The airline industry barely survived its last black swan event, the COVID-19 pandemic. In April 2020, U.S. passenger numbers dropped by almost 95%. By June of that year, some 16,000 planes had been taken out of service.
The Federal government put $50 billion dollars of taxpayer money in the carriers and airports, airlines sold junk bonds based on their frequent flyer programs, and the COVID-19 vaccine began restoring public confidence in travel.
After two years of recovery, global passenger traffic in 2024 is finally predicted to surpass the 2019 level. Estimates are that world passenger traffic will hit 9.7 billion passengers, a record and 106% of the 2019 level.
The stocks of US airlines even started something of a recovery. What could go wrong? Unfortunately, the black swan this year appears to be Boeing.
On March 11, 2024, the stock prices of US airlines, particularly Southwest, plunged again. This time the X-factor was the inability of Boeing to deliver 737MAX aircraft on time and get the aircraft certified. Safety concerns after a door flew off an Alaska 737MAX on January 5 are also prominent. Alaska is asking a judge to dismiss it from possible passenger claims, directing the blame to Boeing and its supplier
Southwest Airlines, (LUV), all of whose 820 aircraft are Boeing 737 models, was hammered hardest. On March 8 Southwest closed at 34.26. On Monday, March 11, after a weekend of worry about Boeing, Southwest closed at 28.76, a decline of 5.50 or more than 15%. A week later, the stock has not recovered, closing March 19 at 28.17.
Southwest Airlines cut its 2024 capacity forecast and said it was reevaluating its earnings guidance for the year as it will get fewer MAX aircraft than expected. Southwest, which was trying to put delay and cancellation headaches behind it, now anticipates far fewer Boeing deliveries than it previously expected this year. The airline may get as few as 46 Boeing 737 Max planes, down from 79.
Adding to airline woes, the popular booking engine Kayak has a filter option which will remove any aircraft you don’t like from consideration. Since Jan. 6, the day after the Alaska incident, Kayak has seen an increase of 15 times in the number of searches trying to exclude Boeing 737 Max 9 aircraft.
Among other issues, a recent CBS News story says that Boeing’s 737 MAX engine issues can cause the anti-ice system to overheat and damage the engine. Pilots apparently have sticky notes in the cockpit, reminding them not to run the de-icing system for more than five minutes.
The issues are leading Boeing to limit the number of planes that it builds.
United Airlines CEO Scott Kirby said the airline told Boeing to stop building the 737 Max 10 aircraft they have on order and instead focus on producing 737 Max 9 planes. “I think it’s impossible to say when the Max 10 is going to get certified,” Kirby said at an investor conference. “If and when the Max 10 gets certified, we’ll convert them back to Max 10s, but Max 10 is out for us until it’s certified.”
As @CNBC reported, “Boeing needs to become a better company and the deliveries will follow that,” Southwest Airlines CEO Bob Jordan said.
There is little alternative for the airlines than to work with Boeing as it fixes its culture. But the issues are real. A fellow travel writer told me, “I’m not flying on Boeing planes,” knowing full well that she had little choice in the matter. Boeing’s troubles have become tabloid fare, complete with lurid tales of drugs, suicide and murder
Meanwhile airlines are stuck. The airline industry is essentially a duopoly, with Boeing and Airbus providing all the full-size passenger planes. The Airbus A321NEO many airlines would like to buy is also backordered, limiting possible airline growth. Even JetBlue, which flies an almost entirely Airbus fleet, has not benefited from a passenger switch. A number of its jets will be grounded for inspection of their Pratt & Whitney engines.
Warren Buffett, renowned as one of the world’s greatest investors, was a long-time critic of airlines as financial sinkholes. He once said, “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.”
In 2007, Buffett further expounded in a letter to Berkshire Hathaway investors.
He noted, “if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
But in 2016, Buffett broke down and invested $10 billion in Delta, United, American and Southwest. Four years later, with the advent of COVID-19 and a 90% plunge in passengers, Buffett dumped airline stocks.
Buffett acknowledged Berkshire lost money on the deal. “We took money out of the business basically even at a substantial loss. We will not fund a company that…we think that it is going to chew up money in the future.”
Buffett received a fair amount of criticism for dumping the airlines in May of 2020. A month later, President Trump said “Warren Buffett sold airlines a little while ago. He’s been right his whole life, but sometimes even someone like Warren Buffett — I have a lot of respect for him — they make mistakes. They should have kept the airline stocks, because the airline stocks went through the roof today.”
But Buffett plays a long game. In the four years since his sale, airline stocks have barely risen from their depressed price, but Berkshire Hathaway‘s business keeps booming.
Buffett’s conglomerate reported that operating earnings at its insurance, railroad and utilities businesses jumped 28% in the fourth quarter to $8.48 billion. It held $167.6 billion in cash, a more than $10 billion increase from the prior quarter. Berkshire Class A shares have rallied roughly 16% this year.
Unfortunately, as Buffett understood, the airlines are vulnerable to being harpooned by a factor they cannot control. In 2020, it was a worldwide pandemic. In 2024, the black swan is a crisis at the company that builds their aircraft.
On May 1, 2020, American closed at $10.64 after descending from its December 31, 2019, closing price of $28.68. After two years of recovery from COVID, on March 1, 2024, American stock closed at $13.96.
On May 1, 2020, Southwest closed at $29.23. On March 11, 2024, LUV stock closed at 28 despite the end of the pandemic the airline operating at full capacity.
Only United has shown much growth. It closed at 26.62 on May 1, 2020, and 42.89 on March 11.
With Boeing’s woes and a massive spring and summer of travel upcoming, 2024 will be another challenging year for the carriers. But for Buffett, at least, the airlines and their problems appear to be in the rearview mirror.