This week, Warren Buffett’s Berkshire Hathaway disclosed a significant commitment to the US airline industry, saying it had raised its stakes in Delta Air Lines and American Airlines and taken a new position in Southwest Airlines.
According to a regulatory filing, Buffett purchased $2.2 billion in shares of Southwest. He also owns about $2 billion of American, United Airlines, and Delta.
The investments total more than $8 billion.
It’s 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 has changed?
First, the price of crude oil is now half of what 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 reported record profits.
US airlines have also invested billions of dollars in next-generation aircraft, interiors, and technology. This includes the arrival of state-of-the-art fuel-efficient airliners such as the Boeing 787 Dreamliner, Airbus A350, Boeing 737 MAX, and the Bombardier C-Series.
In addition, American, Delta, and United have invested heavily in premium cabin seating and amenities aimed at high-spending business travelers. As a result, the overall quality of the four airlines' product offerings has significantly improved in terms of luxury, connectivity, and efficiency.
And the landscape of the US airline industry has changed dramatically in the past few years. Overall, airlines in the US are in a much better place now.
In 2013, United was mired in a messy integration process after its 2010 merger with Continental. Southwest was working through its integration of AirTran Airways. At the same time, American and US Airways were about to announce a massive $11 billion merger to form the largest airline in the world.
This means that in 2013, three of the four largest mainline carriers in the US were either struggling through or about to enter the costly process of merging - increasing the risk of operational problems resulting from combing differing corporate culture, labor agreements, and infrastructure.
Now 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. United's five-year journey through merger hell is finally over, with the airline surging forward under the leadership of CEO Oscar Munoz. And the newly merged American Airlines seems to be working its way through a successful integration process.
But Buffett's newfound faith in the airline industry doesn't mean everything is perfect. US airlines face increasing competition from a flood of low-cost international airlines for budget travelers, and from Asia and the Middle East for premium-cabin customers.
Weakness in the traditionally lucrative transatlantic and transpacific routes due to slowing economic growth in China and instability in Europe temper some of this optimism. In addition, profit margins among the four airlines will face pressure from new labor agreements that clawed back many of the concessions made after 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.
