Warren Buffett Is Big on Airline Stocks Now: What Does This Mean for Singapore Airlines Ltd?

Warren Buffett has invested big into airline stocks.

At the end of last year, Buffett’s Berkshire Hathaway was holding US$9 billion in US airline stocks. The big position comes as a surprise as Buffett had consistently spoken out against investing in airlines stocks over the years.

A change of heart?

For investors in Singapore’s stock market, there’s an interesting question: if Buffett is into airline stocks now, would he be interested in Singapore Airlines Ltd (SGX: C6L)?

Some context on Buffett’s decision-making may be helpful. My fellow US Fools, Sean O’Reilly and Adam Levine-Weinberg, had a great discussion on Buffett’s big move into airline stocks. The conversation yielded interesting insights into how the airline industry in the US has changed for the better.

In essence, the US airline industry had consolidated to the point where four companies control over 80% of US domestic flights. Levine-Weinberg said:

“I think that’s probably why more investors are getting interested, because they see there’s now four companies that can, together, control more than 80% of the domestic market, and a good chunk of the international market, as well, out of the U.S.

So, they each have a stake in making sure the industry is profitable, because they know if they go out and grow 7%, everybody else is going to do the same thing, and it’s going to hurt industry health profitability by quite a bit.

So, consolidation has, in that way, helped the airlines to take a more balanced approach to capacity growth, and not grow when they’re not making enough money to justify it.”

There are still difficulties

Yet, the challenges in the airline industry remain. Consolidation  does not solve all the existing problems within the industry. In 2007, Buffett wrote:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.”

The commitment in costs to run an airline remains high, while the possibility of earning back that cost is subject to a competitive pricing environment. In addition, higher oil prices can have a big impact on the costs of operating an airline.

Foolish takeaway

The conditions that led to Buffett moving into US airline stocks may or may not exist in Asia, where Singapore Airline plies its trade. But it provides context on what to look out for as the airline industry evolves.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares of Berkshire Hathaway.