In an SEC 13F filing after the market closed today, Berkshire Hathaway reported initial investments in three airlines, American Airlines Group (NYSE:AAL) ($800 million), Delta Airlines (NYSE:DAL) ($250 million) , and United Continental Holdings (NYSE:UAL) ($250 million) as of September 30, 2016. On CNBC today, Warren Buffett also revealed an additional Berkshire investment in Southwest Airlines (NYSE:LUV) that was made after September 30.
Berkshire substantially cut its holdings in Wal Mart (NYSE:WMT) (Warren Buffett) by about $2 billion, or about 70%, during the third quarter. It also eliminated its stake in Suncor Energy (NYSE:SU) ($500 million) (Ted Weschler – Fortune Magazine October 27, 2014).
Since Warren Buffett in the past has promised to never again invest in airlines after an unpleasant earlier experience investing in USAir Preferred stock in 1989, it is likely that the current airline investments were made by one or both of Mr. Buffett’s portfolio managers, Todd Combs and/or Ted Weschler. Also, the relatively small size (less than $1 billion) of each of these investments would indicate that Mr. Buffett’s deputies had made them.
Consolidation in the airline industry, along with lower energy prices, would appear to make this industry attractive for long term investment.
I was quoted in a Bloomberg article on this topic:
“The move evokes Berkshire’s disclosure in 2007 that it invested in several railroads, David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, said in an interview. Buffett decided later to buy BNSF and exit holdings in its rivals.
Similar to Railroads
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.”