Video: Buffett Curbs Delta, Southwest Stakes After Losing $5.3 Billion on Airline Stocks

Warren Buffett (Trades, Portfolio) revealed on Friday that Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) reduced its stakes in Delta Air Lines Inc. (DAL, Financial) and Southwest Airlines Co. (LUV, Financial).

The guru’s Omaha, Nebraska-based insurance conglomerate is one of the largest shareholders of the four major U.S. airlines, which include Delta, Southwest, American Airlines Group Inc. (AAL, Financial) and United Airlines Holdings Inc. (UAL, Financial). In the past, Buffett has mentioned that he oversees three of these positions, while one of his two portfolio managers, Todd Combs and Ted Weschler, oversees the fourth.

Buffett hasn’t always been a fan of the sector, however. Prior to establishing his airline holdings in 2016, the renowned investor referred to these stocks as “death traps,” adding that investors had “poured their money into airlines for 100 years with terrible results.”

His previous wariness towards airlines was linked to a failed bet on US Airways in 1989, where he nearly lost all of his investment before eventually making money on it.

The guru also lamented about the sector in his 2008 letter to shareholders.

"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money,” Buffett wrote. "Think airlines. Here, a durable competitive advantage has proven elusive since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."

Following his slew of investments in late 2016, Buffett offered his new insights on airline companies in a 2017 CNBC interview.

“It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope,” he said. “The hope is they will keep orders in reasonable relationship to potential demand.”

Berkshire Hathaway Vice Chairman Charlie Munger (Trades, Portfolio) also contributed his two cents on airlines in 2017. While both gurus used to believe the business was a “joke,” he said, “Now if you put all those stocks together, we own one minor airline. By the way, it’s a total catechism.”

“We did the same thing with railroads — ‘railroads are no damn good, too many of them, truck competition.’ We were right — it was a terrible business for about 80 years,” he added. “Finally, they got down to four big railroads, and it’s a better business. Something similar is happening in the airline business.”

It appears their previous outlook on the sector may prove to be correct. GuruFocus calculated that Berkshire has lost an estimated $5.3 billion on its airline holdings.

According to GuruFocus Real-Time Picks, a Premium feature, Buffett curbed Berkshire’s stake in Delta by 18.06% and trimmed the Southwest position by 4.31%. Filings with the Securities and Exchange Commission show the transactions were made on April 1 and 2.

While Berkshire Hathaway did not provide specific reasons for the sales, they could be related to the declines seen in the sector as a result of the coronavirus pandemic. As passengers stay home in an effort to fight the spread of the Covid-19 virus, airlines have been forced to cancel flights and ground planes.

Delta and Southwest are among the 10 largest players in the transportation industry, as illustrated by the chart below.

Delta

Berkshire dumped 12.98 million shares of Delta. It now holds 58.9 million shares, which represent 0.59% of the equity portfolio. The stock traded for an average price of $24.19 per share.

GuruFocus estimates Buffett has lost 46.5% on the investment since the third quarter of 2016.

The Atlanta-based airline has a $14.22 billion market cap; its shares were trading around $22.24 on Monday with a price-earnings ratio of 3.04, a price-book ratio of 0.94 and a price-sales ratio of 0.29.

The stock has declined more than 60% year to date.

Buffett is Delta’s largest guru shareholder with a 9.2% stake. Other top investors include PRIMECAP Management (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Robert Olstein (Trades, Portfolio).

Southwest

Buffett’s company divested of 2.3 million Southwest shares, bringing its total holding down to 51.3 million shares. The stake represents 0.68% of the equity portfolio. Shares traded for an average price of $32.22 each.

Based on GuruFocus data, Berkshire has lost 31.5% on the investment since the fourth quarter of 2016.

The low-cost airline, which is headquartered in Dallas, has a market cap of $15.88 billion; its shares were trading around $30.64 on Monday with a price-earnings ratio of 7.18, a price-book ratio of 1.61 and a price-sales ratio of 0.74.

Year to date, the stock has tumbled around 45%.

With a 13.89% stake, PRIMECAP is Southwest’s largest guru shareholder. Buffett is second with 9.92% of outstanding shares. Other top guru investors are Simons’ firm, the T. Rowe Price Equity Income Fund, Greenblatt, Gayner, Pioneer, Ainslie, Ray Dalio (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), John Hussman (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).

Portfolio composition and performance

The majority of Berkshire’s $242.05 billion equity portfolio, which was composed of 52 stocks as of the end of fourth-quarter 2019, was invested in the financial services and technology sectors.

GuruFocus data shows Buffett’s firm returned 11% in 2019, underperforming the S&P 500’s return of 31.48%.

Disclosure: No positions.

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