If You Have to Invest in Airlines, Don't!

"How do you become a millionaire? Make a billion dollars and then buy an airline." -- Warren Buffett

In 1989, Warren Buffett, the chairman and CEO of Berkshire Hathaway, invested $358 million in convertible preferred shares of USAir Group, now US Airways (NYSE: LCC  ) . By 1994, the position had lost 75% of its value. Although Berkshire eventually made money on the investment -- big surprise! -- it nevertheless prompted Buffett to make the following statement:

If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: 'My name is Warren, and I'm an aeroholic.' And then they talk me down.

The truth about airline stocks
If there's any doubt about the wisdom of this advice, that should all be cleared up with the following chart, which tracks the performance of the Amex Airline Index, an index of major U.S. and overseas airlines. As you can see, an investment in this index in 1992 would have resulted in a 20% loss, compared to a nearly 200% gain on the S&P 500 over the same time period.

^XAL Chart

^XAL data by YCharts

In terms of individual components, moreover, over the last five years, shares in United Continental (NYSE: UAL  ) , Southwest Airlines (NYSE: LUV  ) , and Delta (NYSE: DAL  ) have each declined over 38% in value; shares in U.S. Airways and JetBlue have declined by more than 60%; and American Airlines filed for bankruptcy at the end of last year. The only airline that appears to have paid off for investors is Alaska Air Group, which is up triple digits -- though, if history is any indication, that won't last much longer.

If you must scratch that airline itch
If you still can't fight the urge to invest in an airline company despite this evidence, then it's time to move up the margin chain to Boeing (NYSE: BA  ) .

Unlike the commercial airline industry, there is significantly less competition in the manufacturing sphere, which resembles more of a duopoly than a completely open market. Without as much pressure on prices, Boeing has been able to record positive net income every year since 2007. And that's despite the economic downturn!

In addition, the manufacturing giant has significant exposure to, and opportunities in, the rapidly expanding emerging markets, particularly Asia. In terms of current exposure, the company gets only 18% of its revenue from the Asia Pacific region. But in terms of opportunities, the statistics are shocking.

According to Boeing's estimates:

  • China alone plans to increase its airport count 30% by 2015, building an average of 15 a year.
  • Half of the world's air traffic growth will be driven by travel to, from, or within Asia over the foreseeable future.
  • Total air traffic for the region will grow by 6.7% a year until 2030.
  • Airlines will need 11,450 new planes valued at $1.5 trillion to meet the increased demand.

To give you a rough comparison, traffic demand in North America is expected to only grow at an annual rate of only 2%, requiring a comparatively modest 7,530 new planes. And to add insult to injury, the majority of this increase is expected to come from routes between here and the economically dynamic regions in Central and South America.

If you've prefer to stay away from airlines
At the end of the day, of course, you could always just skip the airline industry altogether and go for a stock with an exceptional past, present, and future: "The Motley Fool's Top Stock for 2012." Over the last five years, this stock has returned over 260%, and given its massive exposure to Latin America, it very well could go dramatically higher. To read our free report and learn the identity of this stock before the rest of the market catches on, click here now -- it's free.

Fool contributor John Maxfield does not have a financial position in any of the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2012, at 12:19 PM, travelwriter wrote:

    This is a classically "foolis" (and not in a good way) analysis of the airline sector from the Motley Fool. You do no what they say about past performance, right -- it's not indicative of FUTURE performance.

    Which is why airline stocks are VERY cheap here -- because there are many foolish views, such as expressed in this article. Looking to the past will not help you predict stock prices: you want to focus on the present and future.

    Check out the present: oil prices are historically very high (with weak fundamentals). Even paying these high prices, airline profits are high, because the industry has transformed itself into a nice oligopoly. Absent some black swan event (complete meltdown of world economy, global jihad), there is really nothing on the horizon to suggest a reversal in these improved fortunes. To the contrary -- and what is happening now -- it looks like oil prices will retreat to more rational fundmaental levels. This would obviously boost airline earnings substantially, and you would have record low p/e's (some p/e's would be flirting with "2s").

    So do you want to do real analysis, or do you want to be "foolish" and focus on the past?

  • Report this Comment On May 23, 2012, at 1:29 PM, stevefilson wrote:

    No, this article has it right. Falling oil prices in the past have just resulted in lower fares resulting in lower revenue. Stay away from airline stocks or from airline employment for that matter.

  • Report this Comment On May 23, 2012, at 2:00 PM, TMFGemHunter wrote:

    There has been a lot of consolidation since the "past", and it seems more likely than not that US Airways and American will merge within the next two years, leaving the country with 3 network carriers, 2-3 major low cost carriers, and a small collection of niche carriers. Not a lot of competition at all, and perfectly consistent with long-term profitability.

    Some investors will never believe that the airline industry has changed, even though every executive in the industry will tell you that it has. It's past time to go long airlines, particularly with falling oil prices.

  • Report this Comment On May 23, 2012, at 10:59 PM, sciencedave wrote:

    The airline industry is dominated by legacy agreements with unions, fierce competition, and no big growth prospects. Do you really think that makes a good area for investment? Just like GM it has not really changed yet.

  • Report this Comment On May 23, 2012, at 11:13 PM, NOTvuffett wrote:

    Somebody should start a fund that just shorts airline stocks, I would buy it, lol.

  • Report this Comment On May 24, 2012, at 2:02 PM, sharkflyt wrote:

    Right now I wouldn't bet on Delta because they have made a purchase of a refinery that could back fire if fuel prices drop. I don't see the oil companies giving Delta a pass while they lose the profits from the largest airline in the world. Right now my sights have been on Spirit Airlines (SAVE) which has had a 91% growth factor along with a business model that works as far as route structure and ala carte pricing.

    With Spirit you can choose how much or how little you want to spend and that equals a successful enterprise. They also don't believe in hub and spoke system which ultimately allows people to take better direct flights to popular destinations. They are also the only airline to offer the most miles for any credit card in the history of airlines.

    I do realize people need to get used to paying for things like soda and bags but if you look in the mirror , it is you that has to decide whether or not that soda or bag should fly along with you which equals weight and fuel. I found out why Spirit charges for those items and it is to cover the cost of those traveling for $19 each way without checked bags. This was the choice of the customer and this can be your choice as well.

    People must stop complaining about bag fees and items for sale on an airplane because it is those charges that keep people employed and allow for lower cost service which keep the airline and the customer happy.

    If you think paying $197 round trip from Las Vegas to Ft. Lauderdale plus $120 in bag fees and $3 soda is expensive then add it up and you will see that even with all those prices you don't even come close to paying what people had to pay for that same ticket back in 2000.

    Year 2000: Las Vegas,NV to Ft. Lauderdale,FL

    DELTA- $1785

    SOUTHWEST- $985

    UNITED - $1814

    Today year 2012

    SPIRIT : $470 which includes bag fees and soda.

    SOUTHWEST- $605 which includes your bags and free soda.

    So your bags fly free on SWA but you can fly near free with Spirit Airlines. The math is simple.

  • Report this Comment On May 24, 2012, at 7:30 PM, SuntanIronMan wrote:

    I love how this article came out a day before basically all the airlines had a major to decent rally on a relatively flat-day, lol.

    I mean, I agree with you that airlines are a bad investment. I definitely wouldn't invest in any. But I can't help to laugh a little at the timing. The first company you mentioned in the article (US Airways) is up almost 11% today. :p

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