‘Never buy an airline’: Who said this and does it still hold in the post-COVID-19 travel boom?

Never buy an airline – you’ve probably heard this saying before. Just why is this said and is it still true amidst high industry demand?

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Why should you never buy an airline?

It’s a common saying that you should “never buy an airline” because of the high costs and risks associated with running such a business. It is unknown where this came from, some say Warren Buffett and while he has been a critic, there is no evidence he said that specific phase. Ironically, even if he once did, even he fell afoul of that on one occasion that we’ll get to soon.

Airlines must constantly compete for customers, and there is constant pressure from ever-changing fuel costs, labour costs, maintenance costs, customer service expectations, government regulations and other economic factors.

The airline industry is also highly cyclical in nature as demand for air travel fluctuates significantly with the state of the economy. All of these factors combine to make successful airline operations difficult to maintain. Moreover, while many of these impacts hit quick, the recovery is a lot slower. Just look at the fact that the most famous airline ETF – the JETS ETF – is still down from pre-COVID levels.

What about the high demand

But hang on, isn’t this an argument to buy into this industry now because of high demand? No. While Qantas has been an exception, it is uncertain whether or not this will be the case as it pays for its fleet renewal. Also consider that is more difficult to undertake capital raisings given the Qantas Sale Act requires the majority of it to be Australian owned. Some may point to Virgin Australia and its relisting – it arguably could’ve 2-3 years ago but opted to wait for equity market conditions to list. If it was certain to rise just because of travel demand, why not list much earlier?

The saving grace for both carriers that the Australian economy has not been as bad as New Zealand and this is why Air New Zealand (ASX:AIZ) is still down from its pre-pandemic peak (along with fleet issues).

Even in the American market, while some airline stocks are doing OK, other are not. For instance American Airlines has lagged its peers for several structural and operational reasons including its high debt burden which costs over US$1bn in annual interest and its focus on its domestic network rather than premium long-haul flights. Ditto low cost carriers Spirit Airlines and Frontier. Even United and Delta, which are doing well now, have had struggles in the past.

Turning to Europe, most airline stocks like Air France-KLM, Lufthansa Group, eastJet an TUI have fallen as airline equities came under pressure from weaker fare trends and cost pressures.

Just look at Warren Buffett

Even the most famous investor of all time makes mistakes and he has done so. Notwithstanding long scepticism after he made a big loss on US Airways shares in 1989, Buffet bought shares in several US airlines in 2016, reaching nearly 10% in a couple of them.

Why the (brief) change of heart? Some speculate it was the industry consolidation that occurred over the first half of the 2010s because he previously stated that intense competition was a reason to stay away. But he exited his positions in early April 2020, no doubt at significant losses.

Of course, had Buffett held he would have made some of his money back. Yet when push came to shove, he was not certain the airlines would be bailed out and that business travel would return to pre-COVID levels – indeed, it still hasn’t now.

Never buy an airline – if you’re a long-term investor

Let’s go back to 2007 to find Buffett’s best quote on this sector. ‘The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money,’ he said at the time.

Inevitably, some have made money from day trading airlines in the aftermath of the pandemic.

But there is a fine line between day traders and investors, and far more difficult for the latter to make money from airlines in light of all the reasons listed in this article.