Last month we learned that Warren Buffett bought shares of American Airlines, Delta Air Lines and United Airlines, according to Berkshire Hathaway’s third-quarter regulatory filings. He also confirmed that he purchased Southwest Airlines stock as well. If we look at the Dow Jones U.S. Airlines Index year-to-date, these allocations appear to have been well-timed.

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Warren Buffett Airlines

Buffett is universally recognized as one of the most influential investors of all time, so his decision to book a flight on airlines, after blasting the industry for years, is worth examining more closely.

Protected by an Economic Moat

We can mention a couple of things upfront. Most everyone knows Buffett is a value investor. He seeks equity in companies that the market has undervalued—including airlines. As I’ve pointed out before, if we use price-to-earnings as our valuation metric, airlines are among the least expensive in the industrials sector.

He also likes companies that are protected by what he calls a “moat,” the “something” that prevents new competitors from disrupting the industry, giving the veteran players a clear advantage in the marketplace. This is why Buffett has always been attracted to railroads. Because rail is prohibitively capital-intensive, the barriers to entry are high and competition is limited, giving companies greater market power.

Warren Buffett Airlines

We see a similar moat protecting U.S. airlines. Since the industry consolidated a decade ago after a wave of bankruptcies, a vast majority of the market share is now concentrated in the big four carriers. In 2015, American, Delta, United and Southwest controlled about 77 percent of U.S. airline revenue.

These are pretty high-level factors to consider. When we delve deeper into the factors Buffett uses to assess equities, the airlines group becomes even more attractive.

Airlines Crushed the Broader Market

What you see below are the top 10 U.S. airlines compared to the S&P 500 Index, using four of Buffett’s favorite financial metrics:  return on equity, cash flow return on invested capital, net income margin and free cash flow per share. As of the third quarter, the airlines group trounced the broader market in all four areas for the 12-month period. This might have contributed to Buffett’s decision to rotate back into a space he spent a couple of decades deriding.

Warren Buffett Airlines

You can find the definitions of these factors on Investopedia, but they’re pretty self-explanatory.

Return on equity (ROE) measures how much profit a company generates with shareholders’ money. Whereas the S&P 500 returned about 14 percent during the 12-month period, airlines returned 36 percent of equity.

Cash flow return on invested capital (CFROIC) tells investors how much cash flow a company produces as a percentage of its total capital. CFROIC was 35.60 percent for carriers, 14.90 percent for blue-chip stocks.

Net income margin, simply put, is the percent difference between a company’s sales and its net profits. In the past, airlines were notorious for having razor-thin margins. That’s all changed thanks to industry consolidation, restructuring of businesses and the addition of new revenue streams. The top 10 airlines saw margins of more than 12 percent, while S&P 500 margins were 9.8 percent.

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Finally, free cash flow per share is exactly what it sounds like. It’s sometimes used as a proxy for earnings per share, but it specifically measures a company’s ability to pay back loans, taxes and other expenses on a per-share basis. Airlines beat the S&P 500, $4.1 per share to $3.3 per share.

Airlines have definitely come a long way since Buffett invested in—and lost money on—US Airways back in 1989. If you’re interested in learning more, I invite you to join me during my next webcast. I’ll be discussing how airlines reversed their fortunes from near-bankruptcy to record profitability, and where they might go from here.

Article by Frank Holmes