Buffett's Berkshire takes stakes in four major airlines

[LongHaul]

Not sure who bought the airlines but I thought it was very stupid.

 

One thing is pretty clear - airlines are some of the riskiest companies out there.  The industry history is filled with bankruptcies.  And you can't look at the recent 5- 10 yrs, you have to go back 40 or so.

 

Bottom line is that ULCC are Much lower cost carriers on a CASM basis and are growing like weeds.

Low cost producers win in a commodity industry.  The history of almost all the high cost producer airlines is bankruptcy.  We'll see...

 

IBM was a mistake so Buffett is human and can make mistakes.

 

 

 

 

[John Hjorth]

Not sure who bought the airlines but I thought it was very stupid.

 

One thing is pretty clear - airlines are some of the riskiest companies out there.  The industry history is filled with bankruptcies.  And you can't look at the recent 5- 10 yrs, you have to go back 40 or so.

 

Bottom line is that ULCC are Much lower cost carriers on a CASM basis and are growing like weeds.

Low cost producers win in a commodity industry.  The history of almost all the high cost producer airlines is bankruptcy.  We'll see...

 

IBM was a mistake.

 

First of all, I do not see what IBM has to do with this topic.

 

[augustabound]

First of all, I do not see what IBM has to do with this topic.

Is there a second of all?

[DooDiligence]

The reference to IBM was about Sabre & possible data mining which may have given T&T some kind of insight that we're not seeing.

 

Combined with inside info from PCP (the company & not the drug.)

 

I know, I know - I don't really believe all that either (I think they were smoking PCP when they bought...)

[KCLarkin]

Not sure who bought the airlines but I thought it was very stupid.

 

One thing is pretty clear - airlines are some of the riskiest companies out there.  The industry history is filled with bankruptcies.  And you can't look at the recent 5- 10 yrs, you have to go back 40 or so.

 

Bottom line is that ULCC are Much lower cost carriers on a CASM basis and are growing like weeds.

Low cost producers win in a commodity industry.  The history of almost all the high cost producer airlines is bankruptcy.  We'll see...

 

IBM was a mistake.

 

I think the past 40 years of bankruptcy can clearly be linked back to deregulation. Have the past 40 years of bankruptcies allowed the legacy airlines to cut costs and consolidate enough so they can compete? Certainly the gap between the legacy carriers and LCC has narrowed dramatically.

 

And it's true that ULCC are lower CASM. But they also offer lower levels of service, resulting in lower RASM. An obvious example is business class. A business class seat has much higher CASM. But a business class flyer would never choose Spirit Airlines.

 

Is it possible that both point-to-point, leisure ULCCs and higher cost hub-and-spoke business airlines can co-exist profitably? Probably not. But the odds are much higher today than they were 10 or 40 years ago.

[captkerosene]

The environment is currently fertile but it's also unstable and eventually it will self destruct ... again. In time, each of the carriers we bought will go bankrupt. It may take 20 years but we know how the story ends. Remember who really owns the airlines - the unions.

[John Hjorth]

First of all, I do not see what IBM has to do with this topic.

Is there a second of all?

 

I apologize for couch moderating here, especially to LongHaul. I hope you accept my apology.

 

In the beginning of 2014 I was looking at Hawaiian Airlines, based on a topic on this board. I passed on it, because  I could see and understand the inside Hawaii moat, but could not get to some kind of conviction about "the rest" of the activities of the company.

 

A few months back I actually took a closer look at LuftHansa, spending a couple of days on it, and I was tempted, but passed. I haven't looked back at it since then. It is about [more or less overlapping]:

 

1. The value of the airplane fleet [leased or owned]. I have no idea how to get to some kind of conviction about if the book value is fair or not. The capital I a priori would commit to the investment did not justice the time of mine involved in diving deep into this matter.

2. The lack of calme "inside" some of these carriers [not particulary related to LuftHansa]. Constant battles between unions, certain staff groups and management and board, to get things to work in the daily operations. Shareholders are hostages in these fights [Norwegian Air Shuttle ASA [NAS.OS] and Scandinavian Air Line Systems comes to mind here].

3. Especially, I have been following what has been going on for years with SAS. It seems like a never ending story of restructurings, based on fights between management/board and certain staff groups.

4. Norwegian Air Shuttle has actually been able to reach a size within a relatively few years that is comparable to the size SAS. I haven't been able to get to some kind of understanding of what's been going on, other than somebody is betting hard. So, I'm still in the dark about the competitive dynamics in this industry.

