Millennials have been scooping up airline stocks that Warren Buffett famously dumped. But new data suggest they are about to regret that decision.
Buffett invests in stocks with a long-term investment thesis. When he realized airlines might never be the same in a post-pandemic world, he sold his shares in four airline stocks.
But, it seems retail investors bought airline stocks for quick short-term gains. Unfortunately, data are not on their side.
Lufthansa AG, the largest airline in Germany, recorded a net loss of $2.35 billion in the first quarter of 2020.
The airline saw a staggering 98.1% decline in passengers year-over-year. Such a significant drop in travelers forced Lufthansa to park 700 airplanes from April to May.
Global air traffic has come to a virtual standstill in recent months.
When airlines park their planes at a local airport, they are required to pay parking and maintenance fees along with aircraft leases.
For Lufthansa, necessary costs alone led to $298 million in impairment charges for the first three months of 2020.
Indonesia’s most significant private airline Lion Air sees a similar trend.
Starting this week, Lion Air will ground 138 aircraft . Its subsidiaries, Batik Air and Wings Air, will also park 140 jets.
The substantial decline in passengers costs airlines billions of dollars in losses per quarter.
Despite all this, the fear of missing out (FOMO) among investors is pushing the demand for airline stocks. Bailouts and the Federal Reserve’s commitment to providing more liquidity into the market are fueling the appetite for stocks in general.
Still, rising share prices cannot offset the abysmal financial turmoil airline companies are currently facing. So, why are airline companies losing so much money in such a short period?
Airlines do not own the majority of the aircraft they operate.
Consulting firm ICF estimates :
Today, over 13,300 commercial jet aircraft, valued at approximately $331 billion, are owned by operating lessors and leased on this basis to the global airlines, representing more than 49% of the fleet by value.
As such, aircraft have to be fully booked for airline companies to be profitable.
According to the U.S. Bureau of Transportation Statistics , some airline companies cannot offset operating expenses even after selling 100% of their seats:
Since 2000, most large passenger airlines suffered a sharp increase in their Breakeven Load Factor. Some carriers could not cover operating expenses even if they sold 100% of their seats at average airfares.
Airline companies have to make a tough decision: operate their planes with significant losses or park them with huge maintenance fees.
Both options cause airlines to lose hundreds of millions of dollars, if not billions.
Retail investors ignore all this because airline stocks have declined so much from their recent highs. United Airlines, for instance, fell from $82.2 on February 12 to $29.91 on June 2. Within four months, the stock posted a 63.6% drop.
Investors are buying into airline stocks under the assumption that individual companies will begin to travel again in a few months as the pandemic fades. But, vaccines are unavailable, and top scientists are playing down their effect on providing long-term immunity.
In the medium-term, airline stocks face a risk of correction as the hype surrounding government bailouts and stimulus subside.