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Buffett's Berkshire takes stakes in four major airlines


KCLarkin

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Yes, they are flying 787s on long flights. Great planes. But they have 12 787s, according to their website. United has 25.

 

If you look at the whole fleet, yes, United will be more expensive because they have an older fleet. But airlines compete route by route. So if they wanted to, United could reconfigure their 787s to a higher density and compete directly on Norwegians routes. Would Norwegian still have a cost advantage? Probably but maybe not by much.

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The current airlines are getting fat from regulatory protections.  Norwegian is coming to eat the domestic carriers alive.  I wouldn't invest in this space unless you think we are becoming much more protectionist.  They simply can't compete with these new airlines without massive capex spending

 

The obvious question is why does Norwegian have such a low cost structure? They buy the same planes. They use the same fuel. Apparently, they even hire Americans. So either Norwegian has a tax advantage, illegal subsidy, or some other structural advantage that I am missing.

 

Or the cost advantage is an illusion. For example, flying to cheaper but less desirable airports. Or packing more seats on a plane.

 

For Norwegian, the issue is compounded by the carrier’s high-density seating configurations that add extra weight to its planes. Norwegian packs 291 seats on to its Boeing 787 -8 models and 344 on to its bigger 787-9s. By comparison, United's 787-8 and 787-9 Dreamliner models seat 219 and 252 passengers, respectively.

 

I think the cost advantage of many of these ULCC's comes simply from cramming more seats on the plane. But this isn't really a sustainable competitive advantage. United can easily re-configure its planes. We saw this with Air Canada Rouge, for example.

 

But presumably United uses lower density configurations because they can charge more to business flyers. So the network carriers let the LCCs and ULCC's pick off the leisure travellers.

 

L-A-B-O-R

 

 

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L-A-B-O-R

 

R-O-I-C.

 

So far, I haven't found any mention of ROIC in Norwegian's presentations. I haven't run the numbers myself, but it looks like they are buying growth and losing money after including Cost of Capital.

 

Because they are willing to buy uneconomic growth, they can buy the newest, most fuel-efficient airplanes.

 

--

Labor doesn't seem to be the answer (at least not directly).

 

They try to circumvent unionization by outsourcing to 3rd parties. They hire pilots in Singapore. They setup their subsidiary in Ireland to avoid Norwegian labour regulations and taxation. So it seems like they are aggressive. And the regulatory regime is rightfully skeptical at Norwegian's aggressive use of loopholes.

 

But beyond their labor arbitrage games, their labor cost advantages seem to come down to buying high-density 787s. If a 787 has two pilots, the airline flying with 344 seats is going to have a huge labor cost advantage over the one with 252 passengers. As I mentioned previously, that's not a sustainable advantage.

 

Why aren't other airlines copying this strategy? The ROIC doesn't seem to be attractive. And they are leveraged beyond belief.

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Yes, they are flying 787s on long flights. Great planes. But they have 12 787s, according to their website. United has 25.

 

If you look at the whole fleet, yes, United will be more expensive because they have an older fleet. But airlines compete route by route. So if they wanted to, United could reconfigure their 787s to a higher density and compete directly on Norwegians routes. Would Norwegian still have a cost advantage? Probably but maybe not by much.

But do you view this as a favorable thing for airlines?  To me this just suggests how precarious a large airline company is as a long term investment

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I did take a quick look at Norwegian Air Shuttle ASA [Publ] yesterday. I have the same perception as KCLarkin based on the quick look. Not much money has been earned within the last 10 years, and a very low equity ratio. This combined with an enormous planned and committed fleet expansion for the next few years.

 

A major rise in fuel prices for a longer period going forward, and this company will end up in deep trouble. It seems to me to be like an all in bet for the future of the company with the risk nowhere near zero of running the company in the ditch.