 

Especially bullet 4 has been touched earlier in this topic. [Norwegian Air Shuttle, Easyjet, RyanAir etc.]

 

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The whole industry seems to me to be some kind of "Last man standing" revolver game, as i.e. container shipping right now.

 

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This kind of investment simply does not fit my temper with regard to risk, and prospects of reward [, - however I might get it totally wrong - so what? I certainly have other - for me  more interesting - cases on my desk].

 

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Edit:

 

My family and mine overall investment in BRK is right now a bit above 20%. When you start merging toes with an "old lady" late in life, you have to take the whole package "as is". Unless you have the capital - and thereby votes - to make a change. There are quite some dents to BRK lately - within the last year or so -, that I do not like to read about. To me, this BRK airline bet is about ~USD 1 B, relative to USD 2-hundred-and-something B.

[DooDiligence]

Why risk permanent loss of capital on such a historically difficult business as an airline?

 

The development, manufacture & marketing of diabetes therapies seems a safer bet...

[Gamecock-YT]

The unions don't have the ability to shut down the companies anymore. When was the last airline strike? When was the last railroad strike? Labor was always the big problem at airlines. The unions haven't gotten nicer, they've just lost much of their power.

 

They are finally in a position to get some leverage after the recovery. You see all the pilot unions getting new contracts, American's pilots negotiated poorly and want a second bite at the apple after seeing cargo/delta pilots get fat raises. You'll see more labor unrest to come. You don't have strikes when people are actively being furloughed.

 

Also, a topic that has been mentioned before on here that will be continuing trend in the industry is a shortage of pilots. Due to the industry dynamics where it was cheaper to work at McDonalds than be an entry level pilot (and take on the associated debt to get trained to even be in that position) there's a shortage of pilots at the regional airlines that will continue to work its way throughout the system with the mandatory retirement age of 65. Labor costs will continue to increase.

 

So sure, it seems like this is a play on a consolidating industry with semi-rational actors (although capacity keeps increasing, never mind low fuel prices artificially keeping CASM in check). But, it just seems like we're a lot closer to a cyclical top for the aviation industry than we are a bottom.

[LongHaul]

unions are a great point.  Not ideal.

 

Plus there are Airplane fanatics out there who find it fun to build and run Airlines.

I think it ends up hurting the ROIC of the industry long term. 

 

[KCLarkin]

Why risk permanent loss of capital on such a historically difficult business as an airline?

 

Air Canada, for example, is up 1000% in the past 5 years. So, it can be attractive if you time the cycle correct.

 

The question is why NOW. Most people would agree that airlines are at or near a cyclical top. To me, the airlines look very expensive today. They must see something we don't. Right?

[augustabound]

Air Canada, for example, is up 1000% in the past 5 years. So, it can be attractive if you time the cycle correct.

 

The question is why NOW. Most people would agree that airlines are at or near a cyclical top. To me, the airlines look very expensive today. They must see something we don't. Right?

 

It's a head scratcher no matter how I look at it (same with some others here I guess).

 

I've sworn to never read another airline AR again. I have to separate my love for commercial jet watching at Pearson airport for the bad businesses they are. 

 

Interesting, Pabrai Tweeted the top US airlines are good businesses cheap right now.

John Huber asked him why they are good businesses but he didn't respond.

 

 

[KCLarkin]

Oliver Wyman Airline Economic Analysis:

http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/jan/oliver-wyman-airline-economic-analysis-2015-2016.pdf

 

Interesting report for anyone who wants to waste brain cells thinking about airlines.

[DooDiligence]

There are Airplane fanatics out there who find it fun to build and run Airlines.

 

I think it ends up hurting the ROIC of the industry long term.

 

I've had a Private single engine land (no instrument rating) since 1980 & I love the precision & beauty of aircraft (the smell of 100LL gives me a woody!)

 

I've never owned a plane & never will (maintenance costs will kill you.)

 

Has anyone at BRK been friends with Burt Rutan?

 

Paul Allen helped fund his SpaceShipOne project & Richard Branson was interested in this as well.

 

Lots of billionaires trying to get a leg up on consumer space travel & maybe Buffett & Company are "blue skying" for 20 years down the road?

 

Just noodlin'

 

 

 

 

[rb]

Yea, the moment BRK starts investing in space travel technology is the moment I sell my BRK stock.

