By Malcom Berko
Dear Mr. Berko: When American Airlines came out of bankruptcy in December 2013, I invested $9,600, buying 400 shares at $24. My wife’s been telling me to sell for over a year, but my gut says to hold. Your opinion would be greatly appreciated.
– TE: Kankakee, Illinois
Dear TE: In 1989, Sir Warren Buffett, CEO of Berkshire Hathaway (he deserves the peerage), invested $360 million in the convertible preferred of US AIR Group (which merged with American Airlines in late 2013). Five year later, that position was worth $90 million and Sir Warren’s Berkshire Hathaway (BRKB-$136) lost $270 million on that position.
Though Sir Warren eventually made money on this investment, it prompted him to make the following statement: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. It would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: ‘My name is Warren, and I’m an aeroholic.’ And then they talk me down.”
And Sir Warren is right; between 1999 and 2011, Continental, Frontier, Eastern, Republic, America West, National, TWA, United, US Air, Aloha, Northwest, Delta and American all took the pipe, some of them more than once.
TheStreet is bullish that American Airlines (AAL-$41) should deliver another strong performance this quarter; Value Line believes this could be a $95 stock in a few years; Deutsche Bank and Argus rate it as a buy; while Reuters and Credit Suisse rank it as “outperform.”
However, AAL’s great share earnings are a result of an impressive buyback program. In 2014, management used $2.5 billion to repurchase 60 million shares, reducing outstanding shares by 11 percent, and last year, AAL repurchased 35 million more shares. Management is thinking short-term, like it always does, which is why Sir Warren won’t buy an airline stock.
These airline bozos are buying back AAL because fewer outstanding shares increase the earnings per share. It makes more sense if those clowns used those billions to reduce AAL’s mushrooming debt that pushed it into bankruptcy several years ago. It seems these AAL fatheads, who live in the bozosphere (just above the atmosphere) and breathe bozone, will never learn.
Because the number of carriers is increasing, the competition between the airlines is furiously heating up again like it always has. And some carriers, like AAL, are reporting lower passenger yields from price competition just like it always has. AAL’s management announced it intends to compete head-on with the lower cost carriers just like it always has. So this will result in lower ticket prices, lower revenues and lower earnings just like it always has. Then things become tough again and management will pine for a more comfortable cash position – just like it always has. Stupid is as stupid does! Listen to Sir Warren.
AAL is headed by W. Douglas Parker. I’m concerned about his level of management skills. Parker was a semi-big shot at Lufthansa, US Airways and America West and early on in his career, he worked as a financial analyst for American Airlines. All of these airlines, except for Lufthansa, required bankruptcy protection in the past dozen years.
Parker has done a credible job of running American since it came out of bankruptcy in 2013. I’m disappointed in management’s short-term focus – that Parker and his board cavalierly used precious billions to repurchase AAL stock to goose share earnings. I wonder how effective he will be working with the various unions that are the nemesis of every airline.
You should have listened to your wife at $56. Earnings will be disappointing. Sell those 400 of AAL immediately.
See more of Malcolm Berko’s twice-weekly columns at SFBWmag.com. Please address your financial questions to: Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To learn more, visit creators.com.
