Warren Buffett once famously laid out just how bad a business the airline industry is for investors,
If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.
But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.
You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.
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However Buffett got back into airline investing two years ago, not quite convinced that major carriers had become ‘high quality industrials’ as Delta likes to argue just that the business is better than it used to be. Berkshire Hathaway promptly lost over a billion dollars on these investments.
Nonetheless a month ago there were rumors he was going to buy Southwest Airlines in its entirety and that drove up the airline’s share price. Yet Southwest isn’t the carrier in which Berkshire Hathaway holds the largest stake.
According to CNBC’s Berkshire Hathaway portfolio tracker here are the company’s holdings “as of December 31, 2018 as reported in Berkshire Hathaway’s 13-F filing on February 14, 2019, except for Delta Air Lines, which is as of March 11, 2019” compared to publicly available date for shares outstanding.
|Airline||Shares Owned||Outstanding||% Owned|
Buffett had previously said that he prefers to stay under 10% with each airline but explained that he wound up owning over 10% of Delta by accident. They were making share purchases (increasing the numerator) while Delta was buying back shares (decreasing the denominator).
Warren Buffett said Berkshire Hathaway Inc.’s investment in Delta Air Lines Inc. rose above his comfort threshold by mistake.
The stake climbed when Delta bought back its own stock and Berkshire increased its holdings, according to regulatory filings this month.
“What I didn’t realize was that that purchase had taken us over 10 percent,” Buffett said Thursday in a wide-ranging interview with CNBC from a benefit luncheon in Grapevine, Texas. “I was already in territory I didn’t plan to get, so I just decided to buy a whole lot more stock.”
He suggests that airlines aren’t “a suicidal business anymore.” For the past several years they’ve been earning billions of dollars. And for the most part they haven’t had to pay income tax on their profits, either, because of net operating loss carry forwards.
The IRS limits ‘NOL’ deductions in the event of change of control so that profitable companies can’t just go buy offsetting losses. To avoid hitting those limits American Airlines requires board approval before a single investor can take a stake of 4.75% of greater. That’s the tool that American used to prevent Qatar Airways from buying in though of course they expressed no such similar concerns with Buffett’s stake.