Warren Buffett has long been pessimistic about the airline industry. Buffett said the following in the 2007 Berkshire Hathaway shareholder letter:
[buffett]
Q2 hedge fund letters, conference, scoops etc
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“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
Clearly, Buffett was historically not a fan of the airline industry…
But he’s changed his mind, and Berkshire’s investment holdings prove it. Berkshire owns the following percentages of the 4 largest US airlines:
- Southwest (LUV) – 9.6%
- United Continental (UAL) – 9.4%
- American Airlines (AAL) – 9.4%
- Delta (DAL) – 9.0%
In his most recent 13F disclosure, Buffett announced that he sold off some of his position in American Airlines and United Continental, and added to his Delta and Southwest holdings.
We believe that Buffett could be priming up to buy one of the Big 4 US airlines.
The most recent Sure Dividend video examines the possibility of Buffett buying a major airline (and which one he is most likely to acquire).
Is Warren Buffett Going To Buy An Airline?
Warren Buffett is the best investor of our time.
As the Chairman and Chief Executive Officer of Berkshire Hathaway, he transformed a failing textile manufacturer into one of the world’s largest conglomerates. His strategy has historically included the outright purchase of entire businesses as well as partial ownership stake that were implemented through the stock market.
Recently, Buffett has surprised the investment community by initiating several large bets in the airline industry. Although Buffett has historically condemned airlines as a terrible business model, he now has approximately $10 billion invested in this sector.
In this video, we examine Buffett’s historical stance on the airline industry as well as his recent investments in the sector to determine the likelihood of him acquiring an airline in full.
Warren Buffett has historically held a very poor view on the airline industry, largely due to an gut-wrenching investment that he made on behalf of Berkshire Hathaway’s shareholders’. We’ll begin by discussing this investment in detail.
In 1989, Warren Buffett purchased $358 million of U.S. Airways preferred stock. He was attracted by the company’s operating leverage. Because much of the expenses associated with operating an airline are fixed in nature, incremental seats sold above the breakeven point are pure profit in theory.
In reality, operating an airline is extremely difficult. The business model is exposed to poor relationships with labor unions, extreme competition, and exposure to volatility in oil prices.
Once the airline industry was deregulated and competition elevated, U.S. Airways’ financial performance deteriorated significantly. Buffett’s preferred stock declined in value accordingly. At one point, Buffett actually attempted to sell his preferred stock in U.S. Airways for a 50% loss. He was later able to close the position at a small profit.
Because of this experience, Warren Buffett has made several condemning statements about the airline business model. We discuss his historical quotes on airlines in the video.
The Airlines in Warren Buffett’s Portfolio
As of June 30th, 2018, Buffett held the following stakes in the Big 4 domestic airlines:
- Delta Air Lines: $3.1 billion
- Southwest Airlines: $2.9 billion
- United Continental Holdings: $1.9 billion
- American Airlines: $1.7 billion
Buffett is among the largest shareholders of each of these companies. His percent ownership of each of the four businesses is as follows:
- Delta Air Lines: 9.0%
- Southwest Airlines: 9.6%
- United Continental Holdings: 9.4%
- American Airlines: 9.4%
In the most recent quarter, Buffett made the following changes to his allocations among the airlines:
- Delta Air Lines: +10,066,483 (18%)
- Southwest Airlines: +8,887,943 (18%)
- United Continental Holdings: -1,021,421 (-3%)
- American Airlines: -1,300,000 (-2%)
As you can see, Buffett has noticeably increased his allocation among his top two airline bets and slightly reduced his investment in his smaller two positions.
Earlier this year, Warren Buffett said in an interview with CNBC that he “wouldn’t rule out owning an entire airline.” Because of this, we have done some research on which airline Buffett is most likely to acquire, which is the topic of the next section of this video.
The Airline That Warren Buffett is Most Likely to Acquire
Based on Buffett’s current portfolio construction as well as his recent allocation changes, we believe that the two airlines that Berkshire Hathaway is most likely to acquire are Delta Air Lines or Southwest Airlines.
Among those two airlines, we believe Southwest is the more likely candidate. There are two main reasons for this.
The first is Southwest’s track record. The company has been profitable for 45 consecutive years.
As this slide from Southwest’s investor education website shows, this is a track record that is essentially unmatched among the company’s peer group.
The second reason why we believe that Southwest Airlines is the most likely candidate for a Warren Buffett acquisition is the company’s culture. Southwest Airlines has a reputation for consistently acting in the best interests of its customers.
This culture was pioneered by the airline’s founder, Herb Kelleher, who coincidentally is a friend of Warren Buffett’s. Kelleher was the first to implemented industry practices such as the ten-minute airstrip turnaround and complimentary beverages. Because of the influence of this legendary businessman, the company continues to be an industry leader today, which contributes to our belief that it is the most likely airline acquisition candidate for Warren Buffett.
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