Warren Buffett has always been disapproving of airlines as an investment, so it was a big surprise when Berkshire Hathaway loaded up on shares in North American airlines at the end of 2016.
It may have been one of Buffett's investing lieutenants, rather than the Sage of Omaha that made the choice, but it is interesting that he allowed it to happen.
So would Warren Buffett buy into Australian-listed airlines and should you? The oil price has dropped by 10% since the start of March, which is a good boost for airlines. Here are the three main choices on the ASX:
Virgin Australia Holdings Ltd (ASX: VAH)
Virgin is the operator of Virgin Australia and Tigerair Australia. In its half-year report to 31 December 2016 it reported revenue fell by 0.9% and a loss of $21.5 million compared to a $62.5 million profit in December 2015.
Virgin has been in a price war with its main competitor but recently broke it off, which should be good for both parties. For all the capital invested in Virgin's planes I think investors would hope for a profit.
I don't think Warren Buffett would buy shares in Virgin Australia due to its failure to generate sustainable profits.
Qantas Airways Limited (ASX: QAN)
Qantas Airways is the owner of the Qantas and Jetstar businesses.
In its half-year report to 31 December 2016 it reported that profit fell by 25% to $515 million. A 25% decline of profit isn't ideal, but it's still a large amount of profit.
Qantas has a diverse earnings base. It earns a lot from its frequent flyer points system and is really pushing its Assure health insurance, which is backed by NIB Holdings Limited (ASX: NHF).
Qantas is trading at 8x FY17's estimated earnings and has a trailing partially franked dividend yield of 3.72%.
Warren Buffett might be interested in Qantas thanks to its diverse earnings and profitability.
AIR N.Z. FPO NZ (ASX: AIZ)
Air New Zealand reported a 23.6% drop in its half-year earnings to NZ$349 million.
It has paid a dividend every year since 2005 and has a market-leading position of flights in New Zealand. This is very useful because there is a boom of tourists flying into New Zealand which should provide a strong tailwind. Air New Zealand is trading at 7x FY17's estimated earnings.
I think Warren Buffet would be quite interested in Air New Zealand because of its ability to keep earning a profit and paying out a dividend.
Foolish takeaway
Out of the three airlines, I think Warren Buffett would be interested in Air New Zealand more than the other two. In my opinion none of the airlines would make good long-term investments. It would be better if you focused on the type of stocks that Warren Buffet normally does.
