For many, a good investment should be pure, have consistent growth and attract good rewarding returns. The airline industry has experienced structural improvement resulting in a supply-demand balance and pricing power. This mentality may be the reason as to why Mr.Warren Buffett is investing in airlines. It is amazing to see how good returns his returns are.
In the past, Warren Buffet had viewed the airline business in his opinion to be, capital intensive, low margin, the highly competitive market in which he was not willing to venture. The past few years has seen Mr. Buffet having some interest in the airline industry with Berkshire buying stock in American, Delta and United airlines in 2016. And later added southwest airlines in 2017, bringing a total investment of approximately $9 billion with Berkshire holding 7% and 9% of each airline.
Some reasons may have lured him into venturing into the business such as lower oil prices.The price of engine oil was low which seemed to bring big returns to investors. Profitability in the airline industry is on the lag as a result of fuel costs and labor costs. When the oil prices go down, profitability soars.More needs to be done to improve this aspect in the airline industry.
Warren Buffett may be doubling down on the future of air travel since, in the recent past, Berkshire Hathaway had bought industrial parts manufacturer Precision Castparts which have the aerospace industry as its primary customer. Other reasons may be that he has a lot of attractive valuation and consolidation. Mr. Warren Buffett is very business minded which explains his was of evaluating market trends.
In the past decade, the airline industry has experienced some positive changes all which have helped in creating a better operating environment making the business lucrative, and that has attracted investors.