US Airways Group Inc (LCC), Delta Air Lines, Inc. (DAL): Why Buffett May Be Wrong About Airlines

For United and American, Buffett’s airline mantra may be quite accurate. Both companies are plowing billions of dollars a year into expensive new aircraft, and the resulting debt burden could limit their flexibility going forward. In an industry downturn, these two companies seem like the ones most likely to run into trouble.

The “reformed” airlines
However, not every airline follows the failed policies that have justified Buffett’s negative opinion of the sector. Delta Air Lines, Inc. (NYSE:DAL) and Allegiant Travel Company (NASDAQ:ALGT) have both distinguished themselves in recent years through their use of used aircraft to reduce capital expenditures.

Allegiant exclusively flies used planes that it can buy or rent cheaply after other airlines have upgraded to newer models. Allegiant Travel Company (NASDAQ:ALGT) has used this strategy to grow rapidly over the past decade, while remaining consistently profitable. Furthermore, the company has more cash than debt. Clearly, this is an airline that doesn’t act the way Buffett expects! Allegiant Travel Company (NASDAQ:ALGT)’s “capital-light” strategy makes it more flexible and more profitable than most rivals.

Delta Air Lines, Inc. (NYSE:DAL) hasn’t gone to the same extremes as Allegiant, but it still takes advantage of cheaper used planes quite frequently. It’s been buying up used MD-90s for years and recently leased 88 used Boeing 717s from Southwest. Furthermore, the company keeps its planes flying longer than competitors; Delta Air Lines, Inc. (NYSE:DAL) still flies some DC-9s that are nearly 35 years old on average. This strategy has helped Delta Air Lines, Inc. (NYSE:DAL) deliver higher profit than its peers recently, while limiting its debt load.

Foolish bottom line
Warren Buffett is half right about airlines. Airlines with low profitability that go on capital spending binges — such as United and American — should probably be avoided. On the other hand, more profitable airlines that have disciplined capital spending — such as Allegiant and Delta Air Lines, Inc. (NYSE:DAL)– may be able to deliver long-term profits for investors. These are the companies that may be of interest to long-term investors.

The article Why Warren Buffett May Be Wrong About Airlines originally appeared on Fool.com is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long September 2013 $33 puts on United Continental Holdings. The Motley Fool recommends Southwest Airlines.

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