Airlines best positioned to bounce back: Analyst

Robert W. Mann, Jr., independent airline industry analyst and consultant, principal of R.W. Mann & Company, joins Yahoo Finance’s Alexis Christoforous to discuss outlook on the travel industry amid the pandemic.

Video transcript

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ALEXIS CHRISTOFOROUS: Welcome back. Warren Buffett said he doesn't regret selling airline stocks last year when the pandemic-induced lockdowns grounded air travel. And he told shareholders at the annual meeting this weekend that he wouldn't invest in airlines now given the current pressure they're under.

WARREN BUFFETT: The airlines, clearly what happened was not their fault in any way, shape, or form. It wasn't like 2008-2009 when people blamed the banks and hated to see them helped. I think the airline business has done better because we've sold, and I wish them well. But I still wouldn't want to buy the airline business.

ALEXIS CHRISTOFOROUS: Well we know that after he sold Delta and Southwest, those stocks went on to rally more than 45% from the end of May last year through now. Joining us now to talk about the outlook for the airline industry is analyst Robert Manne of RW Mann and Company and a former airline executive himself. Robert, thanks so much for being with us. What do you make of Buffett steering clear of airline stocks right now? Is he passing up what could be a very good opportunity do you think?

ROBERT MANN: Well he already has, to some extent. He took his losses, didn't buy back in, and has not ridden the semi-return. There's more to come. But I would say as a timing expert, perhaps this was not his greatest call, all respect to his other calls, of course.

ALEXIS CHRISTOFOROUS: And within the airline sector right now, who do you think is best poised to bounce back? We're seeing that the airlines in general are coming under some pressure today, but is there more runway here? And who within that group do you like?

ROBERT MANN: Sure. Well the airlines that are best positioned are those who formerly dealt in domestic leisure market activity, where the demand is now strongest and where the fare levels are commensurate with their cost structures. So it's the Spirits, it's the JetBlue's, it's the Southwests, it's the Frontiers.

The folks who still have a ways to go, and we'll see that when European borders reopen hopefully in July time frame, are the network carriers, the global network carriers-- American, Delta, United-- who normally would carry 40% of their revenue on international flights and who today carry almost none. So they also see the domestic leisure demand, but their cost structure is not well situated for the current fare levels.

ALEXIS CHRISTOFOROUS: And what about this controversial middle seat? I think Delta Airlines just started to open up that middle seat. A lot of the airlines were leaving it empty for more social distancing during the pandemic. And now demand is such where a lot of the airlines are now putting people in those seats, selling those middle seats. Do you think that's going to stay that way?

ROBERT MANN: Well, there were three airlines who offered to do that from the outset. And one by one, they all concluded that not only was that capacity needed and could be economically utilized, they concluded that after a year, in some cases, the marketplace was comfortable with flying on an aircraft that were relatively full and where a middle seat guarantee was no longer the same sense of surety or assurance that it was back in, let's say, April or May of 2020. So those sorts of value propositions made sense at that time, especially as customer care and concerns were paramount. But they no longer really make a lot of sense. And if you go from filling four seats in a six-feet row to filling six seats in a six-feet row, you have a 50% revenue upside on essentially very little incremental cost. So it's a very economic trade up.

ALEXIS CHRISTOFOROUS: You know, another thing that Buffett said over the weekend about getting rid of those airline stocks last year was he said it would have been hard for those carriers to get any federal aid if they knew that a large investor like himself was still involved. The government might look at that and say, look, you don't need to help. Somebody like a Warren Buffett can help you out. Do you agree with that?

ROBERT MANN: Well, I certainly respect his opinion. It's hard not to. But airlines continue to have institutional investors who have carried them through this crisis, who have supplied additional equity and additional debt capital at market rates. So I would say that while I understand his opinion, and it clearly was helpful, the industry has actually had unprecedented access to capital-- capital that I would not have imagined they could have raised during this crisis.

ALEXIS CHRISTOFOROUS: And finally, I just want to get your thoughts on what the TSA said last week, saying that they will continue to mandate mask wearing for all modes of transportation, including the airlines. Do you think that's going to make or break somebody's decision to travel?

ROBERT MANN: At this point, no. I think there's enough experience with the protocol that, other than some sort of outsized statement of allegiance or loyalty, it really is a non-issue. The statistics show that aircraft are well designed and airlines and airports are probably the strongest links in infection control. But at the end of the day, you cannot do anything but improve on safety and security of health by continuing to wear a mask in flight. And this is why DOT, FAA, and TSA are going to mandate it right through Labor Day and possibly beyond.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Robert Mann, airline industry analyst, thanks for being with us today.