Buf­fett In­vest­ing Bil­lions into an In­dus­try he Once Called a ‘Death Trap’

The Economic Times - - Companies: Pursuit Of Profit -

Busi­ness In­sider: 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 $2.15 bil­lion of South­west Air­lines, raised his stake in Delta to nearly $3 bil­lion, and boosted his po­si­tion on Amer­i­can Air­lines. He also owns a stake in United. This 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.

PROF­ITS FLY HIGH

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-effi- cient 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 trav­el­ers. 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 $11 bil- lion 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, la­bor 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 trav­el­ers 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 la­bor 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.

ET IMAG­ING ARINDAM

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