 

Mr. Kjos does not seem to take into consideration margin of safety in investment decisions. He appears to just want the company to grow - the faster the merrier. He will either die very rich, or the opposite. There will be no in-between outcomes. And most likely he does not give a damn about it, as already mentioned - as an "in general" comment - earlier in this topic.

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L-A-B-O-R

 

R-O-I-C.

 

So far, I haven't found any mention of ROIC in Norwegian's presentations. I haven't run the numbers myself, but it looks like they are buying growth and losing money after including Cost of Capital.

 

Because they are willing to buy uneconomic growth, they can buy the newest, most fuel-efficient airplanes.

 

--

Labor doesn't seem to be the answer (at least not directly).

 

They try to circumvent unionization by outsourcing to 3rd parties. They hire pilots in Singapore. They setup their subsidiary in Ireland to avoid Norwegian labour regulations and taxation. So it seems like they are aggressive. And the regulatory regime is rightfully skeptical at Norwegian's aggressive use of loopholes.

 

But beyond their labor arbitrage games, their labor cost advantages seem to come down to buying high-density 787s. If a 787 has two pilots, the airline flying with 344 seats is going to have a huge labor cost advantage over the one with 252 passengers. As I mentioned previously, that's not a sustainable advantage.

 

Why aren't other airlines copying this strategy? The ROIC doesn't seem to be attractive. And they are leveraged beyond belief.

 

This demonstrates why Airlines are a lousy investment, or at least a deep cyclical.  Up starts come on the scene with regularity.  I like West Jet as an example.  They kept labour costs low, and flexible by using profit sharing to keep unionized labour out.  They also ran with a bare minimum of planes in the air to meet their flights. 

 

Anecdotally, I was in Calgary a number of years ago, and we flew West Jet.  On our return, there was a major storm in the east, a day and a half earlier.  Our flight got delayed for 12 hours, at least.  The reason for this was that a couple of their planes had been stranded out east.  This put the entire system behind the eight ball.  They didn't have any extra capacity in the system.  Every plane they had was working all the time.  Air Canada, on the other hand had no delays - they simply slotted in extra planes and staff, which of course costs more. 

 

West Jet could also sideline their labour without union repercussions.  They kept every plane working non-stop.  But this is not sustainable on a larger scale where the effects of bureaucracy start to take over.

 

Right now, the major airlines we are discussing have a huge tailwind.  They have been able to squeeze their labour force for a few years, have dirt cheap fuel costs, and have squeezed the customers.  Rising fuel costs reduce profitability - you can add surcharges but customers will reduce the number of flights in the face of too much price increase.  The honey pot of profitability starts to look pretty desirable to the labour force.  Customers will push back:  In the last few years we have had baggage fees added, and meals eliminated - when word around how well these airlines are doing there will be push back. 

 

These companies are at, or near, the top of the cycle in terms of profits.  As with any cycle predicting how high it goes, or when it ends is tough. 

 

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  • 1 month later...

https://www.bloomberg.com/news/articles/2017-01-31/buffett-bought-12-billion-of-stock-from-election-through-friday

 

Rose asked if Buffett’s most-recent purchases included airlines. Buffett ducked the question, saying only that Berkshire held stakes in airlines as of Sept. 30.

 

In November, Berkshire disclosed that it held in American Airlines Group Inc., Delta Air Lines Inc., and United Continental Holdings Inc. at the end of the third quarter. The billionaire said that month that Berkshire also bought a stake in Southwest Airlines Co. since Sept. 30.

 

Buffett told Rose he wouldn’t get into why Berkshire bought the shares, but said that it was “in large part” his decision.

 

Wow, so Warren did have some sort of input into buying the airlines.

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https://www.bloomberg.com/news/articles/2017-01-31/buffett-bought-12-billion-of-stock-from-election-through-friday

 

Rose asked if Buffett’s most-recent purchases included airlines. Buffett ducked the question, saying only that Berkshire held stakes in airlines as of Sept. 30.

