Berkshire Bets on Airlines With Stakes in American, Delta

Updated on
  • Airlines jump in extended trading on Berkshire disclosure
  • Berkshire reduces stake in Wal-Mart, exits Suncor holding

Warren Buffett’s Berkshire Hathaway Inc. bet on the biggest U.S. airlines, reversing decades of aversion to the industry.

Berkshire held 21.8 million shares of American Airlines Group Inc. as of Sept. 30, valued at almost $800 million at the time, according to a regulatory filing Monday from the billionaire’s Omaha, Nebraska-based business. Buffett’s company also reported 6.33 million shares of Delta Air Lines Inc. and another 4.53 million of United Continental Holdings Inc., according to the filing. And Berkshire added an investment in Southwest Airlines Co. after Sept. 30, CNBC reported, citing Buffett.

“What this says is, ‘The run isn’t over for airlines,’” Stifel Nicolaus & Co. analyst Joe DeNardi said. “There’s still a lot of this story to play out."

Airline shares surged in 2014 but failed to sustain their rally on concerns about rising fuel prices and labor expenses. By 2018, the spike in employee costs may be behind the industry, DeNardi said. The Bloomberg U.S. Airlines Index has gained about 1.8 percent this year through Monday’s close. That trails the 5.9 percent advance of the S&P 500 Index.

Buffett has long bet on the growth of the U.S. economy by investing in transportation. Berkshire owns the BNSF railway, the McLane trucking operation and a network of car dealerships. And while the conglomerate also has the NetJets luxury aviation unit and Precision Castparts, the maker of products for the plane industry, Buffett has previously cited the risks of airlines.

Buffett’s Mistake

The billionaire said in 2001 that he’d sworn off investing in airline stocks after earlier lamenting the “mistake” of betting on US Airways Group Inc. He added that the industry had been unprofitable from the time of Wilbur and Orville Wright through 1991.

“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. “Sometimes, it takes them 10 minutes to talk me out of it, sometimes more.”

The latest picks may have involved one of his investing deputies, Todd Combs or Ted Weschler. Buffett often limits himself to purchasing bigger stakes, such as holdings in Wells Fargo & Co. or Coca-Cola Co.

American jumped 4.1 percent to $45.20 at 5:52 p.m. in extended trading in New York. Delta climbed 3.4 percent to $49.10. United Continental rose 2.2 percent to $64.35. Southwest advanced 3.3 percent.

Industry Consolidation

The U.S. airline industry has stabilized with a series of mergers that started in 2005 and ran through 2013, reducing the number of major carriers to four from nine. Since that time, carriers largely have focused on building strength out of their biggest hub airports and into international markets.

Most of the mergers followed bankruptcy restructurings by all of the nation’s full-fare airlines with global operations. U.S. carriers lost a combined $53 billion from 2001 through 2011, before returning to profitability.

Berkshire’s move evokes Buffett’s disclosure in 2007 that he invested in several railroads, David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, said in an interview. The billionaire decided later to buy BNSF and exit holdings in its rivals.

The airline industry “has pretty much rationalized itself, similar to railroads,” Kass said, citing consolidation that reduced competition. “They have their sort-of monopoly routes, they can price as they choose to maximize profits, and there are huge barriers to entry.”

Wal-Mart, Suncor

Buffett has previously expressed his admiration for Southwest co-founder Herb Kelleher, likening him to Sam Walton, who helped build Wal-Mart Stores Inc. into the world’s largest retailer.

Berkshire cut its Wal-Mart stake in the third quarter by about two-thirds to 13 million shares. Buffett’s company exited a holding in Suncor Energy Inc. Berkshire didn’t return a message seeking comment.

Buffett increased his bet on Phillips 66 in the three months ended Sept. 30, but that addition was previously disclosed. Berkshire owns such a large stake that it must report trades in the refiner soon after making them, rather than waiting for the quarterly regulatory filing.

Delta “welcomes new investors as we continue to build a model for sustainable, long-term success as a high-quality global company,” the Atlanta-based airline said in a statement.

American also was pleased with the news, saying that, “This investment further reinforces our view that our industry has fundamentally changed in a profound and lasting way.”

— With assistance by Michael Sasso, Jordyn Holman, and Julie Johnsson

(Updates with Buffett’s admiration for Kelleher in 15th paragraph, Phillips 66 in third-to-last.)
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