In 2016, Warren Buffett surprised the investing world when Berkshire Hathaway's (BRK.A -0.34%) (BRK.B -0.01%) SEC filings showed that the company had acquired stakes in three major airlines. In addition, Buffett revealed that he had purchased a stake in Southwest Airlines (LUV -0.91%) for Berkshire's portfolio during the fourth quarter of 2016. Here are the details about Buffett's investment in Southwest Airlines and why he likes the airline business so much all of a sudden.
Buffett's investment in Southwest Airlines
The short answer is that Berkshire Hathaway owns 47,659,456 shares of Southwest Airlines, as of its latest SEC filing. That translates to a stake of just over 8% in the airline, and it's worth $3 billion based on Southwest's current stock price.
Image source: The Motley Fool.
Southwest Airlines is a relatively new investment for Berkshire Hathaway. The bulk of the stake -- 43.2 million shares -- was acquired in the fourth quarter of 2016, and Berkshire decided to add about 10% to its investment, bringing its position in Southwest to its current size.
Berkshire has big stakes in other airlines as well
In addition to Southwest Airlines, Berkshire has invested in the three other largest U.S. airlines; it initiated those positions during the second half of 2016. As of March 31, the latest available data, here's what Berkshire's airline investments look like.
|
Airline |
Recent Price |
Number of Shares |
% Ownership |
|---|---|---|---|
|
Southwest Airlines |
$63.13 |
47,659,456 |
8% |
|
American Airlines Group (AAL -2.06%) |
$52.66 |
49,278,854 |
10.1% |
|
Delta Air Lines (DAL 0.43%) |
$54.81 |
55,025,995 |
7.6% |
|
United Continental Holdings (UAL 0.17%) |
$78.26 |
28,951,353 |
9.4% |
Source: Berkshire Hathaway 13-F. Share prices are current as of July 10, 2017.
Why Buffett changed his tune and bought these four airline stocks
Berkshire's SEC filings for the third quarter of 2016 came as a big surprise to investors, as they were the first indication that Buffett was buying airline stocks.
The reason this was such a shocking announcement is that Buffett has historically been very negative on the airline industry. Ten years ago, in 2007, Buffett said: "The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines." As recently as 2013, Buffett remained an airline pessimist, saying that the sector has "been a death trap for investors."
So, what changed?
As a general rule, Buffett doesn't discuss his reasons for investing in specific stocks, so we don't know what about Southwest Airlines and the other three specifically attracted Buffett. However, Buffett seems to believe that the airline business has fundamentally changed. He told CNBC in a February interview that the airlines had a "bad 20th century" and that he hoped they'd gotten their bad times out of the way.
According to reports, a presentation from American Airlines CEO Doug Parker had a lot of influence on Buffett's decision. Simply put, after years of airline bankruptcies and consolidation, Buffett seems to have more confidence in the industry now that there are less than a handful of big players.
Furthermore, Buffett tends to invest in companies that are among the biggest and best in their business, which is evident from his investments in companies including Apple, Coca-Cola, and Wells Fargo. In other words, if Buffett likes the airline business, investments in Southwest and the other three make sense. An investment in, say, JetBlue would have been more surprising.
Will Buffett buy Southwest Airlines in its entirety?
The parallels between Berkshire's airline investments and its railroad investments of the 2000s have prompted speculation that Buffett may attempt to buy Southwest Airlines or one of the other major carriers in its entirety.
Just like the airline industry, the railroad industry consolidated to just a few big railroads after years of poor results. Once the consolidation had occurred, Berkshire took a stake in three major railroads and ended up buying one of them -- BNSF -- in 2010.
To be clear, other than these similarities, there is no indication that Buffett intends to add an airline to Berkshire's fully owned subsidiaries. In fact, at Berkshire's annual meeting, Buffett specifically rejected any comparison between the railroad and airline industries. However, given Buffett's positive outlook for the airline industry and Berkshire's nearly $100 billion cash hoard, I can't say I'd be surprised if it happened.
