Airline Stocks: Too Much Baggage

STREET SMART

- James K. Glassman

A bit of advice about airline stocks: Resist them. I know it’s hard. Warren Buffett once joked about his own addiction, saying, “I am Warren, and I am an aeroholic.” Buffett’s mentor, the scholar and investor Benjamin Graham, was right from the start. He wrote in 1949 that it’s obvious that the airline industry will take off, but that doesn’t make airline stocks good investments.

In the late 1980s, Buffett bought US Airways preferred shares anyway and made a little money for Berkshire Hathaway on the dividends, all the while disparaging his choice. In 2007, he wrote in his annual shareholder letter, “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”

But he remained attracted. In 2016, he started buying a chunk of nearly the entire U.S. industry, eventually paying $7 billion to $8 billion to buy roughly 10% of American Airlines Group, United Airlines Holdings, Delta Air Lines, and Southwest Airlines. By 2019, he had a small profit. Then COVID-19 struck, and he immediately pulled out, calling his investments “an understandable mistake.” A year later, the stocks had taken off, with United and American more than doubling between May 1, 2020, and May 1, 2021. Such is life with airline stocks. They’re suitable only for shortterm market timers, and no one—not even Warren Buffett—can time the market, knowing precisely when to jump in and out.