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Maybe Buffett Was Right About Airlines After All

Tuesday - 4/2/2013, 12:38pm  ET

"How do you become a millionaire? Make a billion dollars then buy an airline."
-- Warren Buffett

^XAL Chart

^XAL data by YCharts.

Or maybe not. Yesterday, on April Fool's Day no less, the financial media grasped onto a particularly peculiar story. "Airline Returns Refute Buffett Aversion to U.S. Carriers" read a Bloomberg News headline. Barron's chimed in with "Buffett's Missed Airlines Bet."

The argument in both was the same, though I suppose that's not surprising given that the Barron's article quoted the Bloomberg piece. Warren Buffett, probably the greatest investor of all time and the chairman and CEO of Berkshire Hathaway , has shunned airline stocks for the past quarter century. Yet, in the first quarter of this year, an index that tracks the sector surged by 35%. As of yesterday's closing price, Delta has seen its stock soar by 33%, United Continental's by 28%, and US Airways Group's by 19%.

According to an analyst quoted by Bloomberg, "The same factors that made airlines uninvestable for years -- too much capacity, too much debt -- are the opposite now and make them attractive. I'm not going to shy away from an industry just because it has a bad history."

So there you have it. Buffett was wrong, and an analyst who willingly ignores decades of precedent was right.

Well, suffice it to say, a coronation is perhaps a bit premature. Shares of the major airlines are down considerably today after Delta reported disappointing traffic figures for the month of March and cut its first-quarter revenue forecast. The company's president had previously predicted that first-quarter passenger revenue per available seat mile -- a key metric in the industry -- would increase between 4.5% and 5.5% in the first three months of the year, implying a gain of between 4% and 4.5% in March. The company reported this morning, however, that the actual figure came in at 2%.

According to the press release issued by Delta, "The reduction from previous guidance is due to lower close-in bookings driven by the sequester, lower than expected demand as a result of our attempt to drive higher yields, and temporary inefficiencies during implementation of new revenue management technology."

The fact remains that airlines are and have been a horrible investment. Was the first quarter of this year an aberration? Yes. Obviously. But does it disprove the prudence of Buffett's aversion to the sector? I suppose the chart at the beginning of this article speaks to that.

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This article was originally published as Maybe Buffett Was Right About Airlines After Allon Fool.com

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