Earlier this week, United Airlines posted fourth-quarter profit topping estimates with United’s revenue for each seat it flew a mile, rising 0.2 percent, up from a previous forecast of no growth year over year. The airline forecast earnings per share of between $6.50 and $8.50 for 2018, from $7.02 a share in 2017, lending credibility to its shares, which are up more than 15 percent this year.

But, then on the earnings call, United ruined the party by announcing that it will grow capacity at 4 to 6 percent a year until it stops being profitable or something to that effect. Its shares promptly tanked giving back all the gains for the year when the market opened on Wednesday.

And, it took the entire airline group along for the downhill ride. Berkshire Hathaway, the biggest shareholder of United and Delta Air Lines Inc., and the second-biggest shareholder of Southwest Airlines Co., and the third-biggest shareholder of American Airlines Group Inc., lost about $476 million the next day.

Future Wealth’s View

The irony is likely not lost on Warren Buffett himself, for he is known to have said “In a business selling a commodity-type product, it’s impossible to be a lot smarter than your dumbest competitor.” And yet, United somehow seems to have uniquely figured out that by adding capacity, even as it faces high fuel costs, that it can raise its profit margins at the expense of its competitors.

Just when you think that the airlines had finally solved the problem of overzealous competition and were on a path to sustainable profits, we have one of them behaving irrationally and forcing all the others to follow suit. It is fair to expect that many of these companies are going to have call their friendly bankruptcy lawyers back to their offices in the near future.

At Future Wealth, we simply avoid commodity businesses – airlines, restaurants, energy, food and tobacco products etc. Even though our clients have modest exposure to Berkshire Hathaway stock, we note that airlines is but a small portion of Berkshire Hathaway’s Holdings.

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