bankruptcy, combined with improving underlying fundamentals and a growth profile which remains very attractive among other mature industries, airline profitability and top and bottom line growth is expected by many to remain robust in the medium- to long-term.
With the merger of US Airways and American Airlines Group Inc. (NASDAQ:AAL) in 2015, the “Big 5” became the “Big 4”, providing American Airlines with a more concentrated oligopoly along with its peers Delta Air Lines, Inc. (NYSE:DAL), Southwest Airlines Co. (NYSE:LUV), and United Continental Holdings Inc. (NYSE:UAL). These four airlines currently account for more than 80% of the domestic travel within the United States — a number likely to grow amid expectations that continued consolidation will define airline travel in the future.
The amount of power airlines are able to wield relative to their suppliers, as well as very high barriers to entry, make this industry a standard Porter’s Five Forces example in classrooms across the country. Such a wide moat is, perhaps, one of the distinguishing factors which has driven investment from even the most defensive investors.
Having the ability to change one’s perspective on a business — or an entire industry, for that matter — based on changing fundamentals and long-term profitability prospects, is perhaps one of the greatest assets any investor can rely on.
The fact is Mr. Buffett’s “forever” or “never” designations on specific companies or industries continues to be a relatively fluid discussion (as evidenced by his recent investments in airline stocks and his position in Apple Inc. (NASDAQ:AAPL), a company operating in the tech sector, which has traditionally been avoided by Mr. Buffett due to core competency concerns).
Chris MacDonald has no position in any stocks mentioned in this article.