Over at Motley Fool, where the vast majority of my writing appears, sometimes I wander into the world of airlines. These articles tend to be relatively popular, so let’s see how you guys like them. But first, (obligatory mile high joke).
Warren Buffett is your GOD, so let’s see what he has to say about airlines.
Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results. It’s been a death trap for investors…Here a durable competitive advantage has proven elusive ever 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.
One of these days, I should really do a post on things I disagree with Warren Buffett about. There are a few. But one thing I really disagree with is his views on airlines. Besides, the dude OWNS an airline.
For the most part, airlines have been pretty crummy investments. Generally, businesses with huge capital requirements and thin margins aren’t the type of things you want to invest in. It’s one of the reasons why I tend to stay away from the grocery business as well. Both industries are competitive, and depend on volume to make any profits at all. The cost to operate a full plane compared to a half full plane is pretty much comparable. It’s the same thing with a grocery store.
Lately, both Air Canada (TSX:AC.B) and Westjet (TSX:WJA) have done pretty well. Westjet is up 14% over the last year and 168% over the past five, while Air Canada’s price is up 320% and 562%, respectively. Air Canada’s share price has gone up so much because the company keeps flirting with bankruptcy and extracting themselves from it. Good luck if you want to get involved with that. U.S. exchanges are filled with airlines that have done comparatively well, after a wave of consolidation in the space.
Upon first glance, the airline business doesn’t look like a bad place to be. Demand is strong, partially because economic times aren’t bad, and because travel is the new bourgeois luxury item. I won’t judge, since I’m three weeks away from taking a very long plane ride to another part of the world. And consolidation has kept the price of fares pretty strong. How often do you see actual price wars between airlines these days, especially in Canada? It costs approximately a million dollars to fly across the country.
This is exactly the kind of false security that will sucker you into investing in an airline. Fight it. Fight it with all your might.
Unlike Mr. Buffett, I wouldn’t avoid the sector entirely. I think there are opportunities in airlines, provided you pick and choose your spots. It also helps if you find an operator that a) doesn’t suck and b) has a solid balance sheet.
After 9/11, Westjet’s share price fell from $9.50 to just under $7. By the end of 2003, it was trading at more than $19.
Southwest Airlines fell from over $19 to under $13. Two years later, it had recovered back to its pre 9/11 highs (although, to be fair, it didn’t reach those highs again until this year).
Although, to be fair, the sector is littered with corpses. American Airlines went bankrupt twice. Delta went bankrupt in 2005. Both these companies are back, they’re leaner than ever, and yet they’re still pouring damn near every cent they make into expanding their fleet. Both look like they’re in pretty good shape, but solid demand and cheap debt will do that to a company.
The bottom line is this: about once or twice a decade, the chance will come up to buy an airline that’s a good operator, who has gotten beaten up with the rest of the sector, for a decent price. The world will look like a very bleak place, but it’s very possible to make money in the airline business. You just have to be incredibly patient, and buy the best ones.
Saying that, it’s probably just best for most investors to avoid the sector completely, especially now. It’s a boom and bust business. The booms won’t last, and a lot of times the busts involve a bankruptcy judge. There’s just too much leverage associated with the business. If things start to slow down a bit, even the best operators will get hit. It’s only a matter of time until this party comes to an end. Don’t get flying with no pants on.