INSUBCONTINENT EXCLUSIVE:
By Katherine ChiglinskyWarren Buffett, who once joked that capitalists should have shot down the Wright brothers’ first plane and saved
investors money, has made a course correction that’s raised the idea he’s considering the purchase of an airline.
Thirty years after a
troublesome investment in USAir, Berkshire Hathaway Inc
has amassed stakes that make his holding company among the biggest shareholders in the four largest U.S
Last year, the famed investor said he wouldn’t rule out owning a carrier, prompting talk about which one he’d grab.
“One of those
airlines would certainly be affordable and doable” if Berkshire wanted to buy, said David Kass, a professor of finance at the University
“But then the question is, would Buffett really want to do that”
Berkshire has been acquiring shares of Delta Air Lines Inc., the
world’s most valuable carrier, and now has airline stakes worth more than $9 billion
The market values of those companies range from around $14 billion to $34 billion, and recent share declines could present some bargains to
Buffett.
Buffett, 88, hankers for a large deal
He said in his annual letter released last month that his push for an “elephant-sized acquisition” has been thwarted by high prices
And Berkshire is sitting on a cash pile that had grown to about $112 billion at year-end
Industry watchers have said Buffett may be closer to an outright purchase.
Buffett’s assistant didn’t return a request for comment, and
representatives for American Airlines Group Inc
and United Continental Holdings Inc
A Delta spokesman said only that the company appreciates Berkshire’s investment
spokesman declined to comment on speculation, adding that the carrier also appreciates Berkshire’s support.
Airline stocks are cheaper
Southwest has fallen about 23 percent since its 2018 high of $66.52 a share and Delta is down almost 18 percent from its $61.32 peak last
year.
While Buffett prefers to keep stakes in companies below 10 percent, his Delta holding has crossed that threshold at about 70.9 million
The holding got a further boost from Delta’s repurchases
Breaking that barrier reinforces the view that Delta is at least a long-term investment, according to David Sims, president of Sims Capital
Management, which oversees $50 million, including Berkshire Class B shares.
Berkshire is the biggest holder in Delta, with a stake valued at
It has amassed a $2.8 billion investment in Southwest, a $1.78 billion stake in United and American Airlines stock valued at $1.38
billion.
‘Kamikaze Behavior’Buffett’s thinking on the industry has evolved
He once chided airlines for being “suicidally competitive” on price, and said executives engaged in “prolonged kamikaze behavior.”
And he criticized himself for the USAir deal which, while ultimately profitable, he has always considered a mistake.
“I had Berkshire buy
USAir preferred stock in 1989,” Buffett wrote in a 2007 letter
“As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being
paid.”
In more-recent years, Buffett has said that pricing, labor issues and other areas have stabilized as competition dwindled amid a
string of bankruptcies and mergers.
And Berkshire has some familiarity with the airline industry
The $503 billion conglomerate owns NetJets, a fractional aircraft ownership company
One of its newest companies, Precision Castparts, serves the aerospace market.
Investors looking at Berkshire’s history with railroads may
see a parallel with its investments in multiple airlines
Buffett’s company bought up stakes in two major railroads before his 2010 purchase of BNSF in one of Berkshire’s largest deals
Still, the airline stakes have held at around the 10 percent level while Berkshire’s interest in BNSF climbed above 20 percent before the
purchase.
Buffett’s preferred methods of doing deals could hamper any agreement
He shuns hostile takeovers, meaning the airline would need to be a willing seller
And Buffett tends to keep existing management in place after an acquisition
Such a hands-off method can be troublesome if the target company ends up running into issues, especially if Berkshire lacks a manager who
has the airline expertise to step in, according to Cathy Seifert, an analyst at CFRA Research.
Buffett was reminded of the trickiness of a
hands-off approach recently with his stake in Kraft Heinz Co., which he helped form through acquisitions
That company took a $15.4 billion writedown on some assets, hurting Berkshire’s stake in the business.
“The issues at Kraft have perhaps
blindsided Berkshire a little and may give them pause with the companies that they bring into the fold,” Seifert said
For the airlines, the question is, “does it make sense to have an airline under the umbrella in such a decentralized company”
Buffett
has expressed optimism about airlines in recent years, while remaining cautious about forecasting.
“It’s fair to say that they will
operate at higher degrees of capacity over the next five or ten years than the historical rates which caused all of them to go broke,”
Whether “they will do suicidal things in terms of pricing, remains to be seen.”
