Warren Buffett: Why You Should Never Invest in Airline Stocks

Warren Buffett’s history of avoiding the airline industry as an investment has been well-documented over the years.

In Berkshire Hathaway’s 2007 shareholder letter, Buffett shared his stance that he wasn’t a fan of investing in the airline industry. He told shareholders, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.”

Buffett added in that letter, “Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”

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Even though the airline industry is essential to the economy, the Oracle of Omaha doesn’t invest in it and isn’t fond of it. Here’s why Warren Buffett advises people not to invest in airline stocks and his turbulent history with the industry.

Warren Buffett’s History of Investing in Airline Stocks

This video on YouTube collected Buffett’s quotes where he has historically been opposed to investing in the airline industry. He stressed that the airline industry has very, very low incremental costs per seat, but enormous fixed costs. It’s labor- and capital-intensive, which makes it a “death trap” for investors. These harsh words made it clear that Buffett wouldn’t be investing in airline stocks until something changed in 2016.

In a surprising turn of events, Buffett reversed his stance on the airline industry and invested in four airlines in 2016. The Motley Fool wrote about this at the time and noted that it was an odd time to start investing in legacy carriers, as they felt that profitability may be peaking. At the time, it was pointed out that the years of post-bankruptcy mega mergers combined with a decline in fuel prices led to airlines bringing in record profits.

In May 2020, Buffett announced that Berkshire Hathaway had sold its entire airline position. The position was worth over $4 billion with investments in United, American, Southwest and Delta Airlines. CNBC transcribed Buffett’s comments from the virtual annual shareholder meeting, where the following comments were made:

“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way. I don’t know if Americans have now changed their habits or will change their habits because of the extended period.”

It’s worth pointing out that the airline recorded its tenth straight year of profits in 2019, until travel came to a halt because of the pandemic in 2020. Buffett explained that when he sells something, he sells the entire stake rather than trimming the position. Even though he acknowledged that he admired airlines and their management teams, external events forced a change in investment strategy.

How Have Airline Stocks Performed?

Since Buffett is one of the most well-known investors, many have tracked his trades and portfolio performance. Just one year after Buffett announced that he had sold his entire airline portfolio, The Motley Fool revealed that the assets would be worth about $5 billion more. Since he sold at the bottom, he missed out on billions in profits. However, it has been speculated that the government wouldn’t have been as inclined to step forward to bail out the airlines if Berkshire had held on to its position.

According to research conducted by GOBankingRates earlier this year, you would’ve lost money if you invested in airline stocks that were trading at record highs in 2015, with some stocks dropping over 80% since then. If you review the charts of most airline stocks, you’ll find that Buffett has strong evidence for not being a long-term holder in this space.

Expert Insights on Investing in Airline Stocks

GOBankingRates reached out to investing experts to gather additional insights on investing in the airline industry and whether Buffett’s sentiment makes sense. Here’s what the experts had to say.

The Airline Industry is a Risky Investment

“The very cyclical nature of the airline business is not well-suited for Warren’s style,” remarked Keith Richards, the president and senior portfolio manager at ValueTrend Wealth Management Inc. It’s clear that the airline industry is far too risky of a bet for a value investor like Buffett, who thrives on some level of control and predictability.

Jay Cushing, the senior bond analyst at Gimme Credit, acknowledged that investing in the airline industry has long been considered a risky proposition.

“Over the years, airlines have been repeatedly hit with a wide range of uncontrollable external shocks that have made the sector especially difficult for investors to navigate,” he explained.

Cushing shared that oil price spikes can quickly hurt profit margins, terrorism concerns can decrease travel demand, and union labor disputes can result in costly disruptions.

The Structure Makes Profitability a Challenge

Richards pointed out that the airline industry lacks the clear ability for any player to achieve a strong competitive advantage due to extremely high fixed costs and variable costs that are difficult to pass on to consumers. Since Buffett reviews a company’s earnings and fundamentals, he’s clearly not impressed by what he sees in the airline industry.

“The industry is highly cyclical, tightly regulated, and heavily unionized, which limits managerial flexibility and raises operating costs,” shared Cushing. The airline industry relies on a capital-intensive business that requires massive ongoing investments in aircraft, maintenance and operations, making profitability a struggle.

Cushing concluded, “These factors create a landscape in which even well-managed airlines struggle to deliver consistent returns.”

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This article originally appeared on GOBankingRates.com: Warren Buffett: Why You Should Never Invest in Airline Stocks