Air Canada (TSX:AC) stock is controversial. Some believe it will more than double in value. Others think it will ultimately be worth nothing. But what does Warren Buffett believe?
Luckily for us, he’s made it clear exactly what he thinks about the airline space.
This is what moves airline stocks Some industries aren’t much more than supply and demand. This is a sign of a pure commodity.
Think about how you shop for airline tickets. You may have a preference on routes or carriers, but the biggest factor for most people is simply price. Why pay $1,000 to fly on one airline if another can bring you there for $500?
Buffett understands this dynamic better than nearly any other investor. For decades, he reiterated that supply and demand will drive airline stocks higher or lower.
“The hope is they will keep orders in reasonable relationship to potential demand,” he told CNBC in 2017, shortly after buying millions of shares across several airlines. And by orders, he’s really talking about supply.
Previous to COVID-19, airline demand had been increasing nearly every year for decades. Industry sales climbed higher and higher. But every time demand increased, carriers rushed to buy more planes. Increased supply added competition, keeping prices perpetually low. That made long-term profits all but impossible to generate.
What does Buffett think about Air Canada? It shouldn’t be hard to connect the dots to figure out what he thinks about Air Canada.
When looking at gold bricks, there isn’t much differentiation. The same can be said about airlines, no matter how hard they argue otherwise. Pricing rules the game.
It’s no wonder that almost no airline stock gained sustainable value for decades, only for the entire industry to skyrocket in value last decade. These stocks move together.
Sadly for them, Buffett sold all of his airline positions in mid-2020. If you guessed he was worried about supply and demand, you guessed right.
“You’ve got too many planes,” he concluded after disposing his stakes. That may be an understatement. Right now, there’s roughly 10 times too many planes compared to demand, which is 90% lower than 2019.
The problem is that as demand fluctuates, supply remains the same. Planes don’t disappear overnight. In fact, supply often continues to rise as deliveries are fulfilled from orders made years ago.
What does Buffett think about Air Canada? Considering he exited the industry entirely and has yet to jump back in, he’s probably quite bearish. No airline, no matter how well run, can survive an industry bear market. Airlines may remain in a slump for several years to come.
Bottom line Don’t think Buffett is bearish on all stocks. In recent weeks, he’s actually been buying several companies. But more than ever, he seems to be discerning, intentionally picking certain sectors over others.
When it comes to airline stocks, don’t expect to see Buffett get back in for several years, if ever. But when it comes to the overall stock market, he’ll continue to make targeted purchases.
The post Warren Buffett: This Is What Will Happen to Air Canada (TSX:AC) Stock appeared first on The Motley Fool Canada.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.
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