Buffett’s Right Again as 60% of Asian Airline IPOs Lose Money

Warren Buffett said a decade ago he’s sworn off putting money in airline stocks since his $358 million “mistake” in US Airways Group Inc. Investors in Asian carriers would do well to heed his advice.

Six of the 10 initial public offerings by airlines in Asia during the past five years are trading below their sale prices, according to data compiled by Bloomberg. Today, Bangkok Airways Co., which raised $494 million last month in Asia’s latest airline IPO, fell 12 percent on its trading debut to join the list.

Asia’s airlines have failed to capitalize on a surge in passenger numbers as the start of a dozen new carriers in the past decade has pushed the industry toward overcapacity. The 10 airlines have fallen an average 12 percent from their offer levels even as the region’s publicly traded carriers racked up a combined $1.8 billion in losses last year.

“There’s too much competition in the airline industry,” said Alan Richardson, an investment manager at Samsung Asset Management Co. in Hong Kong who previously lost money buying shares in Thailand’s Nok Airlines Pcl. He didn’t invest in the Bangkok Air IPO. “Until you get a shift in the demand-supply, you won’t get any meaningful leverage in these asset-heavy companies.”

Asia’s increasing urbanization and growing middle class are fueling a surge in travel demand. New airlines have popped up all over the continent, from Vanilla Air Inc. and Peach Aviation Ltd. in Japan to budget carriers in India started by a property tycoon, cookie maker and owner of a travel agency.

Surging Growth

That contrasts with the mature markets of the U.S. and Europe, where overcapacity has led to consolidation and fewer carriers for planemakers to sell to.

Close to half the world’s air-traffic growth will involve Asian routes over the next 20 years, according to Boeing Co. marketing chief Randy Tinseth. Carriers from the region will require 12,820 more aircraft, or 36 percent of the global total, Tinseth said in February. Competitor Airbus Group NV puts the figure at 11,000 planes.

“Airlines are not good investments,” said Shukor Yusof, founder of industry consultant Endau Analytics. “It never was even at the best of times. That’s why Warren Buffett has stayed away from it. It’s a very cyclical industry.”

Trying to take advantage of the upcycle in traffic is Bangkok Air, Thailand’s oldest private carrier. The company received orders for more than 1.5 times the amount of stock it offered in its IPO. The airline set the sale price at 25 baht, the midpoint of the marketed range of 23 to 27 baht per share.

Plane Orders

The stock fell to 22 baht at the close of trading in Bangkok today, the worst debut performance in the country this year, with over 114 million shares changing hands, according to data compiled by Bloomberg. The country’s benchmark index declined 0.3 percent.

Bangkok Air plans to use the money to buy 18 new planes, mounting competition for regional rivals like Thai Airways International Pcl and Singapore Airlines Ltd. Competition is also hurting Qantas Airways Ltd., Australia’s biggest carrier, which is taking measures such as cutting its planes’ weight to return to profit.

The last airline share sale in Thailand lost money for investors. Nok Air, a budget carrier controlled by Thai Airways, is trading 45 percent lower than its offer price of 26 baht last year.

“There’s always risks investing in airlines,” said Richardson of Samsung Asset. He bought the carrier’s shares, which he said ended up being “a value trap” and “a mistake.”

Richardson didn’t participate in the Bangkok Air IPO as “I can probably buy cheaper six months later when all the euphoria would have faded,” he said.

Buffett, the billionaire chairman of Berkshire Hathaway Inc., said in March 2001 that he’s off investing in airline stocks after the “mistake” in US Airways.

“Now if I get the urge to invest in airlines, I call an 800 number, and I say: ‘Hello, my name is Warren, and I’m an air-o-holic,’” he said then. “Sometimes, it takes them 10 minutes to talk me out of it, sometimes more.”

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