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Maybe Buffett Was Right About Airlines After All

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

^XAL Chart

^XAL data by YCharts.

Or maybe not. Yesterday, on April Fool's Day no less, the financial media grasped onto a particularly peculiar story. "Airline Returns Refute Buffett Aversion to U.S. Carriers" read a Bloomberg News headline. Barron's chimed in with "Buffett's Missed Airlines Bet."

The argument in both was the same, though I suppose that's not surprising given that the Barron's article quoted the Bloomberg piece. Warren Buffett, probably the greatest investor of all time and the chairman and CEO of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , has shunned airline stocks for the past quarter century. Yet, in the first quarter of this year, an index that tracks the sector surged by 35%. As of yesterday's closing price, Delta (NYSE: DAL  ) has seen its stock soar by 33%, United Continental's (NYSE: UAL  ) by 28%, and US Airways Group's (UNKNOWN: LCC.DL  ) by 19%.

According to an analyst quoted by Bloomberg, "The same factors that made airlines uninvestable for years -- too much capacity, too much debt -- are the opposite now and make them attractive. I'm not going to shy away from an industry just because it has a bad history."

So there you have it. Buffett was wrong, and an analyst who willingly ignores decades of precedent was right.

Well, suffice it to say, a coronation is perhaps a bit premature. Shares of the major airlines are down considerably today after Delta reported disappointing traffic figures for the month of March and cut its first-quarter revenue forecast. The company's president had previously predicted that first-quarter passenger revenue per available seat mile -- a key metric in the industry -- would increase between 4.5% and 5.5% in the first three months of the year, implying a gain of between 4% and 4.5% in March. The company reported this morning, however, that the actual figure came in at 2%.

According to the press release issued by Delta, "The reduction from previous guidance is due to lower close-in bookings driven by the sequester, lower than expected demand as a result of our attempt to drive higher yields, and temporary inefficiencies during implementation of new revenue management technology."

The fact remains that airlines are and have been a horrible investment. Was the first quarter of this year an aberration? Yes. Obviously. But does it disprove the prudence of Buffett's aversion to the sector? I suppose the chart at the beginning of this article speaks to that.

Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On April 02, 2013, at 1:01 PM, mariposa12345678 wrote:

    Airline stocks is still very cheap compare with other sector ,forward PE is around 10.

  • Report this Comment On April 02, 2013, at 9:27 PM, sciencedave wrote:

    Almost every airline in the US has been thru bankruptcy. Long term most will always be bad investments unless they change their infrastructure or differentiate their services substantially.

    Remember they sell a not-too-enjoyable service anymore...that is all. Hard to improve much on that. Hard to take that home and use it. Legacy costs prevent them from breaking the business mold.

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