[Uccmal]

Why risk permanent loss of capital on such a historically difficult business as an airline?

 

Air Canada, for example, is up 1000% in the past 5 years. So, it can be attractive if you time the cycle correct.

 

The question is why NOW. Most people would agree that airlines are at or near a cyclical top. To me, the airlines look very expensive today. They must see something we don't. Right?

 

If you time the cycle right.  Had you got in in early 2009 you had 4-5 years of pain to endure.  I personally dont know anyone who can endure long term pain like that.  It works okay in a Schloss- Graham situation but as a large enough holding that might really move the needle it would have been torture. 

 

The other thing about Ac is that in 2007-08 the stock was higher than it is now.  And it pays no dividend (at least right now).  So, had you invested at the top or near top of the cycle you would be down 30% on inflation, and god only knows the opportunity cost.  I dont see how the big US guys are any different.  I looked up all four of the others and the charts mirror AC's.  Delta, luv, and AAL pay paltry dividends, and UAL has none. 

 

It is interesting how the stock charts lag the price of fuel.  Fuel up, then the stock price drops.  So, we can expect airlines to come off as fuel prices rise, perhaps? 

 

As to the unions.  It isn't just the pilots.  Its every union that works in an airline.  Everyone in baggage, mechanics, and other services need to be heavily trained, skilled, and bonded.  They may not have had bargaining power for awhile but they will have it now.

 

There is a notion going around that costs may come down should planes be piloted from the ground.  But there is still an added layer of labour in a different area, that costs just as much.  And pricing power would erode with automation.  They would save on per diem costs for pilots, but thats about it. 

 

Pure and utter speculation: Buffett is prepping to buy Southwest and trying to obfuscate his interest. 

 

I agree, alot easier to buy a diabetes drug provider. 

[rb]

There is a notion going around that costs may come down should planes be piloted from the ground.  But there is still an added layer of labour in a different area, that costs just as much.  And pricing power would erode with automation.  They would save on per diem costs for pilots, but thats about it. 

 

Pure and utter speculation: Buffett is prepping to buy Southwest and trying to obfuscate his interest. 

 

I agree, alot easier to buy a diabetes drug provider.

I don't think that pilot costs are a very high percentage of the overall costs. Then all you need a couple of accidents to put a lid on that idea. Also we went down from 3-4 pilots to 2 pilots per plane and the economics of the industry didn't really change. I think if we're talking about mass transportation drones as the cure for airlines we're really grasping at straws.

[John Hjorth]

LuftHansa : Strike of the Pilots Union Cockpit on 23. November 2016.

[KCLarkin]

If you time the cycle right.  Had you got in in early 2009 you had 4-5 years of pain to endure.  I personally dont know anyone who can endure long term pain like that.  It works okay in a Schloss- Graham situation but as a large enough holding that might really move the needle it would have been torture. 

 

The other thing about Ac is that in 2007-08 the stock was higher than it is now.  And it pays no dividend (at least right now).  So, had you invested at the top or near top of the cycle you would be down 30% on inflation, and god only knows the opportunity cost.  I dont see how the big US guys are any different.  I looked up all four of the others and the charts mirror AC's.  Delta, luv, and AAL pay paltry dividends, and UAL has none.

 

Cyclicals are hard, no doubt. But the basic rule is pretty simple: Strong returns attract capital. More capital lowers returns. Lower returns cause capital to exit. And it takes a long time for capital to enter and exit. So the cycles last longer than you expect. The Air Canada chart probably looks pretty familiar to someone who owns Penn West.

 

--

 

The other dynamic is low-cost versus high cost producers. WJA, LUV, RyanAir had a relatively stable decade. But the marginal guys had a wild ride. Every investor should understand cyclicals. At least so you know what to avoid. I highly recommend "Capital Returns".

 

 

[LongHaul]

If you time the cycle right.  Had you got in in early 2009 you had 4-5 years of pain to endure.  I personally dont know anyone who can endure long term pain like that.  It works okay in a Schloss- Graham situation but as a large enough holding that might really move the needle it would have been torture. 

 

The other thing about Ac is that in 2007-08 the stock was higher than it is now.  And it pays no dividend (at least right now).  So, had you invested at the top or near top of the cycle you would be down 30% on inflation, and god only knows the opportunity cost.  I dont see how the big US guys are any different.  I looked up all four of the others and the charts mirror AC's.  Delta, luv, and AAL pay paltry dividends, and UAL has none.

