This week, Warren Buffett’s Berkshire Hathaway made a significant commitment to the US airline industry by raising its stake in Delta and American while taking a new position in Southwest Airlines.
According to a regulatory filing, Buffett purchased $US2.15 billion of Southwest Airlines, raised his stake in Delta to nearly $US3 billion, and boosted his position on American Airlines. He also owns a stake in United.
The is a striking about-face for the legendary investor who, at his company’s 2013 annual meeting, called the airline industry a “death trap for investors.”
So, what’s changed?
First, the price of crude oil is 50% cheaper in 2017 than it was in 2013. Cheaper jet fuel, traditionally the most significant cost outlay for an airline, has pushed US airline profitability to unprecedented levels.
Over the past two years, American, Delta, United, and Southwest have all reported all-time record profits.
Second, US airlines have invested billions of dollars in next-generation aircraft, interiors, and technology. This includes the arrival of state-of-the-art fuel-efficient airliners such as the Boeing 787 Dreamliner, Airbus A350, Boeing 737MAX, and the Bombardier C-Series.
In addition, American, Delta, and United have all invested heavily in brand premium cabin seating and amenities aimed at high-spending business travellers. As a result, the overall quality of the big four’s product offerings have made significant improvements in terms of luxury, connectivity, and efficiency.
Finally, the landscape of the US airline industry has changed dramatically. Overall, airlines in the US are in a much better place right now.
In 2013, United was mired in a messy integration process after its 2010 merger with Continental. Southwest was working through the integration process of AirTran Airways. At the same time, American and US Airways were about to enter into a massive $US11 billion merger to form the largest airline in the world.
This means, that in 2013, three of the four largest remaining mainline carriers is the US was either struggling through or about to enter the costly process of a merger — increasing the risk for operational problems resulting from the treacherous process of combing differing corporate culture, labour agreements, and infrastructure.
Four years later, Delta is humming along as one of the most profitable airlines in the world. Southwest’s integration of AirTran proved to be relatively drama free, while United’s five-year journey through merger hell is finally over, with the airline surging forward under the leadership of CEO Oscar Munoz. Concurrently, the newly-merged American Airlines seems to be working its way through a successful integration process.
With that said, Buffett’s new-found faith in the airline industry doesn’t mean all things are perfect. US airlines face increasing competition for budget travellers from a flood of low-cost international airlines while facing down competition from Asia and the Middle East for premium cabin customers.
In addition, weakness in the traditionally lucrative trans-Atlantic and trans-Pacific routes due to slowing economic growth in China and instability in Europe temper some of this optimism. In addition, profit margins among the big four will face pressure from new labour agreement that clawed many of the concessions made during the dark days post-9/11.
However, even with these headwinds, American, Delta, United, and Southwest remain the world’s four largest and most profitable airlines. Which is why Buffett has good reason to be optimistic.