Warren Buffett has — to my knowledge — never owned shares in International Consolidated Airlines Group (LSE:IAG). But the Oracle of Omaha has some advice that I think is helpful when thinking about whether or not I should buy IAG shares.
The business
The last few years have been tough for IAG. First there was the pandemic, which halted air travel across the globe. Then the awful Russian invasion of the Ukraine prompted Russia to ban UK airlines from travelling through its airspace. Today, the company finds itself with total debt that’s up 161% from 2019 and a share price that is the lowest it has been this calendar year.
It’s not all bad news, though. The company reported a loss in 2021, but it expects to return to profitability in 2022. Bookings for this summer are up and the company is forecasting around 85% of its 2019 capacity to return this year, as long as there are no further political or pandemic-related disruptions.
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This means that there’s clearly reason to think that the worst is over for IAG and the airline sector. I think IAG also compares favourably with other airlines from an investment perspective. Its current interest payments account for around 4% of the operating income it generated in 2018. This compares favourably with EasyJet (25%) and Ryanair (11%).
Does this mean that I should buy IAG shares, though? As is so often the case, I find Warren Buffett’s advice on this subject helpful.
Buffett on airlines
In the 2007 letter to Berkshire Hathaway shareholders, Buffett made the following now-famous statement about airlines: “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. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
Buffett’s point here is that the airline industry as a whole is unattractive as an investment proposition. The problem is a vicious cycle. First, airlines are in constant need of money. It takes a lot of money to run one, with costs including aircraft, servicing, landing fees, staff, and more.
Second, they are unable to offer investors with an adequate return on their cash. Competition in the airline industry is ferocious and this results in extremely low prices. This means that airlines can’t generate enough cash to provide an adequate return to investors, which leaves them in need of further money and the cycle continues. This severely limits the attractiveness of IAG shares as an investment.
Conclusion
Airlines have had a difficult couple of years. But the worst seems to be behind them and I think this might have a positive impact on IAG shares over the next few months. As an investor, however, I’m looking for investments that I can hold for a longer duration. From this perspective, I don’t see IAG shares as attractive. If I were going to invest in an airline, it would be IAG. But I think that there are better opportunities in the market right now, so I’ll avoid the airline sector.
