Airline Shares Reach Record as Buffett's Berkshire Extends Bet

  • Investment firm becomes biggest shareholder in Delta, United
  • Evercore sees ‘one of the biggest pivots’ in investing history

Warren Buffett Beefs Up Airline, Apple Bets in 4Q

Airline shares reached a record after Warren Buffett’s Berkshire Hathaway Inc. increased its stakes in the four biggest U.S. carriers, adding to a bet that industry consolidation will end the boom-and-bust cycles the billionaire long shunned.

Berkshire’s latest purchases made it the largest shareholder in Delta Air Lines Inc. and United Continental Holdings Inc., and No. 2 in American Airlines Group Inc. and Southwest Airlines Co. The holdings represent one of the biggest common-stock investments in years for the company controlled by Buffett, who once called airlines “a death trap for investors.”

The six biggest U.S. carriers -- bolstered by lower jet-fuel prices and years of dealmaking that left fewer major competitors -- posted their fifth straight year of profits in 2016, earning about $14 billion on an adjusted basis, according to data compiled by Bloomberg. That helped soften memories of the previous decade, in which losses surpassed $50 billion.

“While some longer-term investors have recognized the positive structural and behavioral industry changes for years now, these investments provide further validation,” Duane Pfennigwerth, an analyst at Evercore ISI, said in a note to clients Wednesday. He called Berkshire’s change of heart on airlines “one of the biggest pivots in the history of investing.”

The Bloomberg U.S. Airlines Index climbed 2.4 percent to close at a record. Southwest led major carriers, advancing 3.6 percent to $57.29. Ten of the index’s 11 members posted gains.

Increased Holdings

Berkshire’s stakes in American, Delta and United increased to more than $2 billion each, according to a U.S. regulatory filing Tuesday. Buffett’s Omaha, Nebraska-based investment company also disclosed a holding in Southwest valued at about $2.2 billion as of Dec. 31.

American’s chief executive officer, Doug Parker, helped win over Buffett lieutenant Ted Weschler last year with his argument that a transformed airline industry was poised for steady returns, Bloomberg News reported this month.

Read more: How American Airlines influenced Berkshire

By controlling expansion and better matching the supply of seats and flights with demand, airlines “are behaving in a way that is positive for shareholders,” said Jim Corridore, a CFRA Research analyst.

“They do not look to expand at any cost, they’re not each looking to be the
biggest carrier,” he said in an interview. “They’re looking to be the most profitable, and this has changed their strategy.”

— With assistance by Noah Buhayar, and Michael Sasso

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