Airlines are back in favor as investors react to the changing fundamentals of the sector. And as the sector is at an inflection
point, activist and astute investors are scrambling to claim a piece of the airline pie.
Buffett's Newfound Interest In Airlines
- The 13-D regulatory filing done by Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B)
showed the company took a new position in Southwest Airlines Co (NYSE: LUV) in the fourth quarter of 2016, buying 43.2 million shares for $2.15 billion.
- Buffett also increased his stake in Delta Air Lines, Inc. (NYSE: DAL) by 850 percent to 60 million shares, valued at $2.95 billion.
- Berkshire also raised its stake in American Airlines Group Inc (NASDAQ: AAL).
- Berkshire's stake in United Continental Holdings Inc (NYSE: UAL) was upped by 540 percent during the quarter.
Buffett's positions in the four airlines currently make up 6.5 percent of his portfolio. At the end of the third quarter,
Buffett revealed a 21.8 million-share stake in American Airlines, while he also picked up 6.33 million shares of Delta Air Lines and
4.53 million shares of United Continental.
However, there were doubters too. Omega Advisors lowered its stake in Delta Air Lines to 75,600 shares from 976,400 shares. The
fund's stake in United Continental was reduced to 1.76 million shares from 2.06 billion shares.
Related Link: Here's Every Time Buffett Has
Bashed Airline Stocks
Buffett has had an antagonistic stance toward the sector until recently, and the about-face has come as a surprise. Are things
really looking up for the airlines? Has the sector hit the purple patch? What has really changed with these companies?
The shares of airline stocks have made a turn for the better in the middle of 2016 after their lackluster run until then.
AAL data by YCharts
Source: Y Charts
Fundamentals — Fuel Costs/Demand/Geopolitical Setbacks
Airlines, which suffered from unit revenue declines for much of 2015 and the first half of 2016, look poised to put the worst
behind them. Most vouch by their ability to turn things around and begin reporting positive unit revenue growth by early 2017.
Dwindling fuel costs in the wake of lower crude oil prices have also proved salubrious for the stocks. Aviation turbine fuel
accounts for roughly 15–20 percent of the operation costs of airlines.
The airline sector has also undergone a considerable degree of consolidation over the last several decades, forced in part by
the enormous losses racked up by the companies amid a slowdown in demand. Companies responded to the slowdown in demand by reducing
capacity and saving on costs.
With demand picking up after 2010, airlines trimmed their losses, although they weren't able to completely wipe away the losses. Some airlines
went out of business, while others pursued M&As to stay afloat.
The consolidation process is now fairly complete, with the positive impact of the measure beginning to manifest.
However, airlines may not be completely out of the woods, the volatile geopolitical landscape can undo all the good works of the
airlines in a jiffy, as it brings down volumes and in turn the revenues. It also works through the impact, it has on the price of
crude oil. With Buffett looking past these apprehensions and endorsing the sector, better days could be ahead for these stocks.
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