 

In November, Berkshire disclosed that it held in American Airlines Group Inc., Delta Air Lines Inc., and United Continental Holdings Inc. at the end of the third quarter. The billionaire said that month that Berkshire also bought a stake in Southwest Airlines Co. since Sept. 30.

 

Buffett told Rose he wouldn’t get into why Berkshire bought the shares, but said that it was “in large part” his decision.

Perhaps it was his decision, but I think someone else did the convincing...

 

http://www.nytimes.com/2005/05/26/business/diverse-mix-of-investors-in-airline-deal.html?_r=0

 

 

Wow, so Warren did have some sort of input into buying the airlines.

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  • 2 weeks later...
  • 2 weeks later...

Definitely sounds like they are done adding shares of the Airlines.  They don't want to go over 10% and have share repurchases to factor in. 

 

Yes, it also sounded to me like this basket of airline stocks was for the long term for BRK [to the contrary to a "generally undervalued" trade]. Time will naturally tell.

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does anyone have the link to the American Airlines presentation that CEO Doug Parker gave that apparently convinced Tedd Weschler to invest?

 

This is good. Thanks.

 

Key takeaways:

- Available seats are only up 6.7% over the last 10 years.

- 3 global hub-and-spoke carriers. Consolidation of these hubs makes the legacy airlines more efficient and competitive.

- Cabin segmentation allows legacy carriers to better compete with Low Cost airlines, while still generating premium RPMs

- Combination of low stock price, free cash flow, and NOLs allow airlines buy large amounts of stock.

- Capacity discipline plus backlogs at Boeing and Airbus mean that good times will last longer than expected

- Bankruptcies have allowed legacy carriers to become more competitive

 

Despite the similarities, this is very different from the railroad thesis. The thesis looks sound to me, if a bit late.

 

 

 

 

 

 

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Bloomberg has an article on the growing importance of the credit-card / miles portion of the major airlines' businesses -

 

https://www.bloomberg.com/news/articles/2017-03-31/airlines-make-more-money-selling-miles-than-seats

 

as an aside, I haven't paid cash for an airline ticket for myself or my family in several years.  someone is paying, I guess it's the banks?

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Bloomberg has an article on the growing importance of the credit-card / miles portion of the major airlines' businesses -

 

https://www.bloomberg.com/news/articles/2017-03-31/airlines-make-more-money-selling-miles-than-seats

 

as an aside, I haven't paid cash for an airline ticket for myself or my family in several years.  someone is paying, I guess it's the banks?

 

Wouldn't you say that that cost is borne by consumers on average?

 

Credit cards that earn miles or rewards have higher processing fees than plain credit cards. The increased cost is passed on as slightly higher prices for all consumers.

 

 

 

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Bloomberg has an article on the growing importance of the credit-card / miles portion of the major airlines' businesses -

 

https://www.bloomberg.com/news/articles/2017-03-31/airlines-make-more-money-selling-miles-than-seats

 

as an aside, I haven't paid cash for an airline ticket for myself or my family in several years.  someone is paying, I guess it's the banks?

 

Wouldn't you say that that cost is borne by consumers on average?

 

Credit cards that earn miles or rewards have higher processing fees than plain credit cards. The increased cost is passed on as slightly higher prices for all consumers.

 

I agree, if you by all consumers mean the carrier passengers. There are cards out there with no fees at all and built in rewards.

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  • 4 months later...
Guest notorious546

does anyone have a copy of the stifel nicolaus report which highlights how rewards programs/float like revenue was positive for the airlines?

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Priceline founder Jay Walker talks about how the load factor is better today in this https://skift.com/history-of-online-travel/ excerpt:

At that time when we started, the airlines were flying about two million empty seats a day. There were many more airlines and the industry load factor was probably around 61 or 62 percent, unlike the 87 percent is today. The airlines were flying a lot of empty seats around, which meant there was a lot of perishable inventory but at the same time we knew there was a fair number of people who would fly if they could get the price they wanted.

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