Here's why Warren Buffett calls airline stocks hazardous to your investment health

Published Sun, Jan 14 20246:58 AM EST

With a midair emergency, disappointing profit forecast and more aircraft groundings after only two weeks, the airline industry is already off to a turbulent 2024. That only vindicates Warren Buffett, who dumped $4 billion worth of airline stocks in the pandemic and will most likely never give the industry another chance. Buffett, chief executive officer of Berkshire Hathaway and renowned as the "Oracle of Omaha," has long said the airline business suffers from a low-margin, capital-intensive model as well as additional risks stemming from forces outside its control, like the price of jet fuel and geopolitical uncertainty. "It's a labor intensive, capital intensive, largely commodity-type business," Buffett said during the annual meeting of Berkshire shareholders in 2013. "That's been a deathtrap for investors." Being a leader of an airline is also a thankless, burdensome job since so many problems can arise, Buffett said. "I mean, believe me, no joy being a CEO of an airline," he said in 2020. "It's a very, very, very difficult business because you're dealing with millions of people every day and if something goes wrong for 1% of them, they are very unhappy." Buffett, one of the world's biggest dealmakers with mountains of cash on hand, said he's been approached many times by investors wanting to start an airline business. But the entreaties only turned off Buffett. "I've had probably a dozen proposals over the last 25 or 30 years from people that that want to get into the airline business ... and a number of them have. It's sexy for some reason," Buffett said in 2013. As Buffett's late business partner Charlie Munger once quipped: "You really couldn't create another railroad, but you can create another airline. And that's what we don't like about it." Selling airlines In 2020, Buffett revealed that Berkshire sold all of its equity holdings in the U.S. airline industry. That included stakes worth a combined $4 billion in all four legacy carriers — United Airlines , American Airlines , Southwest Airlines and Delta Air Lines . Buffett said at the time that the pandemic might have fundamentally changed the industry. "The world has changed for the airlines. And I don't know how it's changed and I hope it corrects itself in a reasonably prompt way," Buffett said then. "I don't know if Americans have now changed their habits or will change their habits" as a result of the shutdown, the prolonged Covid outbreak and canceled travel plans. Back then, many Buffett watchers were left disappointed as shares of those carriers soon staged an epic rebound, more than doubling from their 2020 lows. Even former President Donald Trump weighed in on the trade, saying that Buffett has been right "his whole life" but made a mistake selling airlines. However, Buffett might still get the last laugh since, despite their bounce off the lows, the carriers never fully recovered from the pandemic damage. In fact, the U.S. Global JETS ETF (JETS), which tracks 50 U.S. and international airlines, remains about 40% below pre-Covid levels in 2019. 'Bad century out of the way’ Buffett shocked many when he returned to the industry in 2016, buying 10% of the four largest U.S. airlines. By that time, he had avoided the sector for a decade and had been so opposed to investing there that he told shareholders in a 2007 letter that "if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down." One exception during that prior decade came when Berkshire bought NetJets, which sells fractional ownerships shares in private business jets, for $725 million in 1998 When Buffett broke his own rule to buy the airline stakes in 2016, he chose to believe that the industry had finally strengthened after being plagued by bankruptcies throughout in the 20th century. "It's true that the airlines had a bad 20th century. They're like the Chicago Cubs. And they got that bad century out of the way, I hope," Buffett said i n an CNBC interview at the time. "The hope is they will keep [aircraft] orders in reasonable relationship to potential demand." Bumpy ride all along The legendary investor's first investing experience with the industry was buying more than $350 million of USAir convertible preferred stock in 1989 . Initially Berkshire took a bath on the USAir holding, but it eventually just about broke even. But Buffett was chastened. "It could've been worse, but it was a mistake," Buffett said at Berkshire's 1995 annual meeting . In the following year's shareholder letter, in 1996 , Buffett repeated an old joke about investing in airlines: "When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: 'There's really nothing to it. Start as a billionaire and then buy an airline.'"