Investors have shunned airline stocks for many years given the corporate mismanagement of the past. But recently, the U.S. airlines industry has been thriving on low fuel prices and strong demand for travel.
“The U.S. airline industry has been hosting a renaissance party for investors. All of the stocks have tripled or better in the past five years,” Kevin Crissey, a senior analyst at Citi stated in a report.
Low fuel prices, as well as dynamics such as consolidation, capacity management, and other sources of revenue, have turned the industry around, particularly in the United States, according to Jonathan Kletzel, U.S. transportation and logistics leader at PwC Consulting.
“What you see in the last year or two is an era of strong profitability in the airlines. And that is reflected in the stock prices today,” he said.
Airline stocks accelerated their move on Nov. 14 after Warren Buffett’s investment company Berkshire Hathaway disclosed a $1.2 billion investment in three airline companies. According to the SEC filing, Berkshire bought stakes in American Airlines Group (ticker symbol AAL), Delta Air Lines (DAL), and United Continental Holdings (UAL).
Berkshire also invested in Southwest Airlines (LUV), according to CNBC.
Buffett’s decision surprised many and got a lot of media attention, as he had avoided airlines for the past two decades. His negative views on the sector stemmed from his investment in US Airways back in 1989.
“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 being paid,” he explained in a letter to Berkshire shareholders in 2007.
However, Buffett later got lucky. He was able to sell his shares in 1998 “for a hefty gain,” as he put it in the letter.
He nevertheless railed against airlines for having large fixed costs, strong labor unions, and exposure to commodity pricing. It is not a great recipe for success, he once said.