 

 

Wise words KC.  Sounds like a good book.

 

Cyclicals are hard, no doubt. But the basic rule is pretty simple: Strong returns attract capital. More capital lowers returns. Lower returns cause capital to exit. And it takes a long time for capital to enter and exit. So the cycles last longer than you expect. The Air Canada chart probably looks pretty familiar to someone who owns Penn West.

 

--

 

The other dynamic is low-cost versus high cost producers. WJA, LUV, RyanAir had a relatively stable decade. But the marginal guys had a wild ride. Every investor should understand cyclicals. At least so you know what to avoid. I highly recommend "Capital Returns".

[DooDiligence]

There is a notion going around that costs may come down should planes be piloted from the ground.  But there is still an added layer of labour in a different area, that costs just as much.  And pricing power would erode with automation.  They would save on per diem costs for pilots, but thats about it. 

 

Pure and utter speculation: Buffett is prepping to buy Southwest and trying to obfuscate his interest. 

 

I agree, alot easier to buy a diabetes drug provider.

I don't think that pilot costs are a very high percentage of the overall costs. Then all you need a couple of accidents to put a lid on that idea. Also we went down from 3-4 pilots to 2 pilots per plane and the economics of the industry didn't really change. I think if we're talking about mass transportation drones as the cure for airlines we're really grasping at straws.

 

I would have a very hard time getting on a plane that was being flown remotely (if the pilot has no skin in the game & is having a bad day...)

[brown91]

Claim: I'd be willing to bet these airline investments are from Weschler.

 

Proof: http://www.nytimes.com/2005/05/26/business/diverse-mix-of-investors-in-airline-deal.html?_r=0

[Uccmal]

There is a notion going around that costs may come down should planes be piloted from the ground.  But there is still an added layer of labour in a different area, that costs just as much.  And pricing power would erode with automation.  They would save on per diem costs for pilots, but thats about it. 

 

Pure and utter speculation: Buffett is prepping to buy Southwest and trying to obfuscate his interest. 

 

I agree, alot easier to buy a diabetes drug provider.

I don't think that pilot costs are a very high percentage of the overall costs. Then all you need a couple of accidents to put a lid on that idea. Also we went down from 3-4 pilots to 2 pilots per plane and the economics of the industry didn't really change. I think if we're talking about mass transportation drones as the cure for airlines we're really grasping at straws.

 

I would have a very hard time getting on a plane that was being flown remotely (if the pilot has no skin in the game & is having a bad day...)

 

I have a hard enough time with planes as it is.  :-)

 

And I have similar concerns with driverless anything.

[KCLarkin]

The current airlines are getting fat from regulatory protections.  Norwegian is coming to eat the domestic carriers alive.  I wouldn't invest in this space unless you think we are becoming much more protectionist.  They simply can't compete with these new airlines without massive capex spending

 

The obvious question is why does Norwegian have such a low cost structure? They buy the same planes. They use the same fuel. Apparently, they even hire Americans. So either Norwegian has a tax advantage, illegal subsidy, or some other structural advantage that I am missing.

 

Or the cost advantage is an illusion. For example, flying to cheaper but less desirable airports. Or packing more seats on a plane.

 

For Norwegian, the issue is compounded by the carrier’s high-density seating configurations that add extra weight to its planes. Norwegian packs 291 seats on to its Boeing 787 -8 models and 344 on to its bigger 787-9s. By comparison, United's 787-8 and 787-9 Dreamliner models seat 219 and 252 passengers, respectively.

 

I think the cost advantage of many of these ULCC's comes simply from cramming more seats on the plane. But this isn't really a sustainable competitive advantage. United can easily re-configure its planes. We saw this with Air Canada Rouge, for example.

 

But presumably United uses lower density configurations because they can charge more to business flyers. So the network carriers let the LCCs and ULCC's pick off the leisure travellers.

 

[rawraw]

I don't doubt there are some unfair cost advantages, but I don't agree that they buy the same planes. I only have a cursory knowledge, so I could be mistaken. But Their fleet is much newer, which is one of the helpful aspects. They aren't like WOW where the flight is cheap but uncomfortable. They fly some of the more fuel efficient planes, which surely the others can buy. It's just lots of capex and  dealing with legacy planes. No idea what keeps the others from investing