Warren Buffett for years advised against buying airline stocks, warning the industry had an "insatiable" demand for capital that required investors to pour money "into a bottomless pit." But all of that changed in the second half of 2016, when Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) began buying a basket of U.S. airline stocks including shares of American Airlines (NASDAQ:AAL).

Buffett explained his change of heart to CNBC in February 2017. Airlines indeed had had "a bad first century," he said, comparing the industry to the until-recently feckless Chicago Cubs baseball team. But he said that while it remains "a very tough business" due to the high fixed cost of buying airplanes, he believes a round of bankruptcies and consolidation has created an industry that can better match up supply with demand and generate sustained profitability.

An American Airlines jet flies over the clouds.

Image source: American Airlines.

So how has the investment in American Airlines paid off for the Oracle of Omaha? Here's a look at Berkshire Hathaway's returns so far.

By the numbers

First, some caveats. Berkshire Hathaway doesn't tell us the exact day and price it bought its shares, but the company does file quarterly statements with regulators disclosing its holdings, giving us a rough idea of when shares were bought and sold. The price paid is far less clear, but we can get a general idea by using American's average share price during the quarter. These are back-of-the-envelope calculations that should be in range but are not meant to be precise.

Berkshire Hathaway first bought into American in the third quarter of 2016 and continued to build its position in the two quarters that followed. The company trimmed its position slightly in late 2017 and then again in 2018. As of Sept. 30 of this year, Berkshire Hathaway owns 43.7 million shares of American worth about $1.22 billion as of the company's Nov. 21 closing share price.

Quarter

Shares Bought/Sold

Average Price

Total Consideration

3Q 2016

Bought 21,770,555

$28.35

$617,195,234

4Q 2016

Bought 23,774,299

$37.38

$888,683,296

1Q 2017

Bought 3,734,000

$40.35

$150,666,900

2Q 2017

Sold 2,278,854

$40.90

$93,205,128

4Q 2017

Sold 1,000,000

$46.74

$46,740,000

2Q 2018

Sold 1,300,000

$37.96

$49,348,000

3Q 2018

Sold 1,000,000

$35.96

$35,960,000

Sources: Securities and Exchange Commission forms 13F, Yahoo! Finance.

Berkshire Hathaway spent a total of about $1.656 billion to build its position over three quarters and recouped about $225 million of that investment in subsequent sales. Still, to date, Berkshire and Warren Buffett are down about $211 million on the American Airlines investment.

What to make of the selling?

Some retail investors like to follow Warren Buffett in and out of stocks, but in the case of American, the stock sales aren't a reason to run for the exits. In an August 2018 statement, Berkshire Hathaway noted that some sales were attempts to keep its ownership below 10% of a company's shares outstanding and "did not reflect our investment management's view as to the relative attractiveness" of the securities.

As of Sept. 30, Berkshire Hathaway owned about 9.49% of American's shares outstanding and likely had to sell down its stake to keep pace with American's share buybacks and keep its holding below 10%.

That said, when Berkshire Hathaway ran up against a similar ceiling at American rival Delta Air Lines, Buffett decided to blow through the 10% threshold and increase his holdings to a current 10.96%. So perhaps the decision to sell does reflect his view of the relative attractiveness of the two airline stocks.

What's next for American Airlines?

American Airlines has been the clear laggard among the four airline stocks Berkshire Hathaway bought beginning in the second half of 2016. American is among the carriers most impacted by the grounding of Boeing's 737 MAX, and it also faces labor unrest. American also has the highest debt burden among major airlines, which could make it more vulnerable should the U.S. fall into a recession.

UAL Chart

Airline stock performance since Berkshire bought in data by YCharts.

But not all is lost for American. Management is in the early stages of revamping the airline's route network and pricing to increase profitability, attempting to focus on markets in which it is able to generate higher returns. Delta pioneered ticket pricing strategies that have helped it to both better compete with discounters for bargain hunters and still extract extra revenue from less price-sensitive travelers. American should see benefits as it implements similar changes.

After a period of spending on fleet renewal, the airline expects capital expenditures to come down dramatically over the next few years, which will free up cash to attack its debt.

American Airlines is not currently on my list of best airline stocks to buy, but the company has the wherewithal to power through current headwinds and slowly gain altitude. Warren Buffett and Berkshire are down on their investment in American so far, but there is still plenty of opportunity for a patient investor like Buffett to come out ahead.