Why Warren Buffett is Buying Airlines, Why Companies Go Public, How to Learn Corporate Finance

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Main Topic: Why is Warren Buffett buying airlines after decades of ignoring them?

Buffett once said, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should’ve shot Orville Wright; he would have saved his progeny money. Airlines have been a death trap for investors.”

Suddenly, after 60 years of avoiding airlines, Buffett has made a major investment in the industry, taking positions in Delta Airlines, American Airlines, and Southwest Airlines.

Airlines are notorious for destroying the capital of investors. There have been more than one hundred airline bankruptcies, and in most of those, common shareholders were wiped out.

Some of the major issues with airlines are:

1. Safety issues can lead to big lawsuits

2. High oil prices lead to squeezed margins

3. High capital costs of buying airplanes

4. Before the 9/11 attacks, there were 10 major airlines all competing for market share, leading to pricing wars and empty seats

So what has changed so much that Buffett now finds this industry attractive?

1. The airline industry business model is changing to be more efficient

a. Between mergers and bankruptcies, there are now only four surviving major airlines, American, United, Delta, and Southwest, which control more than 80% of U.S. domestic flights. The leadership of these airlines has changed and now there are fewer or no price wars.

b. 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.

c. Fuel prices may remain low in the U.S. for some time due to the availability of cheap fuel. The cost of a gallon of jet fuel in the U.S. in 2016 was $1.45, down 52% from $3.05 in 2013.

d. Airlines are moving to a “capital light” model by leasing, not owning the aircraft they fly

e. Labor costs are rising, but those costs have been offset by the dramatic decrease in fuel costs.

With fewer competitors and lower fuel costs, the four major airlines have reported hefty profits over the last four years.

In the 12 months that ended Sept. 30, the nation’s top 25 airlines reported more than $35 billion in combined operating profits, according to the Bureau of Transportation Statistics. In the same period in 2009, the top airlines combined to collect only $685 million in operating profits.

Airlines also began in 2008 to “unbundle” their services, charging passengers new fees to check bags, change flights and buy food and entertainment. That move has generated billions of dollars in revenue for the industry.

So it appears that Buffett has decided that the airline industry has changed to fit with his desired type of industry, an oligopoly with high profit margins and a tailwind (low fuel prices and higher efficiency).


Ask JB: Why to companies go public, and how to learn corporate finance

Ask JB: Why go public? (self.investing)

submitted 46 minutes ago by MmAgoodBurp

What are the different reasons a private company would want to go public. Obviously raising funds is one. Thanks

JB Says: Some of the reasons a company may decide to go public are to:

1. Allow insiders to sell stock and reap gains

2. Raise capital for growth or to pay down debt

3. Create attractive stock option programs for employees

4. For insiders to create a new, high net worth

5. Draw attention to your brand / company

Ask JB: Corporate Finance/Valuation. Reading about these subjects will it help me in Stock market or investment in general ? (self.investing)

submitted 4 hours ago by jinjamaverick

JB Says: My recommendation is to start with learning about accounting, then move on to financial statement analysis, followed by valuation. I addressed this question about how to learn the accounting mental model in episode 75.

Do you have a burning question on investing you would like answered? Click the button below to send it to me and I will answer it on the podcast!


Activist Investor Action Alert: Sandell Asset Management Influences Barnes & Noble ($BKS)

http://www.barrons.com/articles/sandell-asset-management-studies-barnes-noble-1501302737

DISCLOSURES: NONE

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