When you look at the overall history of airline stocks, you will see that they have not been able to truly make the majority of their shareholders very wealthy. The airline business needs a huge amount of capital, and it also has very high fixed costs. You are going to have to pay the same amount to fly a plane whether or not it is filled to the brim with passengers or completely empty.
After the airline industry became deregulated throughout the world, there is now a lot of excessive competition to sell a seat on a flight, and there really isn’t much of a difference between one airline or another. But it’s a glamorous business, and it attracts more and more investors when a new airline comes about.
Warren Buffett’s business partner and vice chairman of Berkshire Hathaway Charlie Monger said in 2008 “the net amount of money that’s been made by the shareholders of airlines since Kitty Hawk is now a negative figure.” That shows you just how negative this essential business can truly be, and it has been around for close to a century now.
Warren Buffett actually looks at airlines as “the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”
Berkshire Hathaway actually owned 9.25% of USAir’s preferred stock in 1989. They exited the position profitably, and Berkshire said “in one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain.” Even though this investment took place over a decade ago, Charlie Monger and Warren Buffett haven’t forgotten the mistake they made. They said that their “analysis of USAir’s business was both superficial and wrong.”
The overall outlook for the entire airline industry will only present investors with short-term trading opportunities. Remember, this is a very highly cyclical business, so the opportunities will only come around once in a while. When Richard Branson (owner of Virgin Australia, Virgin America and Virgin Atlantic) was asked how you can become a millionaire, he answered by saying “there’s really nothing to it. Start as a billionaire and then buy an airline.”