The airline industry is notoriously tough on investors. Fuel costs can rise and fall dramatically from quarter to quarter, and passengers are incredibly price-conscious, making profits hard to come by. Nevertheless, airlines caught the eye of Warren Buffett -- the Oracle of Omaha -- in 2016, and lately, he's been hinting he'd consider an outright purchase if he could strike the right deal for the right company.
Most airline stocks have traded lower this year, but the possibility that Buffett could come knocking has reignited investor interest recently -- especially in Southwest Airlines (NYSE:LUV), a top airline that's become one of Buffett's favorites. In Q2, Buffett's Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) boosted his stake in the friendly flyer by 20%. Should you consider buying shares too?
Playing the field
Warren Buffett's struggled to profit from airlines in the past. Once upon a time, he even called them an investor "death trap."
Nevertheless, he plunged into the sector with both feet in 2016, acquiring stakes in multiple airlines for Berkshire Hathaway in a move that suggested he was struggling to pick a favorite. Since then, he seems to have settled in on two top picks. He still owns big stakes in American Airlines (NASDAQ:AAL) and United Continental (NASDAQ:UAL), but it's Delta Airlines (NYSE:DAL) and Southwest Airlines that he's made his biggest positions in the industry.
In the first quarter, he added 488,962 shares of Delta Air Lines, which was enough to make Berkshire Hathaway the company's biggest institutional investor with a nearly $3 billion stake. He kept his Southwest stake level at 47.7 million shares, but he sold 505,600 shares in United Continental and didn't add any shares to his position in American Airlines.
In the second quarter, he sold shares in United Continental, but he bought more shares in Delta, and importantly, he significantly increased his stake in Southwest Airlines to roughly 57 million shares, a roughly 20% boost from the end of March. As of today, Berkshire Hathaway's position in Delta is worth about $3.2 billion and his stake in Southwest is valued at about $2.9 billion.
People are talking
Southwest Airlines stock took a drubbing in Q2 after an engine exploded, causing damage to a plane that claimed the life of one person and caused injuries to seven others.
Worry the accident would curb ticket demand and force the company to cut prices to keep its planes full was enough to send its stock price reeling. Those concerns were somewhat validated by the fact that in Q2, Southwest's sales grew only 0.2% to $5.74 billion as its load factor fell 90 basis points to 84.7% and its average fare declined 4% to $151.94.
The slowdown in Southwest's business and corresponding sell-off in Southwest's shares was apparently too much for Buffett to resist. Compelled by Southwest's long track record of safety and its above-average reputation for pleasing customers, Buffett went bargain hunting what he arguably believes is one of the premier operators in the industry.
News that Buffett boosted Berkshire Hathaway's position in Southwest in Q2 may not surprise those on Wall Street who've been saying Southwest would be an ideal candidate for Berkshire Hathaway to own outright. Berkshire Hathaway already owns a railroad -- Burlington Northern -- and theoretically, it could benefit from owning an airline too. As fellow Motley Fool Adam Levine-Weinberg noted earlier this month, Wall Street's been speculating for weeks that Southwest's a natural fit for Berkshire Hathaway because of its consistent earnings and top-tier management team -- two factors Buffett's focused on in past acquisitions.
Tying the knot?
It's anyone's guess if Buffett plans to make a bid for Southwest or if he's content being one of its biggest shareholders. Berkshire Hathaway's sitting on a massive $100 billion-plus cash stockpile, so he's got plenty of financial firepower, but Buffett's known for his patience. Given the stock market's rip-roaring rally since 2009, he could be content to wait until the next recession strikes to make his move.
Overall, Southwest and Delta Air appear to have become Buffett's top picks, and given Buffett's track record for picking winners, investors might want to add those stocks to portfolios too, regardless of Buffett's acquisition plans.
Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.