Update on Airline Holdings
Our thesis on the airline industry is working out and the stock prices have demonstrated strong momentum of late.
There were two important themes to our purchase some time ago – falling oil prices and capacity cuts. We wanted to own companies whose earnings were sensitive to falling oil prices (as opposed to those who hedge). This has worked out and every 5$ drop in crude adds significantly to the earnings for many carriers. It is ironic but it was actually high fuel prices that put the airlines in the more favorable position they are in now. They forced the carriers to cut capacity, right-size their fleets which lowered their overall cost structures and firm up pricing.
These tough measures were all being implemented before the economy turned down. Additionally, as the economy really started to decline, oil prices fell even faster than anticipated which helped out even more.
As an added bonus, many companies have successfully embarked on various cost cutting initiatives. These are making meaningful improvements to the bottom line. The rough environment experienced over the last few years have forced the carriers to be disciplined in capacity and cost cutting, and they’ve made meaningful strides.
Now, volumes have either stabilized or increased. That’s a combination which creates a tremendous amount of earnings leverage – particularly as the companies swing to profitability. We still recognize these are extremely risky companies with weak balance sheets, but believe if their fundamentals continue to stabilize they may still have some additional appreciation potential.
Disclosure:
Berkshire equity portfolios and Berkshire employee accounts have long positions in airline stocks.
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