Dear Mr. Berko: I have a large portfolio of conservative issues that pay good dividends. Now I’d like to be more aggressive and own some issues that could improve my portfolio’s growth better than the dividend stocks I own. I want more upside in my portfolio.
The economy is improving, and that’s good for the airline industry, so I am thinking of buying 400 shares of American Airlines. I’d appreciate your thoughts.
— C.C., Port Charlotte, Fla.
Dear C.C.: In a 2007 letter to shareholders, Warren Buffett told investors: “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. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Buffett’s Berkshire Hathaway had recently lost $40 million investing in airline issues.
Airlines are not attractive long-term investments, because airline industry profits reflect the ups and downs of our economic cycle much more acutely than profits of other industries. For the near term, the outlook seems positive. The industry expects robust demand in passenger traffic as economic growth and consumer sentiment improve. Carriers in the shipping business expect to gain new revenues from a general improvement in the economy. The recent tax cuts are a positive, especially for airlines that generate most of their business in the U.S. Finally, most carriers have fairly good cash positions and strong balance sheets, thanks to eight years of low interest rates.
