Warren Buffett has made some critical comments on the airline industry over the last few decades, and frankly, he has a point. But are his criticisms still valid, or have carriers like Delta Air Lines (DAL 2.35%) and United Airlines (UAL 3.73%) altered the way investors should view the industry?

Buffett's views on the airline industry

The airline industry has historically struggled to generate the returns to cover its cost of capital. This is a point recognized by the International Air Transport Association and by Buffett himself. The legendary investor has argued that airlines' high fixed costs and the low marginal cost of adding extra seating and capacity lead to a tendency to ramp up capacity while also selling tickets at a low price.

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It's essential to note that when Buffett and others speak disparagingly about the airline industry and the returns it has generated for investors, they are typically referring to equity investors in airlines.

In contrast, bond investors have tended to do well, and airlines appear to have little difficulty attracting capital to the industry, not least because bonds are commonly securitized against valuable assets, namely the planes. It's also been an excellent industry for suppliers of airline equipment.

In Berkshire Hathaway's annual letter in 2007, Buffett wrote: "The airline industry's demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it."

In 1990, he called out the self-destructive pricing tactics of certain carriers. And in 1992's letter, he talked about airlines acting like members of a competitive tontine -- an arrangement whereby the participants contribute equally to a prize that goes to the lone survivor -- that they wish to conclude "as rapidly as possible."

The general theme of a capital-intensive industry, with relatively small and ever-at-risk profit margins, containing participants who don't always act rationally, would go a long way to explaining why airlines have struggled to cover their cost of capital.

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The airline industry has changed

That said, there's a strong case for arguing that the airline industry is different now. As mentioned previously, Delta and United Airlines are both consistently generating a return on invested capital (ROIC) that exceeds their weighted average cost of capital (WACC), a key requirement for generating value for shareholders.

They are doing so because of a combination of their business models, a change of behavior, and certain structural factors within the industry that are creating a favorable long-term environment for network carriers like Delta and United.

As for their business models, both continue to grow premium travel revenue, and it's proving more resilient in a slowdown. For example, the tariff-induced slowdown this year hasn't led to any deterioration in high-end consumers' willingness to purchase a premium experience, according to United's chief commercial officer, Andrew Nocella, on the last earnings call.

It was a similar story from Delta's president, Glen Hauenstein, who said, "We have not seen any cracks yet in the Premium."

And their loyalty programs -- Delta's SkyMiles and United's MileagePlus -- not only foster loyalty and customer recognition, leading to repeat bookings, but they also generate a wealth of valuable data on consumer behavior and produce lucrative revenue through the sale of miles.

Behavior and structural advantages

As Buffett's quotes above suggest, the industry hasn't always acted rationally, but there is recent evidence that it has begun to do so. For example, when overcapacity manifested itself in the spring of last year, airline stocks sold off heavily, only to recover strongly after carriers reduced unnecessary capacity.

DAL data by YCharts.

Fast forward to today, and both Delta and United have announced cutbacks on capacity expansion plans in light of slowing bookings -- a sign of rational behavior.

Lastly, on the structural advantages, a combination of rising airport costs (partly due to the need for infrastructure investment), labor costs, supply chain costs, and parts shortages is putting significant pressure on the margins of low-cost carriers. That's creating an opportunity for network carriers to offer economy tickets to fill capacity.

Are they stocks to buy?

The airline industry has undergone significant changes, and while Buffett's words should always be heeded, the reality is that Delta and United are generating good and sustainable ROIC by diversifying their revenue streams to ensure long-term, sustainable growth. Both stocks are attractive for long-term investors.